Question

Causes of the Great Depression After reading Chapter 7 and Special Topic 6, write a 2-page paper answering the following question: Contrary to a popular view, the Great Depression was not caused by the 1929 stock market crash. We have had similar reductions in stock prices to those in 1929 before and after the Great Depression. What historical events took place that directly led to the prolonged depressed conditions like those of the 1930s?

Answer 1

The great depression also called the tremendous economic downturns starts from 1929 to 1939. It is most longer and severe economic dip ever faced by the western industrial world in the world. It leads to fundamental changes in the economic policies and macro policy in the economy. The depression started in the US because of the drastic decline in the output, deflation and massive unemployment.

The great depression affected in the US and Europe and partly in Japan and Latin America. The significant causes of depression were the declines in consumer demand, financial crisis, unfavorable government policies, the existence of gold standard, exchange rate problem. The recession started from the US in 1929 from the starting point of output and prices fell. The massive fall in industrial production at around 30 per cent. Also, the unemployment rate hit a peak in history.

The fundamental reason for the depression falls in spending leads to a decline in industrial production because of both producers and merchandisers noticed the decline in the inventories. The decline in spending led to a decline in aggregate demand in the economy.

The stock market crash

The stock market crash also led to the great depression in the US. The tight monetary policy reduced the stock market speculation. In the 1920s the stock prices behaved like constant. From 1921 the stock prices rise four folds and end up with a peak in 1929. The fed raised the rate of interest of stocks to reduce the stock prices in the economy. The higher interest depressed the sensitive interest areas like automobiles and construction. The unanticipated changes in the stock prices led to falls in the interest of borrowers. The stock prices crash led to a fall in the aggregate demand and purchases of durable goods because of uncertainty about future income.

The contraction of the banking system

The decrease of the banking system also caused depression because of many US depositors are lack of confidence in banking solvency system. The bank always keeps a small fraction as their reserves the faith for getting liquid cash is difficult. The continuous fall in banking system started in 1931 and ended in 1933. Finally, the president called for the national bank holiday. At the time of the holiday, the government started inspection and allowed them to reopen only after this. Eventually, one-fifth of the bank failed to revive their business.

Gold standard

Most of the economist think that the fall in US money supply because of the preserve of gold. Under the gold standard, each country set them the value of currency according to their reserves in gold. Due to the failure of the banking system the US started to increase the money supply, it led to reducing the confidence of foreign investors because the US depends upon the gold standard leads to large outflows of gold.