AN ESSAY ON

“THE GREAT DEPRESSION”

WORDS COUNT: 1500

NAME: JEREMIAH Friday ogugo

LECTURE: Dr. Roy khong
MODULE: comtemporary economic
policy
DUE DATE: APRIL9, 2010
1st copy

THE GREAT DEPRESSION

Introduction

Depression is a close cousin to recession which is the decline in total output, employment,
income, and trading lasting for six months or more. Depressions take a longer period of time
and mostly pour out suffering on human kind. Arguments were well around as to the main
causes of the Great Depression. Many schools of taught emerged likely to be the Historians
and Economists pointing accusing fingers on the consolidated efforts of some greedy
politicians, unscrupulous brokers and bankers and unregulated corporations which originated
the economic indelible event in the United States and the world at large. Although anyone
with a good and sound critics, views, observations, and contributions is of the opinion to
critically evaluate the causes of the Great Depression.

It wasn’t a bolt from the blues to the Americans and the world entirely having seen the
economic boom in1920s of too much input with no tangible products hold with too much
debt, but a fast dramatic scene of worldwide economic downturn started from 1929 in most
places and ended sluggishly and slowly in different part of the world with its hard-experiences
and effects in the 1930s.Since its occurrence which was the largest and the most concerned
economic Depression in the world history, it has been a benchmark on how possibly a modern
economy could fall.

Causes of the great depression

The timing and severity of the Great Depression varied substantially across countries.
However, without going deeply into the confusing and obtu se world of economic, a basic
understanding of what caused the Great Depression can be explain as follows:

Stock market crash

The 1920s has been a prosperous decade, but not an exceptional boom period; wholesale
goods prices had remained nearly fixed throughout the decade and there had been mild
recessions in 1924 and 1927.Obviously, stock market was in excess which has risen more
than fourfold from the trough in 1921 to the peak reached in 1929 unexpectedly and a signal
of danger ahead.
 Figure 1

By the fall of 1929, the United States stock prices had reached some levels that could not be
justified by reasonable anticipations of future earnings. And with that in mind, a variety of
minor events led to gradual price declines in October 1929, where investors lost confidence
and the stocks market downfall exposed. Panic selling began on October 24 1929 called the
“Black Tuesday”. Many stocks had been purchased on margin that is, using loans secured by
only a small fraction of the stock’s value. Even though the stock market began to recover
some of its losses towards end of 1930, it just was not enough and Americans truly felt the
Great Depression impact.
From economics point of view, aggregate Demand curve as an analytical tool can be used to
analyze the stock contribution to the Great Depression. Changes in the stock market of that
nature would shift the Aggregate Demand curve downward meaning a short of the demand in
question.

The figure below shows the movement of the Aggregate Demand Curve
 Figure 2

Banking panic and monetary contraction

The next blow was the Aggregate demand occurred in the fall of 1930, when the first of four
waves of the banking system panics gripped the United States. There was this panic when
many depositors lose confidence in the solvency of banks and simultaneously demanded their
deposits be paid to them in cash knowing the problem at stake. Having known that banks
usually hold only a fraction of deposits as cash reserve, they must liquidate loans in order to
raise the needed cash. The then America President Roosevelt on March 6, 1933 declared
“bank holiday” and after then reopened only those banks deemed fit by government inspectors
at which over 9000 banks failed and bank deposits were uninsured thus as banks failed,
costumers simply lost their deposits. Survival banks of the ill-effect situation knowing better
what was at stake in the economic stream stopped being as willing to create new loans a move
that call for less expenditure.

The gold standard

The economists believe that the Federal Reserve allowed or upset the huge declines in the
American money supply partly to preserve the gold Standard. Under the gold standard-
commodity money, each country set a value of its currency in terms of gold and took
monetary actions to defend the fixed price. It is possible that the Federal Reserve expanded
greatly in response to the banking panics, foreigners could have lost confidence in the United
States’ commitment to the gold standard .This could have lead to large gold outflows and the
United States could have been forced to devalue. Likewise, had the Federal Reserve not
tightened in the fall of 1931, it is possible that there would have been a speculative attack on
the dollars and the United States would have been forced to abandoned the gold standard
alongside with great Britain.
Americans used gold standard principle as a key factor for the transmission of decline to the
rest of the world and with this same principle there was imbalance in trade or asset flows rise
to international gold flows. As the United States began to contract severely, the tendency for
gold to flow out of other countries towards United States became imperative and intensified.
This took place because deflation in the United States made Americans goods particularly
desirable to foreigners, while low income reduced American demand for foreign product. To
counteract the resulting tendency toward an American trade surplus and foreign gold outflow,
central banks throughout the world raised interest rates while kept constant the quantity of
money in circulation as shown in the figure below.
 Figure 3

Maintaining the international gold standard, in essence, required a massive monetary

contraction throughout the world as a watch dog to the United States situation. The result was
a decline in output and prices in countries throughout the world that nearly matched the
downturn in the United States.

International lending and trade

There are some other international linkages to this Great Depression that mostly rocked
America. Foreign lending to Germany and Latin America had expanded greatly in the mid-
1920s.United States lending abroad then fell in 1928 and 1929 as a result of high interest rates
and the booming stock market in the United States. This reduction in foreign lending may
have led to further credit contractions and declines in output in borrower countries. United
States as the bed rock of most nations should be considerate in law’s enactment not to be
thing of the mind rather that of the world. The 1930 enactment of the Smoot- Hawley tariff in
the States and the rise in protectionist trade policies created other complications. The Smoot-
Hawley tariff was meant to boost farm incomes by reducing foreign competition in
Agricultural products which other countries followed suit as a retaliation and a calculated
effort to force a correction of trade imbalance. This has resulted to the extreme decline in the
world price of raw materials which caused severe balance of payment problems for primary
commodity producing countries like in Asia, Africa, and Latin America.

Economic impact
Obviously human suffering was the major and unforgettable impact of the Great Depression
since within a twinkle of an eye the world output and living standards drastically dropped.
Work were not there for labour force in industrialized countries and in the world generally.
However, things turned around for the better after the era of this ill-effect phenomenon
changed the world economy mostly that of the international gold standard etc.

Unemployment
Another reasonable effect of the Great Depression was the rate of unemployment during this
period. Since the world economy was being heated up, employment sharply decline as it was
shown in the figure below making the labour force also feeling the impact of the chaos event.

The figure below shows the unemployment rate from 1910-1960

Unemployment rate in the US 1910–1960, with the years of the Great Depression (1929–
1939) highlighted

In the United States, unemployment compensation and old age survivor’s insurance was
established through the Social Security Act in 1935 as a result of the hardship faced by the
people when the Great Depression struck. Also in the European countries, government
pensions were set in motion and union membership gets cohesively strongand well organised.
Government regulatory of the economy with strong hold on the financial markets
substantially increased on the heel of the Great Depression.
The Great Depression uncalled for event injects the thinking and development of
macroeconomics policies intended to temper economic downturns and upturns. As to reduce
spending and monetary contraction in Depression, a British Economist John Maynard Keynes
develops the ideas in his General theory of employment, and money 1936. He suggested and
opined that the Keynes’s theory which states that increasing government spending, tax cuts,
and monetary expansion could be used as tools to contract Depressions. This in combination
with the consensus that government should try reduce unemployment to its minimal scale, has
led to much more activist policies since 1930s.

References:
Bernanke, Ben, and Harold James.”The Gold Standard, deflation, and financial crises in the
Great Depression: An International Comparison”. In Financial Markets and Financial Crises
edited by R.Glenn Hubbard. Chicago: University of Chicago Press for NBER, 1991

Cameron, Rondo. A Concise Economics History of the World. New York: Oxford University
Press, 1993.

Chandler, Lester V. America’s Greatest Depression, 1929-1941.New York: Harper & Row,
Publishers, 1970
Romer, Christina D. “The Great crash and the Onset of the Great Depression”. Quarterly
journals of Economics 105 (August 1990):597-624.

Mankiw, N.G. (2009). Principles of Economics 5th edition. South-Western College: Ohio.

http://en.wikipedia.org/wiki/Great_Depression