Oct 3, 2018 in Economics

The Great Depression refers to the severe crash that affected the worldwide economy before the Second World War. This eventuality had varied impacts in different countries, with the United States and the West being the worst affected. Notably, it was the worst economy crash in the 20th century considering that its effects lasted for about ten years. The depression began with the collapse of the US stock market on the September 4, 1929 followed by the devastating crisis of the October 29, 1929 also known as the Black Tuesday. Afterwards, the effects of the depression started spreading to other countries and eventually became a global crisis. The depression resulted in significant declines in profits, tax revenues, and personal incomes, which affected both the rich and the poor. The economic activities within most countries, especially industrialization and agriculture, were severely affected. These effects caused an immense decline in the international trade by a proportion of fifty percent. Moreover, all countries reported a significant percentage increase in the unemployment rates across all the sectors of the economy.

Some of the factors that contributed to this devastating event were the speculations on deflation that led to the decline in borrowing levels. As a result, the consumer spending declined and investments considerably decreased. When the prices began to decline, countries attempted to initiate counterattack measures, which unfortunately led to the further worsening of the condition. Some countries adopted protectionist policies such as the imposition of quotas and high tariffs. For example, the US used this strategy in the early 1930. After the other countries learnt of this undertaking, they embarked on retaliatory measures aggravating the global collapse of the economy. With time, the Depression effects continued to spread and most industries closed down their operations due to the reduction in the demand of their products. After this, commodity prices declined leading to scarcity enhanced by the shortage of finance and high rates of unemployment.  

Most economists have not yet agreed on the causes of the Great Depression, but their theories attempt to relate the crash in the US stock market as the main cause. During this period, the economic activity demonstrated that most people had speculated the decline in the economy. The decrease in assets and commodity prices, decline in the demand of products and credit offers, and major commotion in trade activities by the government illustrated the situation. Ultimately, these eventualities led to increased poverty levels due to the significant rise in unemployment rates. From this analysis, economists demonstrated the underlying relationship that existed between these events and the government’s economic policies. Therefore, these facts aroused the blame directed towards the collapse of the international trade, under-consumption, over-investment, malpractices of bankers and industrialist, and the ineffectiveness within government officials.

While attempting to establish the causes of the Depression, there is the need to refer to the Keynesian, Monetarist, and Austrian theories. The Keynesian theories relate the collapse of economy with the sudden decline in the consumption and investment spending. The public panic due to the speculations forcing people to avoid the stock market facilitated this outcome. This resulted in the decline in demand, and prices began to decline leading to the crash. According to Monetarist theories, the depression was a normal form of recession, but the monetary institutions’ blunders that caused the shortage of money supply during the economic condition aggravated the recession. On the other hand, the Austrian theories create the relationship that the central banking decisions and the supply of money had on the overall performance of the economy.

Evidently, evaluating the economic conditions that prevailed prior to the depression indicates extreme over-indebtedness and deflation. These factors stimulated the speculation among the investors in the stock market causing debt liquidation and distress selling. After the banks realized the prevailing economic condition, there was a massive bank panic, which led to stringent conditions of borrowing resulting in the decline in money supply. In this regard, the level of assets prices and businesses net worth dropped drastically causing the decline in profits. From these occurrences, most businesses encountered financial distress and the majority became bankrupt. Since there was a rampant shortage of money, outputs declined affecting trade and enhancing unemployment. This fact inculcated pessimism within people resulting in money hoarding. Generally, all these factors led to the fall in the nominal interest and increase in deflation interest rates, which caused the collapse of the economy.

The disparities in wealth and income distribution were some of the factors that contributed the Great Depression. Due to the uneven wealth distribution, the rich exploited the poor since they had influence over the ruling authority. After the rampant speculation on the stock exchange performance, the rich engage in money hoarding by withdrawing most of their money in banks and limiting their expenditure. As a result, banks experienced a shortage of money a situation that adversely affected other aspect of the economy. Ultimately, all this disparities colluded with other aspects of the economic downturn leading to the collapse of the economy.   

The gold standard theory is also another reason that led to the economic depression after the First World War. After the war, most countries resorted to the gold as a form of wealth measurement due to the enormous costs incurred in the war. In this regard, inflation was witness since it was difficult to create the relationship between money and other form of savings. With the huge indebtedness that existed between different countries, each country formulated policies that would favor it against its counterparts. This competition-enhanced speculation within countries resulted in interference of the economic policies, which later led to the Depression. Considering all the causes, the Great Depression can be attributed to the misdeeds of the monetary authorities in formulating economic decisions.

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