The Great Depression

The Great Depression
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The great depression can be traced back from the year 1929; USA underwent harsh economic conditions occasioned by the slowdown of the economy and the stock market collapse. Historically, this is the most severe economic crisis to have been witnessed in America. Essentially, it was incomprehensible to most Americans how this could happen in a country that espoused values like freedom, equality and happiness. Many studies show that the depression was preceded by The 1929 Stock Market Crash, new economic policies, bank failures and also adverse weather conditions in this era. This paper focuses on the Great Depression roots in the period between 1929 and 1941.
Severe economic contractions occurred across many market oriented countries but the impact of the depression was harsher in USA. In the 1930’s the unemployment rate rose considerably to the extent that many people lost there homes and farms while some faced starvation. There was a slight recovery of the economy in 1933, but this slowed down between 1933 and 1934. In 1937 the economy began signs of recovery but by the beginning of World War II USA had not fully recovered from the great depression effects.
This economic depression was a ‘water shed moment’ in the history of USA in which the government took a more pro active role in the economy than ever before. The severe economic conditions led the citizens to accept the role of the government in economic activities while businessmen railed against this. Thus, the government created a social security system to cater for the needs of the elderly and also created a compensation scheme for the unemployed.
The Great Depression Causes
There is no single reason that explains the causes of the depression, economists and historians offer a variety of reasons to why this happened. One of the most cited reasons is the Stock crash of 1929 and the market bubble that preceded the Great Depression. In the 1920’s the economy of USA grew immensely unlike the economies of Europe which still felt the impact of World War I. USA exported many goods to war ravaged Europe while there were a lot of innovations in the electricity and automobile industries. This eventually led to an upward push in the stock prices, with an increase in foreign direct investment to other countries especially Germany. The United States of America accumulated vast gold reserves and became the biggest creditor nation to both Germany and Austria.
Many Americans began investing in the stock market as it appeared as though stock prices would continue to rise. Additionally, there was cheap credit available to people which led to more speculation in the stock market. Eventually the economy began to heat up and the market became a bubble, in reaction the government created a monetary authority the Federal Reserve tasked with the role of deflating the bubble, which happened through raised interest rates, but this made credit more expensive.
People repatriated capital held up in other countries even when the Fed raised interest rates. Eventually, stock prices in the Dow Jones tumbled on October 24th 1929, wiping twenty percent of stock value within two days. This created a panic mode in Wall Street as brokers and investors saw there wealth decrease substantially stock brokers were unable to offload there high priced stocks forcing many firms to declare bankruptcy. Capital flows to Europe became less and less and many banks began defaulting on payments and they suffered huge losses in continental Europe. Finally, American banks also ran short on cash as the economy contracted with investor confidence at an all time low, production decreased substantially and unemployment rose throughout the country (Matziorinis, 2005).
Another cause of the Great Depression that led to a substantial fall in the aggregate demand is the banking panics. Banking panics occurred when depositors demanded there money from banks after losing confidence in the banking system. Banks generally hold only a portion of deposits as cash reserves and the banks had to liquidate loans to obtain cas...