Causes of the Great Depression

Subject: American History
Type: Analytical Essay
Pages: 4
Word count: 825
Topics: Finance, Macroeconomics, The Great Depression
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Introduction

The Great Depression was an economic plunge experienced by the western world and lasted for about a decade, from 1929 to 1939. Although the economic depression originated in the USA, its effects, particularly on employment, deflation, and output, were felt by every country in the world. In the country, it affected several social and cultural expectations that Americans experienced, especially since the Civil War. Different factors have been linked to the Great Depression, each having various effects on the country, including unemployment, decline in output, the collapse of businesses, imports, and commodity prices (Klein, 2001). This essay seeks to analyze the crash of the stock market, banking panics, and the gold standard as factors that contributed to the havoc and crashing of the country’s economy.

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Crash of Stock Market and Banking Panics

In the 1920s, capital in the USA was represented by stocks. During this time, money policies influenced stock prices to go high, influencing people to invest all their money in the stock market. Eventually, when the stock prices went down sharply, and people started to sell their stocks in a panic, the number of stocks available for sale became significantly higher than the number of people willing to buy, contributing to a crash. According to Robbins (2011) and Romer (2003), although the USA had a monetary policy that aimed at limiting the stock market, the move by the Federal Reserve to raise interest rates in the hope of slowing down the rise of stock prices that the country had experienced particularly between 1921 and 1927 hugely depressed interest-sensitive spending thus reducing production. For instance, while the USA used to experience an excess supply of construction and automobile purchases in the mid-1920s, these hugely declined in 1928 and 1929.

Although panic selling of stocks, “Black Thursday” contributed to a decline in prices and forced investors to significantly liquidate their holdings, exacerbating a 33% decline in USA stock prices between the peak of September 1929 and the low in November of the same year (Romer, 2003). It also contributed to a sharp decline in consumers’ ability to purchase durable goods and business investments. However, blaming the Great Depression solely on “Black Thursday” would be unfair as the magnitude of the event can hardly be defined by one mishap. As significant as it was, it was not the only market crash during that time. The stock market had plunged on 24 October 1929 at the opening bell. Although investors managed to halt the slide, it crashed a few days later, losing 12% of its value and wiping out investments totaling about $14 billion (GradesFixer, 2021). As a result, the banking sector was affected as it contributed to a crash in the country’s financial exchange, with over 3000 crumbles in 1930 and over 9000 banks fizzling at the end of that decade. All these contributed to people losing not only jobs but also all their cash.

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The Gold Standard

Largely, the significant decline in the American monetary supply has been linked to the country’s Federal Reserve aimed at preserving the gold standard, which stands for countries setting a value of its currency in terms of gold and taking monetary actions to defend the set price. The USA had the Federal Reserve expanded greatly in responding to banking panics, and foreigners could have lost confidence in its commitment to the gold standard (Romer, 2003). Equally, if it had not tightened in the fall of 1931, it could be a speculative attack on the dollar, and the USA could have been forced to abandon the gold standard. These elements depict that the gold standard limited the country’s monetary policymaking. It was central to not only the decline of the market but also a key factor in transmitting the American decline to the rest of the world.

Under the gold standard, imbalances in trade of assert flow contributed to increased international gold flows. In the mid-1920, American assets, including stocks, brought large inflows of gold to the USA. However, the situation changed in the 1930s when USA’s economy contracted severely as the tendency for gold to flow out of other countries and towards the USA intensified (Romer, 2003). This was due to deflation that made USA goods desirable to foreigners while Americans’ income reduced demand for foreign products. As a single way of countering this tendency, central banks across the globe increased interest rates as maintaining the gold standard required monetary contractions to match the ones occurring in the USA. This resulted in a decline in output and prices worldwide.

Conclusion

The Great Depression remains one of the greatest and longest-lasting economic downturns in history. Although it originated in the USA, its consequences were felt globally. The economic depression has been associated with different factors, particularly: the crash of the stock market and banking panics, which contributed to the closure of over 9000 banks and people losing billions of dollars, and the gold standard, which contributed to significant limits on monetary policing. These factors generally contributed hugely to the decline of the USA’s economy and the world for a decade from 1929 to about 1939.

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  1. GradesFixer (2021). The causes and effects of the Great Depression: GradesFixer. https://gradesfixer.com/free-essay-examples/the-causes-and-effects-of-the-great-depression/
  2. Klein, M. (2001). The stock market crash of 1929: A review article. Business History Review75(2), 325–351. http://www.csun.edu/~twd61312/498%202022/Klein%20on%20the%201929%20Crash.pdf
  3. Robbins, L. (2011). The great depression. Transaction Publishers. https://books.google.com/books?hl=en&lr=&id=Ar2osFxNDJgC&oi=fnd&pg=PP1&dq=causes+of+the+great+depression&ots=TFGRxbFMx_&sig=h5lin6NOGsahAnCMyqIy4nbGoK8
  4. Romer, C. D. (2003). Great depression. Forthcoming in Encyclopedia Britannica. Retrieved4(5), 11. https://eml.berkeley.edu/~cromer/Reprints/great_depression.pdf
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