The Great Depression informative essay

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The Great Depression in the 1930s was characterized by between 25 and 50% fall in total production, lasted close to ten years between 1929 and 1939, and was large scale, affecting the whole economy (Matziorinis, ). The Great Depression differed from other depressions that affected a smaller scale and lasted for shorter periods and fall in total production was not massive. Widespread unemployment, despair, and people were driven to extremities are other effects of The Great Depression. This study seeks to understand the cause of The Great Depression and provide the reasons behind President’s inability to effectively deal with the depression.

The causes of the depression include the decline in aggregate spending in the economy depicted by the huge decline in prices and output in the economy. The fall in the aggregate demand reduced the demand for services and goods at given prices. The effect is a fall in the supply to meet demand causing prices to fall to achieve a lower equilibrium hence a fall in the total production in the economy. The crash of the stock market and fear of a further decline in the economic condition caused people of all classes to stop making purchases. The effect was a further reduction in the production causing a fall in the employment in the economy. Reduced employment levels caused many people to lose their jobs resulting in failure keep up payment for items, which were then, repossessed causing an accumulation in inventory. The impact was a further fall in the expenditure increasing the impact of the depression.

The other cause of the Great Depression is the stock market crash in 1929. Markets in the 1920s were very speculative with eventually crash in December 1929 where stockholders lost over $40 billion dollars. Bank failures were the other cause of the Great Depression with over 9,000 banks failing in the 1930s resulting in the shutdown of the banking system (KRANER, 2010).The failure of the banks led to widespread loss of savings by the people because the deposits were uninsured. The tough economic situation and uncertain economic times made surviving banks unwilling to create new loans further affecting access to credit resulting in fewer and fewer expenditure further causing a fall in aggregate demand. Financial collapse also contributed to the Great Depression with a

Money contraction also contributed to the Great Depression as evidenced by the fall in the money supply by a third between September 1929 and March 1933. The decline in money supply in the economy caused a fall in spending in the economy substantially. The contraction of the money supply from bank panics and deliberate reduction of money supply and increasing interest rates by Fed caused a further decline in aggregate demand.

President Hoover was unable to effectively deal with the crisis because he did not understand the complexity of the crisis and was not aware of the extent of damage caused by the crisis. Hoover believed that the crisis was short-lived and was confident of the economy, which was not a true reflection and his confidence campaigns could not alleviate a fall in aggregate demand and subsequent high unemployment. Hoover was a fiscal conservative aiming at maintaining a balanced budget, which was inappropriate considering the circumstances. To achieve a balanced budget, Hoover increased taxes and reduced spending causing a further decline in aggregate demand in the economy. Hoover supported protectionist policies signing into law the Smoot-Hawley Tariff raising ad valorem tax rates to above 40% causing retailing by other countries and reducing goods to the US further increasing the effects of the crisis.

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  1. KRANER, S. (2010). Causes of the Great Depression and the Great Financial Crisis. Univerza Na Primorskem.
  2. Matziorinis, K. (2007). Causes of the Great Depression: A retrospective. Montreal: Mc Gill University.
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