The Great Depression
- What happened in 1929 that initiated the Great Depression?
The depression was a human calamity. The year 1929 witnessed around $4 billion in savings. However by the year 1932 over 4000 banks failed. The annual stocks of the NSE dropped from $89 billion to $15 billion. A quarter of the workforce, 14 billion was without jobs. The agricultural economy suffered through lean times in the 1920s and collapsed in the 1930s.
- Why did the economy get worse before it got better?
The economy was going through a vicious circle. According to Keynes the economy would continue to get worse because as people lost jobs they stopped spending, as they stopped spending stores stopped ordering inventories, more factories closed, more jobs were lost, more stores and businesses failed – a vicious downward spiral.
- What was the Classical macroeconomic solution to the Great Depression?
Keynes maintained that full employment could be added if public demand was added. He proposed the solution of government spending to improve the economy. This is because the system would not automatically correct itself.
- What was Keynes’ criticism of Classical macroeconomic theory?
Most classical microeconomic theories proposed that if one component of the Gross National Product came down the other would move up. For example if the demand for consumption goods came down then demand for investment goods would go up. However, they did not consider the situation that total private demand may be insufficient to sustain total employment without government intervention.
- What policy eventually ended the Great Depression?
The Keynesian theory advocated government intervention by increasing government spending. This policy eventually ended the Great Depression. During the World War government intervention soared above $100 billion and this led to full production and full employment and brought a downward economy spiraling back in track.
Works cited:
The Great Depression and the Keynesian Revolution. David Schumacher. Annenberg Learner, 2013. Video.
