The Great Depression
The economic downturn that began in 1929 and lasted till late 1930’s, i.e. The Great Depression, was the most extended and severe depression, the westernized economies had ever witnessed. Although the depression originated in the United States, but later went on to affect the global economy in the form of decreased production, record unemployment and many other ill-situations. Below discussed in brief are the causes of Great Depression:
Burst of Stock Market Bubble:
Although many economists consider the reduced consumption expenditure as the primary cause of depression, however, the same was initiated by the burst of stock market bubble that had inflated in early 1920’s and went on till 1929 when the Federal Reserve announced increase in the interest rates to halt stock price increase. However, this proved rather detrimental and only two months later the crash, the stockholders lost $30 Billion.
Reduction in aggregate demand and production activity:
The stock market crash had a substantial effect on the aggregate demand in the US economy as courtesy huge stock market losses and because of fear of further economic shocks, the aggregate demand in the country reduced significantly as people stopped purchasing the items. Hence, with inventory accumulation building up, production levels reduced that subsequently lead to lay-off of the workforce. In fact, the unemployment rate reached 25% and with people losing their jobs, the economy witnessed low or negligible consumer demand that further inflated depression.
Bank Failures
Failure of banking system was yet another cause of Great Depression as the process of banking panics amongst the people and hasty liquidation lead to insolvency of banks. During 1930’s, around 9000 banks failed in the global economy.
Role of Stock Market Crash and the Primary Cause of Depression
Undoubtedly, it was the stock market crash that was the primary reason of Great Depression as post the first world war period, the economic situation in United States was prosperous but it was not an economic boom that could have resulted in manifold increase in stock prices. Hence, when in order to control the rising stock prices Federal Reserve increased the interest rates, it lead to stock losses worth billions and reduced aggregate demand in the economy. Amid decreased demand, production activity was slowed down and people were laid-off from their jobs. Hence, it was only the stock market crash that created the vicious circle of Great Depression.
Works Cited
Ledbetter, James. "The Great Depression." n.d.
Romer, Christina. "Great Depression." 2003.
