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The Great Depression

The Great Depression was a devastating global economic crisis that started in the USA after the major fall of stock prices in September, 1929, and became international news with the crash of the stock market in October, 1929. Its timing was different across the world. In mid-1930’s, some economies started to recover, but in many countries, its negative effects lasted up to the beginning of World War II. The Great Depression is considered as the longest and the most extensive crisis of the time since it had a negative effect on tax revenue, income, and profits of both rich and poor countries. It also led to an intense decrease in the yield, high unemployment rate, and an extreme collapse of many countries in the word. From that time, it has been applied as an example of how far the world economy can decline. The Great Depression was caused by the crash of the stock market, bank failures, reduction in demand and purchase of the products, drought, and Gold standard. It lasted for a long period of time because of timing and severity as well as misguiding government policies.

Causes of the Great Depression

Stock Market Crash

In the late 1920s, the market started to become increasingly speculative. This decade was considered to be a very successful but not an unexpected period. During this time, the cost of wholesale merchandise became steady, and there had been moderate reduction in 1924 and 1927. The stock exchange became abundant, thus soaring almost all the time in the 1920s. The more it grew, the more people became tempted and pumped their money into it. Most people were buying the stock on margin and this meant that they were only paying for the part during the process of buying and the rest after selling it. This measure worked well, provided the price of the stock was going up (Lusted and Casteel 36). However, the Federal Reserve Banks increased the interest rates with an aim of slowing down the stock prices. This was followed by the market crash in late 1929. As a result, people were required to pay more for the stocks whose value was less comparing to what they had paid for. Also, most people had bought the stock using borrowed money, and they were unable to repay the loan after the stock market crashed (Ziemba et al. 37). As a result, many lenders were left without money.

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Bank Failures

A significant number of small banks, especially in the rural areas, went too far to extend the credit to farmers who did not share the success of the 1920s and could not often repay the loan. In their turn, the big banks gave the unwisely huge loans to foreign countries, so that the latter could pay back the debts from World War I. When the stock market crash rippled the economy, the situation got worse, and many US banks stopped loaning European countries. For this reason, they had an outstanding loan which they had defaulted. As a result, most of the banks faced a hard time with about 3,000 of them becoming bankrupt in 1930. Federal deposit insurance could not help, and most people started losing their money while others panicked and started withdrawing their savings, prompting the banks to close. This panic and bankruptcy nearly shut down the banking system of the country. In the successive years, around 9,000 banks became bankrupt. Those that survived were not willing to lend money because they were not sure about the economic situation and were concerned about their survival (Lusted and Casteel 36). This worsened the situation, making people start spending less.

 
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Reduction in Demand and Purchasing of the Products

In the 1920s, the United States was producing merchandise that ranged from automobiles to radios, and people were used to purchase them mainly on credit. According to Ziemba, Zhitlukhin, and Lleo, (42), by 1929, the market had already saturated with such merchandise resulting in reduction of demand. Because of the crisis faced by many banks as well as frantic stock selling, it became hard to acquire credit even for those who wanted to get a new car. Once the products were in excess, people were not buying them, and the revenue for companies that produce them became less. This led to massive laying off of employees throughout the country. When people started losing their income and there was no unemployment insurance, they started losing their homes, and they were left with money barely enough to afford food. The demand for goods and services dropped, thus leading to rise in the unemployment rates.

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The Gold Standard

In the gold standard, every country set an estimate of its coin as well as gold and all money related activities in the protection of the settled cost. The Federal Reserve Bank allowed a huge decline of the money supply with a purpose of preserving the gold standard. Economists argue that the Reserve Bank expanded enormously as a response to the panics of the banks in order to make sure that the commitment of the Americans to the gold standard was not destroyed. This was the main reason why the decline among Americans was transferred to other countries. These countries were eventually compelled to deflate together with the USA (Ziemba, Zhitlukhin, and Lleo 45). Consequently, the value of banks declined, and this situation made them become more susceptible and follow the gold standard.

Drought

The destruction of environment made the economic devastation of the Great Depression worse. A long duration of drought together with poor practices of farming created a massive region that extended from the Dust Bowl to the Texas Panhandle. As a result, there were huge dust storms that choked many towns, leading to the death of livestock and crops, sickening people, and causing extensive damage. Many people ran away from that region as the economy started to collapse (Lusted and Casteel 38). While this drought did not cause the Great Depression directly, it was of such extent that it made several hundred people unable to pay the debts taxes. As a result, they had to sell their farms at throwaway prices.

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Why the Great Depression Lasted So Long

Timing and Severity

The United States experienced the Great Depression in the summer of 1929, which progressed further until the early 1933. The Great Depression started severely as the production and costs fell sharply, while a larger percentage of mechanical creation and GDP dropped in the first year of depression before the panic and reduction of the money supply. The value of the wholesale declined by 33 percent while unemployment rate exceeded 20 percent at its most elevated point (McDaniel 45). This hasty decline had a disastrous impact making it difficult for the economy to swiftly return to the point of activity that it used to have before the crisis.

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Government Policies

Most economists argue that the government also contributed to the prolongation of the Great Depression because it came up with some misguided policies. According to McDaniel (52), President Roosevelt believed that excessive competition played an important role in Depression through reducing prices of products, employment as well as demand for goods and services. For this reason, he introduced the recovery package that allowed the collusion of the businesses except for the antitrust prosecution threat. Apart from that, the businesses sold their goods and services at higher prices, and workers were allowed to demand salary increase of about 25 percent above what they used to earn.

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These policies were indicated in the National Industrial Recovery Act (NIRA), and they had a negative impact on many businesses. After introduction of these policies, the economy was expected to improve, but that did not happen. On the contrary, wages and unemployment in many industries rose to about 25 percent above expected (McDaniel 52). Several goods and services became harder for people to get, the demand became fixed, and the gross national product dropped to 27 percent below expected.

Conclusion

The Great Depression is regarded as a hard and dark time for the economy of America and the world in general. This depression affected many countries and people since it led to a negative impact on the tax revenue, income, and profits of both rich and poor countries. Apart from that, the Great Depression caused an intense decrease in the yield, high rate of unemployment among people as well as an extreme collapse of many countries in the world. Several reasons have been identified as the main causes of this economic crisis, namely the crash in the stock market, bank failures, reduction in demand and purchase of the items, drought, and the Gold standard. It is believed that the Great Depression took a long time to recover from because of the timing and severity as well as the policies introduced by the government to boost business and employment. These policies were later noted to be misguiding because they worsened instead of saving the situation in the country.

 

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