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The topic that I have selected for this research paper is the Industrial Great Depression in US that severely hit the Western developing world in the period from 1929 to 1939. I have chosen several writers who propose many different reasons for the Great Depression in the US, however what is interesting and common in all of the writers that I have chosen is that all the reasons that are given lead to a decline in US aggregate demand that created problems for both the domestic markets of the US and also the international markets which absorbed the effects of this depression in US adversely.
All of the reasons that have been discussed below by writers that I have chosen are purely economic reasons and by explaining the effects on the US markets, they all converge and conform to the point that the US prolonged depression fire spread all over the world because if three basic factors. First, the gold standards were used throughout the globe as a standard system or transactions and asset evaluation. Secondly the decrease in production and aggregate demand of US meant that there would be less production of all the exporters to US and thus the worldwide production would decline.
Lastly with 33% decrease in the US stock markets, uncertainty spread world over and stock market crashes what were seen that led the over all population to feel poorer . We will see in the following research paper how this great depression first originated from the United States where the outputs and demand declined to a great extent which had on over all effect on the global economy marked with acute deflation and severe unemployment.
The effects of the depression were seen variably across different countries with Japan being affected mildly and US and Europe being affected the most. The use of gold standard at that time was enough to play a vital role in this historical event as the entire global economy was connected and trading through this system. Moreover by the end of the depression, or the factor that led to the revival form the great depression was the abandonment of the gold standard system along with monetary expansion that was the need of the hour.
In order to revive from the Great depression a number of financial reforms were necessary and were brought into action including changes in economic theories, policies and institutions. It was the summer of 1929 when the great depression started to spread all over the world when the economic output in the united states had declined up to 47% along with a 30% over all decrease in the GDP of the United states. Deflation marked up to 33% of the actual market prices that resulted in unemployment rate of approximately 20%.
Although in the early stages the Great Britain had not been affected as much as the depression affected the US, however with the start of 1931, the great depression affected Britain to the extent that production of Britain also declined to almost one third of the percentage with which the production of US declined. The decline of production level in Germany was almost as much as that of the US. The prices of primary commodities in these countries declined to such an extent that it became unfeasible for the producers to produce these items along with an even reduced worldwide demand of these products .
Historians believe that there were several factual causes behind this great depression which were led by declined consumer spending decreasing the amount of inventories of the producers. One of the reasons that are believed to start this depression is the tight US monetary policy that led to limited and low speculation in the US stock markets. Although US markets did experience prosperity and constant prices from 1920 to 1927, the stock market and the price index rose many folds in shape of a bubble unlike the general price level that did not show an exceptional boom.
Up till 1929 people had turned towards these stock markets as it was the only market that gave extra ordinary results. However as the rates of interest were increased according to the tight monetary policy in pursuit of rising stock prices, people held back their spending in the booming sectors of stock exchange such as automobiles and construction. Moreover the boom in housing sector in 1920 led to excess supply of houses that caused the housing bubble to burst.
These factors had an adverse effect on all of the sectors of the stock markets of US and the index dropped at the rate of 33% that led the investors to liquidate their investments and holdings. Uncertainty about future incomes and return on investments, the continuous decrease in stock markets declined the total aggregate demand of the US economy as consumers cut down their spending on consumer items and investment in end user products. This caused both the manufacturing and employment to take direct effect of the sector in US and thus people started to feel poorer then before.
This crash in US stock market led to rashes of markets world over that were somewhat related to the US stock market as US has always been a worldwide importer of consumer goods at all times and a decline in US aggregate demand means that the demand for imported products also decreases. This led to a cut in imports of the US and subsequently a cut in exports of many other countries that effected their production line and thus the over all economy of the globe.
Moreover as we move on to the banking sector of the US, we see that as the people became uncertain about their future income and investments, they also felt insecure from banks where they had put their deposits as they felt that the banks may also become solvent with their deposits and are no more safe for their money. Unlike the basic assumption of economics that says that all depositors do not turn to banks for their deposits at once, many borrowers took the roads to their banks to ask for there deposits.
As we can assume that the banks did not had enough reserves to repay all of its investors and depositors thus, almost one fifth of the total banks had to file liquidation as they had failed to serve the depositors. Adding to this banking crisis, farmers who were indebted in order to carry out their operations on their farms were unable to pay back the loans to the banks as the agriculture commodities and prices had also fallen to a horrifying extent.
Thus with this crisis as well, uncertainty spread world over because if the banking line of one of the most developed countries is unable to serve its customers then this is also a point of insecurity for the rest of the economies. Globally monetary policies were tightened in order to control bubbles and price hikes however less then a few were able to keep the economic bubbles from bursting and the decline in aggregate demand and crashing stock markets were seen world over that led to many economies to suffer from this depression .
However after the great economic depression of US that resulted in many countries to suffer as well, the writers that I have selected also explain how the world economy revived from the depression in the following way along with reasons and discussions. It should be noticed that all of the writers that I have chosen agree to the following discussion, reasons and efforts that were made for the revival of economies.
According to these authors the main sources of revival were the devaluation of currency and expansionary monetary policies rather than the tighter ones so that the money should circulated in the economy as people did need money to carry out economic activities. The devaluation of the currency was the time when gold standards were abandoned by the world economies and made dollar the medium of international transactions. According to one of the authors who left the gold standards and devalued their currencies earlier were better off rather then those who were resistant in devaluing their currency .
The author compares US and Britain where Britain came out of the depression by letting go the gold standard first and US getting out much later due to its resistance to devalue its currency. Others also conform to this concept and believe that devaluation of currency did not helped the global production lines right away, however it allowed countries to expand their monetary base in order to pump in money in to the both house holds and industries world wide.
Households will be able to spend only, when they have money to spend over commodities which in turn producers can produce. This is the concept that was used by many countries in order to revive from the economic depression. The fiscal policies did not play a vital role in this role as compared to the monetary policies . Conclusion: All of the writers that I have selected conclude this topic with the following approach.
According to them the human sufferings were immense during this depression as one fourth of the total labor force around the globe did not find industries and places to work uptil 1933. Although Breton Wood’s system of exchange rate had been imposed by the end of World war II, yet up till the Great depression of 1929, people did not accept the system, however, after the great depression people were forced to abandon the gold standard system and adopt to this fixed exchange rate system which was then substituted by the floating exchange rate in 1973.
Lastly one of the most important results of this depression was the development of ideas, theories and economic policies by John Maynard Keynes. It was his theory that suggested that a cut in taxes and increase in government spending can help economies revive from depression like the Great Depression of 1929 .