IntroductionThe great depression is a severe economic downturn that occurred in the 1930s affecting most major economies all over the world. It affected various countries but the onset and effects were varied. According to Jensen (1989), the great depression was the “longest and deepest” economic crisis the world has ever experienced. The depression was so widespread and it devastated both rich and poor countries. The great depression was characterized by very low levels of aggregate demand as consumer confidence fell across the board. When the stock market crashed on October 29, 1929 referred to as black Tuesday its consequently led to the collapse of the banking sector as banks had invested in a bid to save the stock market.
When some banks collapsed the public panicked and withdrew their deposits from those banks that had withstood the failure of the stock market. The effect of this massive withdrawal was the collapse of most of the remaining banks. Many people who had not been able to withdraw their money before the collapse of the banking became bankrupt overnight. When the banking system collapsed various industries lost their deposits and were no longer able to access credit.
This shortage of capital to the industry led to the loss of employment and reduction of salaries. In turn, the amount of income to spend was reduced and businesses started to suffer from low demand. Lower consumer spending meant industries were not able to meet the wage bill and they lay off more workers. Finally, demand was so low that most companies had close to down making millions of workers unemployed. It is important to learn the causes that led to the great depression in order to avoid such a dire crisis in future. Unemployment hits many families very hard and people suffered as they struggled to put food on the table.
In Germany the suffering caused by the great depression was greater and it led to increased support for the extremist Nazi Party. It is claimed that the great depression was one of the factors that led to the start of the Second World War. In this paper, some of the top contributory factors of the great depression are discussed.
The paper details how each factor contributed to the great depression. Secondly, the paper discusses the reasons that the great depression was particularly severe on the German economy. The causes of the Great DepressionCollapse of the Stock market in 1929Prior to 1929, trading securities in the stock exchange was a sure way of becoming rich overnight. The United States had gone through a period of economic prosperity and optimism was high in the Stock market (White, 1990). In the 1920s the value of real estate in the US was on a continuous increase but by 1925, these prices had peaked and began to drop.
The link between real estate and the economy meant that when real estate prices fall so does the price of stock. Furthermore, there was optimism in the Stock market as people could make fast profits in trading securities. This in turn led to speculative spending where American’s could buy stocks through credit. According to White (1990), brokers were lending up to 2/3 of the value of stock an investor was willing to purchase. The effect of this speculative behavior was that more than $8.5 billion was out on loan more than the total amount of currency circulating in the US economy (Bernanke, 2000).
This had the effect of sustaining high stock prices while the money supporting this demand was loaned.