Great Economic Boom during the Great Depression - Case Study Example

The Great Depression College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Introduction to the Great Depression Between 1929 and 1934 the industrialised world experienced the worst ever form of economic crisis called the great depression. In some regions the crisis continued up to 1939. The great depression is touted to have originated from the United States (US). The crisis then spread to the rest of the world, particularly Europe (the Great Britain and Germany) given the heavy economic ties linking them. Given that the US and Europe were the most hit by the great depression, below I discuss the crisis paying particular attention to the underlying causes of the great depression and the reason that led to the abolition of the gold standard. Causes of the Great Depression After the World War I (WWI), the US was experiencing great economic boom and prosperity for the period of the 1920s. Over this period Americans enjoyed a very low credit margin, hence there was impetus to borrow and most of them preferred to put their money in the stock market. Around the summer of 1929, the US economy was undergoing what could generally be referred to as an ordinary economic slowdown. There was a decline in consumer spending that predisposed to a decline in sales; as a result, production also went down. However, stock market prices were on the rise given the confidence investors had due to the general strong economic boom in the US until the fall of that year when the prices escalated to an unjustifiable level (Harold & Ohanian, 901). On the 24th of October 1929, commonly referred to as the ‘Black Thursday’, the stock market bubble burst and investors started to sale their stock in big volumes. On this day 12.9 million shares were traded. Five days after that, on the 29th of October 1929, commonly referred to as the ‘Black Tuesday’, another 16 million shares were traded as panic stroke across the Wall Street. On that day the value of all shares traded on the NY stock market plummeted by about 32 per cent between September 1929 and December 1929 leading to a great loss in investment of close to $16 billion. Most of the investors who had purchased shares on margin (through borrowed money) became bankrupt. The stock market had crashed and this greatly marked the onset of a more severe economic crisis; the great depression (Harold & Ohanian, 903). Figure 1: David Jones Industrial Index Movement (1921 – 1932) After the stock market crash banks that had invested their deposits in the stock market lost heavily. They were drained as people withdrew their savings and many of them became insolvent. Investment brokerage firms also lost heavily as they turned out to be insolvent and were declared bankrupt. Those banks that had not invested in the stock market were not also spared as depositors lost nearly a massive $140 billion. The capital that was flowing into Europe to help reconstruct the economy started to flow out to help salvage the deteriorating situation in the US but this did not help much as the situation was out of control (Bordo & Evans, 1456). Abolition of the Gold Standard The gold standard was a means through which the countries valued their currencies and the gold was used in international monetary dealings. However after WWI the countries had to abandon using the gold as a measure of currency value given the emerging pressing financial needs. The countries had to print money in paper form that was easier and fast to print with so as to make easy the payments for war expenses. After the world majority of the economies were so weak that going back to the gold standard was untenable. To go back to the gold standard countries had to use the gold as a measure of value and support it with gold reserves. However, this meant that countries had to get hold of more gold by increasing their exports over and above the imports and attracting foreign financing. This was quite tricky given the unfavourable post-war economic environment seeing as it would result in trade imbalances. There were no enough finances to rising budget deficits and the demand from the population was very high (Harold & Ohanian, 920). Another problem is that for the countries to go back to the gold standard, they had to lower their prices such that the price levels would equal the price levels before the war. Lowering prices would severely hurt the economy. It would mean the countries had to reduce spending, lower salaries and wages, reduce subsidies and push the market commodity prices down. This would be a deflationary move since it would apply a downward stress on the economy. Britain suffered so much from this pressure such that it had to go to a diet starvation resultant to rising unemployment rates along with labour uprising. Finally in 1925, the economy was able to go back to the gold standard equivalent to 4.86 US dollars (Paxton, 60). The deflationary pressures severely cut down demand in the economy such that the forces spread to other countries relying on the Great Britain to support their economy. However, the Great Britain decided to abandon the gold standard in 1931following the emergence of the great depression. The gold standard would have been hard to sustain amid a weakening global economy. The great depression had weakened the US economy such that gold would easily flow into the country because their products had become quite cheap. The world central banks would then raise interest rates for their economies to contract and equal the US economy. However this reduced output and price levels in the world economies. As a result financial and banking crises emerged further hurting the economies. All this occurrences meant that the gold standard had to be abandoned (Bordo & Evans, 1450). Conclusion The great depression was a blow to the industrialised world economy. The worst ever economic crisis was sparked by the bursting of the US stock market on the 29th of October 1929 (Black Tuesday) and exacerbated by other factors. As regards the gold standard, the WWI left many economies too weak to transact with gold seeing as they would lose a great deal. References Bordo, M.C. and Evans, C. Money, Sticky Wages, and the Great Depression, 2000, American Economic Review, 90: 1447-63. Harold, C. and Ohanian, L.E. Reconsidering the effects of Monetary and Banking Shocks on the Great Depression. 2000, NBER Macroeconomics Annual. Paxton, R.O. Europe in the Twentieth Century. 4th edn, 2005, Thomson Wadsworth. Read More