What was the Great Depression?

The great depression was a period defined by a severe economic downturn which began in 1929 and lasted till about 1939. It is one the rarest events in the history of the industrialised world which lasted for the longest time ever seen.

It originated from the United States; however, its effects were observed all over the globe. This period saw rising unemployment along with severe deflation in almost all major countries.

The economic downfall started with the US stock market crash of 1929. It is considered one of the most devastating events in the industrialised world.

What were the causes of the great depression?

Stock market collapse was supposedly the trigger that led to the economic crash of 1929. Stock market activities were at their peak during that time. Before the crash, the US economy was growing, and its total wealth doubled over the period of 9 years from 1920 to 1929.

The US economy saw a mild recession early on in 1929. Consumer spending was on a decline and the output was piling up in warehouses. There was a reduction in the total production due to an increase in the unsold stock. As a result of this prices rose in the economy and a recession set in.

What was the Stock Market crash and how did it lead to the great depression?

These events were followed by a crash in the stock market. Share prices had also sky rocketed due to the condition of the economy. Thus, more and more investors started selling their stocks and this led to a record volume of shares traded on the exchanges.

Panic selling set in and this led to millions of shares losing their value in a short span of time. Many stocks, that had been purchased by taking loans (on a margin), became worthless. Investor confidence dipped after a small decline in prices was observed. This led to the inevitable burst of the stock market bubble.

This crash led to the aggregate demand falling sharply and thus, leading to a contraction of the economy. As a crash in the financial markets was unfolded, people expected their future income to fall. Thus, consumption fell sharply. Consequently, the already falling output suffered more as there was not enough demand to improve the economic condition.

These economic downturns were spread to the rest of the world through the gold standard.

What were the outcomes of the monetary policy?

An error on the part of the central bank was the mismanagement of the money supply. Too much money was allowed into the economy which led to severe inflation coupled with serious joblessness. Post 1921, the observed rise in prices was due to the additional monetary expansion carried out by the Fed.

Thus, after the stock market crash, the Fed decided to cut the money supply in the 1930s. However, the effects of such contraction were felt by the financial institutions of the country. The banks suffered as there were too many withdrawals at the same time. The policies at that time did not allow banks to have enough alternatives to fall back on. 

Investors lost faith in the banks and this led to depositors liquidating their savings leaving banks with no money. This was the last straw as it led to the economy tumbling.

The then US president Herbert Hoover tried to help the banks by providing government loans. This was done to inject the market with money to boost economic activity. However, Hoover’s beliefs were restricted to the idea that the no government intervention was necessary to provide economic stimulus as jobs would be recovered once the economy stabilises on its own.

How did the economy pan out after the 1930s?

Franklin D Roosevelt was elected as the president in 1932, following which there were some positive changes. He carried out major reforms in the banking sector and tried to engage personally with the population to instil their confidence in the system.

He aimed at reforming the agricultural and industrial sector and focused on job creation. Under Roosevelt’s governance, regulatory authorities like the Securities and Exchange Commission (SEC) and Federal Deposit Insurance Corporation (FDIC) came into existence.

How did the recovery start?

Many reforms were carried out which when combined, took the economy out of these hardships. In 1935, Social Security Act was introduced along with the inception of the SEC and FDIC. These three were the programs that fell under the banner of the “New Deal”.

The signing of the New Deal helped safeguard the economy and has, even to this day, prevented such a scenario. Around 42 new agencies were created all aimed at decreasing unemployment, allowing unionisation, and providing unemployment benefits. It is also argued that the Second World War was also one of the reasons why the great depression ended.

The road to recovery was tough for all affected nations. However, such a scenario is unlikely to occur in the current times. Many regulations have been carried out throughout the globe, to ensure stability in the financial sector and to maintain economic balance.

An extended monetary expansion followed by an extended monetary contraction achieved little of what was expected out of them. Moreover, the notion that leaving the economy to adjust on its own would bring back jobs and stability has been discredited. Thus, countries have learned a lot from this stressful period and such a scenario is likely to never happen again.