Quiz : Special Topic 6 Lessons From the Great Depression

Business

The Great Depression of 1930 is the most severe and prolonged recession in the history of US economy. This era is marked by decade long high unemployment, falling income and difficult living conditions. Unsounded government policies were the core reason for this decade long misery. To avoid a situation as severe as the Great depression the people need to analyze the factors that went wrong and they also need to learn from their past. Many believed that the great depression was caused by fall in stock prices in October 1929. However, this is not true. The stock prices rose sharply during the 1920s which is called the roaring 20s for innovation, technological advancement and economic growth. The stock market just reflected the economic scenario and rose sharply during this period. On September 3, 1929; the stock market reaches the height of 381 and receded to 327 on October 22, 1929. Facing this fall the investor started to sell off their stocks and in just one week on black Tuesday October 29, 1929 the market closed at 230. It falls even further to 199 later on November 13, 1929. After that from mid-November to mid April 1930 the indexes increases every month regaining the losses of 1929. If the falling stock prices had caused the great depression then the increase in the indexes could have made the economic situation better but that never happened. There were similar downturns of stock prices but none of them results prolonged unemployment and falling incomes. Though the falling stock prices causes the initial downturn in the economy but it cannot be held responsible for decade long economic downturn and difficult living conditions.

The Great Depression of 1930 is the most severe and prolonged recession in the history of US economy. This era is marked by decade long high unemployment, falling income and difficult living conditions. Unsounded government policies were the core reason for this decade long misery. To avoid a situation as severe as the Great depression the people need to analyze the factors that went wrong and they also need to learn from their past. Many believed that the great depression was caused by fall in stock prices in October 1929. However, this is not true. The stock prices rose sharply during the 1920s which is called the roaring 20s for innovation, technological advancement and economic growth. The stock market just reflected the economic scenario and rose sharply during this period. On September 3, 1929; the stock market reaches the height of 381 and receded to 327 on October 22, 1929. Facing this fall the investor started to sell off their stocks and in just one week on black Tuesday October 29, 1929 the market closed at 230. It falls even further to 199 later on November 13, 1929. After that from mid-November to mid April 1930 the indexes increases every month regaining the losses of 1929. If the falling stock prices had caused the great depression then the increase in the indexes could have made the economic situation better but that never happened. There were similar downturns of stock prices but none of them results prolonged unemployment and falling incomes. Though the falling stock prices causes the initial downturn in the economy but it cannot be held responsible for decade long economic downturn and difficult living conditions. Therefore, the market which reflected through stock prices was not responsible for great depression. However, the economic downturn was caused by unsounded policies by government rather than failing stock prices. Here are the four economic political decisions which in spite of their good intension went horribly wrong and made a bad situation worse. • In 1929, in spite of stable prices the Fed increased the discount rate that decreases the money supply. The reduction in money supply pushed downward pressure on price level and decreases the value of output and aggregate demand. The firm started to make losses and unemployment rose high. In this situation Fed injected some money into the economy and the economic situation went back to nearly normal. But as soon as the economy recovered Fed increases the reserve ratio and the money supply again contracted. This made the situation much worse than before and the economy faced a double digit deflation and rising unemployment and falling income. • In the face of rising unemployment the Smoot-Hawley trade bill was passed to save the jobs in import competing sectors and to increase domestic demand. The tariff rate was increased substantially by this bill. However this law went horribly wrong as 60 nations retaliate against US and export sectors got harmed. The obligation on free trade also harmed the import sector and volume of international trade decreases. This way the trade restriction could not save job but created more unemployment and decreases the tariff revenue. • The economists prior Great Depression had classical views about the economy and they believed that the government budget should always be balanced. The era of great depression saw rising government deficit. The policy makers in order to balance the budget increase the income tax 150% in a year. This seriously affected the people incentive to income and save. This decreases the aggregate demand in economy and the unemployment increases further. • The New Deal of President Roosevelt often held responsible for bringing the great depression to halt. But this idea is also fallacious. President Roosevelt understood that the falling prices are bad for economy but he never understands that it is because of monetary contraction. He passed many laws to stop the price to fall. He passes AAA law to decrease the supply of agricultural product so that the prices of these products remain high. He also formed cartels for every industry and promoted monopoly pricing to stop these prices to fall to. The labor laws made the collective bargaining to change and the unionization to rise. Several new laws created uncertainty in the economy and new business ventures and investment practically seized. For all these reasons, what might have been a merely a regular economic downturn, has transformed into a decade long misery and difficult living condition called as the Great Depression.

The Great Depression of 1930 is the most severe and prolonged recession in the history of US economy. This era is marked by decade long high unemployment, falling income and difficult living conditions. Unsounded government policies were the core reason for this decade long misery. To avoid a situation as severe as the Great depression the people need to analyze the factors that went wrong and they also need to learn from their past. The New Deal of President Roosevelt often held responsible for bringing the great depression to halt. But this idea is also fallacious. In 1929, in spite of stable prices the Fed increased the discount rate that decreases the money supply. The reduction in money supply pushed downward pressure on price level and decreases the value of output and aggregate demand. The firm started to make losses and unemployment rose high. In 1933 the Fed increases the money supply which helped the economy to recover slightly. There was also sign of private sector recovery. But the New Deal policies namely NIRA, AAA and 1936 tax laws pushed the economy into another recession without fully recovering the economy from the depression. After 7 years of the New Deal the unemployment was as high as 17%. The great Depression was put to a halt by increase in demand for military good at the advent of World War II.

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