What Caused The Great Depression Essay
The Great Depression was the deepest and longest-lasting economic downturn in the history of the Western industrialized world which lasted for an entire decade. It began in August 1929, when the United States economy first went into an economic recession. Its kickoff was “Black Thursday," October 24, 1929 when traders sold 12.9 million shares of stock in one day, tripling the usual figures. Over the next few days, stock prices fell 23 percent causing the famed “Stock Market crash” which sent Wall Street into a panic and wiped out millions of investors.
However, it is far too simplistic to view the stock market crash as the single cause of the Great Depression. A healthy economy can recover from such a contraction. Long-term underlying causes …show more content…
such as high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, and the lack of high-growth new industries all interacted to create a downward economic spiral of reduced spending, falling confidence and lowered production.
Per Ben Bernanke
Another opinion worth considering, regarding the causes of the Great Depression, is of the previous chairman of the Federal Reserve, Ben Bernanke.
He claimed that the central bank was a major factor in the creation of the crisis. It used tight monetary policies when it should have done the opposite.
Bernanke highlighted its five critical mistakes.
1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that began August 1929. That's what caused the stock market crash in October 1929.
2. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold September 1931. That created a run on the dollar.
3. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
4. The Fed did not increase the supply of money to combat deflation.
5. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money
supply.
However, the Fed did not put enough money in circulation to get the economy going again. Instead, it allowed total supply of U.S. dollars to fall 30 percent.
However, it is far too simplistic to view the stock market crash as the single cause of the Great Depression. A healthy economy can recover from such a contraction. Long-term underlying causes …show more content…
such as high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, and the lack of high-growth new industries all interacted to create a downward economic spiral of reduced spending, falling confidence and lowered production.
Per Ben Bernanke
Another opinion worth considering, regarding the causes of the Great Depression, is of the previous chairman of the Federal Reserve, Ben Bernanke.
He claimed that the central bank was a major factor in the creation of the crisis. It used tight monetary policies when it should have done the opposite.
Bernanke highlighted its five critical mistakes.
1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that began August 1929. That's what caused the stock market crash in October 1929.
2. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold September 1931. That created a run on the dollar.
3. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
4. The Fed did not increase the supply of money to combat deflation.
5. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money
supply.
However, the Fed did not put enough money in circulation to get the economy going again. Instead, it allowed total supply of U.S. dollars to fall 30 percent.