The Great Depression is considered one of the worst economic downturns the world has ever experienced. Though it began in the United States, this economic decline is said to have spread fast to other parts of the world causing severe unemployment, a decline in outputs and acute deflation. Its effect started being felt in 1929 and continued for close to ten years leading to severe economic impact in the global market. Bank failures and crash in the stock market of 1929 are considered to be the leading causes of the Great Depression due to their devastating effects on the global economy.
First, the 1920s, also known as the “Roaring Twenties” experienced a severe crash in the stock market which made the world economy to destabilize. During this time, there were several economic, social and political changes that led to trade dynamics across the globe. Various aspects of the economy experienced led to the stock market crash of 1929. Before the crash, consumer spending had hit an all-time high, especially in the United States, which had stabilized the global economy significantly (Robbins 7). Companies produced goods in large numbers and consumers had earned enough income to purchase these products. Technology had also improved giving consumers the opportunity to buy various commodities that made their lives better. However, the spring of 1929 experienced a drastic change in consumer spending. Such market dynamics meant that manufacturers were overproducing resulting in surplus goods (Robbins 14). Nonetheless, stock prices kept going up until September 3, 1929, when they reached their peach, and two days after, the market started to drop.
Moreover, failure in the banking system was another cause of the Great Depression. After the crash in the stock market, depositors began to panic and rushed to withdraw money from the banks (Wicker 49). Before the crash, banks had been advocating for speculation buying where they used investors’ funds to lend to individuals interested in buying stocks. In the long-run, investors were not able to repay the borrowed amounts, and consequently, banks were not in a position to repay the investors their funds. Additionally, the stock market crash created fear that banks would also fail, and due to excessive withdrawals without deposits, thousands of banks had to close. By 1933, almost half the banks that operated in the United States had failed. Other monetary policies introduced by the Federal Reserve System also played a significant role in the Great Depression (Robbins 76). Such strategies included an increase in interest rates, failure to prevent banking panic, neglect of certain banks during the banking crisis.
As discussed above, failure in the banking sector and crash in stock markets that occurred in the late 1920s are two factors that played significant roles in the Great Depression. Before this economic crisis, there was a boom in the global economy. Manufacturing was doing well, and consumers earned enough income to purchase the goods produced. Growth in technology also made life easier by creating quality products. However, by the end of 1929, stocks reached their peak and started dropping contributing to the Great Depression. The fall in the stock market had far-reaching effects on the banking sector. People developed panic and began withdrawing from the banks creating an imbalance between the amount deposited and that withdrawn, leading to the collapse of several banks.
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