The financial institutions failed to control the value of dollar in the economy that was in circulation. The lowering of the interest rates by the federal banks attracted a large number of investors to take advantage of the low discounting rate. This led to the increased effects of the deflation rate of the dollar power and the diminishing of the purchasing power of consumers. Many banks had led out more than their minimum reserves, and the effects of the banks failures were felt after the collapse of the stock market (Sullivan). The ideas of capitalists was to extensively invest to the stock marked for maximum returns but this turned out to be excessive supply of money in circulation rather than the real growth.
The federal bank was unable to regulate the dollar amount circulating in the economy which led to overinvestment due to availability of the cheap capital. The debtors of the banks were unable to service their loans, while, on the other hand, the depositors withdrew their deposits inmass leading to the financial market panic. The ineffectiveness of the reserve bank led to loss of billions in the form of assets which increased the outstanding debt due to the falling price of the dollar value. This made the value of the debt be stagnant with increases in the interests (Romer).
The construction industry and capital investment came to a hold due to the fact that the future profitability was presumed to be unattractive. The conservativeness of banks to lend was reduced resulting into the accumulation of capital reserves with lending to few investors, and thisin turn intensified the deflationary pressure which resulted into the vicious cycle. The debt which had been liquidated could not cope with the accelerated fall of price, as it was far much ahead, and this led to the increase of the dollar value that was owed to the declining asset holding, and, thus, the efforts of individual investors in offsetting their debts was increasing rather than reducing (Leeds).
The medium financial institutions were exposed to the heat of the depression, as they heavily relied on farmers. This was centrally to the larger institution that relied on the stock market. The effects of the depression led to the fall of the farmers’ output prices and the significant increase to the rate of interests. The servicing of their loans was hindered by the low prices, and the fact that their land had been over-mortgaged during the period of economic boom.
The depression had led to increase of the interest rate with the subsequent falling prices of outputs. The over-reliance of the banks led to their collapse, and the lack of the management powerbecause of the high capacity of their reserves led to overinvestment in the stock market. The banks were also practicing risky lending and this made them be in unstable capacity to absorb the depressions shock, due to their inadequate reserves.
The Disintegration of the World Economy
The collapse of the world trade contributed to the Great Depression, as the allies of the US had been loaned heavily by the US banks. These countries were sorting reparations to service their loans, as they were heavily indebted. The economy of the US was weakening, which made these countries borrow. This was attributed to the fact that their goods were highly taxed through tariffs, making it difficult to access the US markets, andthis led to defaulting in servicing their loans.
The productivity of agricultural countries had flourished resulting into a decline in demand for the US goods, as the financial crises had made the purchasing of foreign goods impossible. Thus, the government resulted into the protectionism that made more countries become beggars, and thus, the adoption of the gold standard as the means of exchange was established,because the floating of rate did not cut the interest rates, thus, making countries rely on gold standards as in terms of trade. The use of gold standards by the countries involved had some adverse effects due to the deteriorating economy (Romer).
This was due to the facts that among the countries which had lent out were focused on ways, by which they could recover the debt with the same value of gold. The setting of these countries’ currency price was through the use of the gold standard, of which theyconsequently defended these prices. This played the role of limiting the monetary policy use, leading to trade imbalances which resulted into the flow of gold to the US.
The restriction of exchange and the creation of currency control made countries, such as Britain, set prices of its currency in relation to the prices of gold. This had been criticized, as it was perceived to be a revolution of wages of which it did not have the equilibrium. Countries that relied on loans in the financing of their activities realized the effect and the impact of deflation heavily, as the prices of its commodities were eroded by the real value of their debt (Leeds).
The increase of the depression shock was attributed to the use of the gold standards, as the efforts to lower the effects were hindered, and this allowed the transmission of the problem globally. The gold standard used a relatively high rate to woe investors, and this made the easing of the monetary policy impossible, as the international equilibrium stability was ensured through the exchange rate. Countries which had abandoned the use of the gold standard suffered less, unlike those that adapted monetary policy.
The New Deal Policy
The new deal policies were responsible for the sluggish pace of the Great Depression recovery, as some of the policies benefited the economy through the establishment of social safety, and the stabilization of the financial sector. The deal was responsible for the violation of the basic principles of economics. This was due to the suppression of the principle of competition, and price setting and wages, which was beyond the normal level in most of the economic sectors. These policies plunged the economy back to the depression, as they hindered the powerful recovery forces to act (Romer).
There was the excessive competition that was attributed to the fact that the reduction of prices and wages had led to introduction of wages, which were higher than what they ought to have been. This was contrary to what that was supposed to be in a state of economy, resulting into gains in productivity. The economic power of consumers to purchase was low, and consequently, the demand leading to the decline of the Gross National Product. The policies which were contained in the National Industrial Recovery Act (NIRA) exempted the industries from antitrust prosecution (Sullivan).
It was through an agreement to enter into a collective bargainingagreement which saw the rise of wages, but it ensured the prices of goods were higher. This saw some industries to resume operations of the private companies and a rise in employment. This law had the effect of prolonged depression, as it was against the law, as the policies were short lived and their aim was the inflation of wages. The policies did more damage than good, as theypermitted the collusion of industries to increase the wages and prices of goods above the productivity growth.
The policies which were used to overlook the recovery of the economy had an immediate and powerful impact, as there was evidence of the recovery due to the rise in employment and the payroll. The NIRA started reducing the number of hours to work and the arbitrary raising of wages together with imposing of the new costs on enterprises. This saw the downward tread of industrial production back to depression. The act was a failure as it did only introduced measures which are said to be capitalistic in nature, and instead it would have been introduced as an institutional form to curb excessive capitalism.