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The Great Depression was the worst economic crises to hit the world. The crises did not spare the rich and the poor nations with the US being the hardest hit. Theories have been debated by economists and historians in trying to explain the reasons that were behind the collapse of the economy. The depression devastated the revenue from taxation, while it diminished the individual’sdisposable income and the industrial profits. The productivity output was reduced leading to a rapid increase of unemployment and the deflation of the commodity prices. The conditions of the depression were either worsened or better off by the internal condition of the nation’s internal weaknesses and strengths of those nations that were affected.
The economic meltdown was eminent, but its realization was in 1929, when it took holdas a result of collapse of the stock market in the US. The collapse of the stock market contributed to a chain of collapse of other sectors of the economy, mostly financial institutions. Many countries were using the gold standard, which was the international medium of exchange, and this was the main contributor to the spread of the effects of depression to other countries. The ideologies which had been applied during the economic boom contributed much far to the great depression.
The abandoning of the gold standard as means of trade and the adaptation of the monetary expansions accelerated the recovery of countries which had not been severely hit by the crises. The adaptation of the monetary expansion led to the changes of the economic theory, microeconomic policies and economic institutions. Thus, there is a need to examine the possible causes that lead to the Great Depression and their effects to the economy.
Collapse of the Stock Market
The collapse of the US stock market is attributed to the acceleration of the Great Depression. Its collapse saw investors losing billions of dollars which led them tocutting their disposable income. The US had experienced an economic boom in the 1920s which had a great impact on the economy, due to the unequal distribution of wealth. The production in the industrial sector was enormous far above the demand, whereas, the rate of wage increments was very low, compared to the rate of productivity (Romer). Due to the low wages, the sector had large benefits, which were accrued due to the increased productivity, and were converted to profits. These profits were then invested into the stock at the stock market, while the effect of the low wages was the diminishing of the consumer’s purchasing power.
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The lowering of the discounting rate by the federal bank to attract investors had led to an increase in the productivity that flourished the economy. This increased the investments of capital that created space, which was relatively impossibleto utilize fully increasing the supply power more than the demand, which was caused by the diminished consumers’ purchasing power. The overinvestment in the industrial capacities led to the overinvestment in the stock market (Sullivan). This was done due to the economic boom in the 1920s, as it had been predicted that there will be no classes of status. This led to mass production and consumption to facilitate a continued growth. The result was that the working class and farmers had not been secured adequately and were thriving on poverty. It was increased supply of money that capitalists of the time mistaken it for wealth.
The collapse of the stock market led to massive losses to investors, which transmitted the shock waves to other sector of the economy, and therefore, its collapse was a primary cause of the Great Depression. The collapse of the stock market saw the investors’ cutting their spending, and this lowered the demand of commodities and an increase in supply. This led to the productivity of industries been reduced, and consequently, the cutting cost though lay off, which farther reduced the demand of goods.