Frensisca Aristil
Eco 2013-169825
Extra Credit Paper
The Great Depression
On Tuesday October 27th, 1929, the United States experience the worst crash of the stock market in history. It was so severe, economist called that Tuesday “Black Tuesday” Since many banks also invested in the stock market; the crash caused many banks to close their doors. Many people tried to sell their stocks but no one was buying. Although the Stock Market crashed, many optimists were hopeful that the economy will turn around. John D Rockefeller stated that: “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned ...view middle of the document...
Since the dust storm destroyed their crops, they couldn’t pay back, the bank foreclosed on their small farms; they couldn’t feed themselves and their family so they became homeless.
The great depression caused by the major bank failures, stock market crash, deflation in asset and prices, dramatic drop in demand and credit and disruption of international trade. Nearly two months after the crash of the stock market, stockholders lost over $40 billion. By 1930, there 9,000 banks that closed, at that time there were no insurance so many people ended up losing their savings. The surviving banks could not create new loans due to lack of asset. There were demand-driven theories known as Keynesian economics refer to the breakdown of the international trade and institutional economists, they argued that under-consumption and overinvestment caused an economic bubble. British economist John Maynard Keynes argued in his book General Theory of employment interest in money that “lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment.” Keynes’ idea was to keep people fully employed and the government would run on deficits when the economy slowed down. On the contrary, the monetarist believed that the depression started a normal recession but as a result of the significant policy mistakes by monetary authorities caused the money supply to shrink which led the recession to the great depression
Many economists believed that the sudden decline in international trade caused the economy to worsen. They also blamed the Smoot-Hawley Tarrif Act (an act enacted in June 1930 that increased U.S. tariffs on 20,000 imported goods) for worsening the depression as result of a decline in international trade. Although international trade was only a small part of the economy, it still impacted some businesses such as farmers. American exports decreases and prices also fell, the most impacted farm commodities were cotton, wheat, tobacco and lumber. Since the exports fell, many farmers defaulted on their loans.
American economist Irving Fisher believed that the main factors of the great depression were over-indebtedness and deflation. He believed that loose credit to over-indebtedness fueled speculations and asset bubbles. Fisher created an outline of nine that interacted with one another under the condition of over-indebtedness and deflation to create mechanics of boom to bust. The factors are as followed;
1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business,...
