Short note on great Depression

This has been used from our blog,’Brinks of economic thoughts”

Short note on great depression.

 

{One of the most interesting topics in financial economics,financial crisis ,

And what can be more interesting that 1930s crisis which not only shocked the global economy but also paved way for emphasis on the demand side of economy than the supply side by great economist J M Keynes}

 

In 1929 world was hit by great depression. In USA stocks markets crashed in October 1929.and largest bank in Austria failed in 1931.Output and prices fell in many nations and many fell political turmoil.

 

Depression continued until the USA entered in WW2.

 

 

CAUSES OF GREAT DEPRESSION.

Economic and financial repercussions of WW1 including effects of reparations payment.

 

Structure of international  gold  standard.

 

Bubble in stock prices.

 

Financial  panic and collapse of major financial institutions.

 

LIQUIDATIONIST  THEORY which viewed depression as a necessary corrective to the excesses of 1920s.

 

’liquidate labor,,liquidate stocks,,liquidate farmers,,liquidate real estates.’’

 

Andrew Mellon, Secretary of treasury ,1931.

 

Monetary  policy errors.

 

Tightening  of monetary policy in 1928 and 1929 to stem stock market speculation.

 

Policy  tightening in 1931 to halt a speculative attack on dollar.

Policy  inaction in 1932, despite high unemployment and falling prices.

 

Tight monetary policy led to sharp decline in prices and steep declines in output and employment.

 

Effects of policy error were globally transmitted through gold standard.

 

Fed kept the money tight in part as it wanted to preserve the gold standard.

 

Franklin D Roosevelt abandoned gold standard in 1933 and then deflation ended.

 

Fed responded inadequately to bank runs and contraction on bank lending, providing only minimal credits to bank.

Bank failures swept the country, nearly 9700 out of 25,000 banks suspended operations between 1929 and 1933.bank failures continued until deposit insurance was formed in 1934.

 

Fed appeared to be  believing the liquidationist  theory that banking and credit had expanded too much and needed to be reduced.

 

Franklin d Roosevelt tried many steps to end recession.

 

Deposit insurance for banks ended run.

Abandonment of gold standard allowed money supply to increase  and end deflation.

 

Federal Reserve failed in both its mission.

It did not use monetary policy to prevent deflation and fall in output and employment.

It did not adequately use its function of last resort, allowing many bank failures and a resulting contraction in credit.

 

Academically this crisis left many situations to be studied by academics, wide lessons were learnt, and it was a major happening of the previous century.

 

Harsh vardhan pathak

Msc economics

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