The Great Depression - Example

nаlysе thе саusеs оf thе Grеаt Dерrеssiоn оf thе 1930s. Why did thе Dерrеssiоn hаvе suсh sеvеrе соnsеquеnсеs in Gеrmаny? (Name of the Student) (Name of the Instructor) (Name of the course) (Code of the course) (Submission date) Аnаlysе thе саusеs оf thе Grеаt Dерrеssiоn оf thе 1930s. Why did thе Dерrеssiоn hаvе suсh sеvеrе соnsеquеnсеs in Gеrmаny? Introduction The Great Depression is termed as one of the extreme global economic depression that started in years before the beginning of the Second World War. The Great Depression timing was different across various countries, although in many nations it begun in the early 1929 and continued unit the early 1940s or late 1930s. It was the deepest, most widespread and longest depression in the era of 20th century, and it has been utilized as an illustration in 21 century to depict the extent which the economy of the world can crumble. The crisis had it origin in the United States, beginning with October 29, 1929 stock market crumble (commonly referred to as Black Tuesday), but rapidly extended to nearly every country in the globe (Kenneth, 2010). This crisis had severe consequences in almost every nation, poor or rich. Prices, profits, tax revenue and personal income declined, and global trade reduced by 50% from 67%. Unemployment in the United States increased by 25 percent and in other nations it increased to levels of 33 percent. Urban across the globe bore the full blunt, more specifically those who rely on heavy manufacturing. Rural areas and farming were wrecked because of crop pricing reduction that reached to level of 60%. The sector in construction was nearly brought to its knees in different countries. Like any other industrialised nations, German was not spared either and it economic activities shrunk drastically during this great depression. The actual real gross output of German declined by more than 25% (Mark, 2003). This paper will seek to explore the causes of the Great Depression of the 1930s and the reason why Germany was hardest hit. Causes of the Great Depression Crashing of Stock Market on Wall Street The DJIA (The Dow Jones Industrial Average Index) is a vivid indication of the dynamics on the stock market during the great depression. The DJIA had reached its optimum in September 1929. The month the market of stocks declined is pointed out as October. In this period, researchers suggest that stocks values were escalated by 30%. In 23rd of October, the Dow Jones Industrial Average Index declined by 6.4% and this reveals that the market started to become uncomfortable. The day that followed unfolded to be “the Black Tuesday” where the Dow Jones Industrial Average Index declined by 10%. This caused a group of major banks to be compelled to shield the stock market from advance decline via support purchases that seemed to succeed. As a result, the prices of stocks started to peak again and maintained the upward trend. However, prices of stocks declined again on the Monday that followed. On the 29th of October, the stock marketed in New York was faced with the roughest day and this turned out to be the famous “Black Tuesday”. Uncertainty in public was elevated and raised alarms because of the speculation that was going around that major banks would dispose-off their stocks back to the stock market. The Dow Jones Industrial Average Index declined to the lowest of that day such that it declined by 20% compared to the price that closed on Monday (Dennis, 2010). The period between when the Dow Jones Industrial Average Index had hit its highest in September and the initial low in November, the prices of stocks reduced by 30%. This event is referred to as 1929 “Great Crash” since stock prices reduced so immensely (Romer, 1990). The table below shows the New York Stock prices Note: Statistics During the great crash of the stocks Source: Dennis 2010, pp. 14 As a result, the crash of the stock market lowered countries’ aggregate demand considerably. Business investment and consumer purchases of durable goods declined rapidly in the aftermath of the crash. A more comprehesive explaination to this is that financial crisis produced substantancial uncertainity regarding future income and as a result caused firms and consumers to shy off in buying durable goods. Albeit, the reduction in weath caused by the reduction in prices of stock was relatively minimal, the crisis may also have weakened spending by causing citizens have a feeling of being poorer. Therefore, the huge and sharp reduction in firm and consumer spending. Panic in the banking system The other backlash that contributed in lowering aggregate demand, happened in the 1930 fall where the first of four surges of banking sector panic engulfed the US and later spread to other countries such as Germany. In the period between 1930 and 1933, the united states financial sector was engulfed with situations that are records as the most chaotic and difficult in the entire history (Elmus, 2000). The bank failure waves resulted in the the crumbling of the banking system in 1933 March. It is also recorded that abnormally high rates of bankrapucy and defualt impacted every catergory of borrowers apart from the federal government. The phonomenon of panic in banking systems is caused by a situation whereby a lot of depositors drop confidence in the banks solvency and concurrently request their deposits to be given to them in hard cash. It important to understand that banks specifically hold only a small percentage of deposits in their reserves of hard cash and they can only rise the cash through liquidation of loans. The era preceding the initial banking panic that was witnessed between august 1929 to october 1930 entails the crash of stock market in october 1929. The Federal governement came up with short term measures that was aimed at increasing the quantity of circulating money. As a result, an earlier reduction in money quantity was recommenced, although there was no effort by banking institutions to liquidate loans or by creditors to move to currency from deposit. The United states which is viewed as the epicenter of the Great Depression, experienced four episodes and four adverse shocks of banking sector panic. The episodes happened in the following order; in the 1930 fall (Nov-Dec 1930), in 1931 springs (Mar-June 1931), in 1931 last half and 1932 last quarter. The last wave of panic extended through the 1933 winter and resulted to the famous national holiday of banks that was declared by the then US president in 1933, March 6th.The holiday of banks shut every bank, allowing them to resume operations only after they were confirmed solvent by the then government. The four happenings of the panics in banking systems led to severe damage and ravaged the banking sector in the country. The important factor to consider in this bank failures is the coincidence in timing with severe macroeconomic developments. The possible reason behind these developments was that the banking system reacted, without pointer, to the reduction in agreggate output. Therefore, the difficulties in banking sector led to to declining of output. Hence, the finacial panic and mishaps led to the Great Depression. Trade barriers The global trade contraction in the first stage of the Great depression has remained as one of the most severe shock to the global trade in contemparary history. Between 1932 and 1929 globe export and import volume in the industrialized countries declined by approximately 30 percent. The major factors that have been pointed out to have led to Great Depresion and they include escalating nontariff and tariff, declining demand, international policies on exchange rates and increasing in agreements on bilateral trade. However, this section will illuminate more on tarrif barriers. Tarrif rates have been touted as one of the main factor that led to this depression. The macro-tariff rates are approximated as duties on import divided by import value. The research has revealed that the rate on macro-tariffs in the globe nearly multipled two folds from 1929 to 1932. This era is highly related with the two main happenings in history of tariff policy. The initial shock was the approval of the Hawley-Smoot Tariff Act in 1930s. The succeeding shock was the approval of the import duties act in 1932 February and the abnormal importation act in 1931 November by the parliament of British. These waves of shocks resulted to extensive reaction (Jakob, 2001). The tariff of Hawley-Smoot was a vital promoter of global escalation of barriers on trade. Since the US that was the major creditor at the time, it withdrew large percentage of its international loans and did not put new loans available. As a result, the deficit nations were forced to reduce their imports (Eichengreen & Irwin, 2010). This factor has been viewed as one of the contributors to great depression. Germany was Highly Affected by The Great Depression The Great Depression brutally impacted on Germany economy. The economy of Germany had been in health status in late and middle 1920s, reaching its peak between 1925 to 1928. However, when the Great Depression caught up with Germany in 1931, its economy was brought to its knees and later collapsed. Between 1932 and 1928, the NNP declined by 20 percent, unemployment increased from 1.5 Million to 6 million, and industrial production reduced by more than 40 percent (Cohn, 1992). Between 1930 March and 1932 May, the government led by Bruning was in control when the economy crumbled. He was later preceded by two governments that ruled until 1933 January. When the economy collapsed in 1932 due to great depression, no recovery was seen until the year 1933. Researcher has contributed this to poor policies by Bruning. The path to recovery begun soon after or about the time that Hitler gained power in 1933 late January. With the rule of Hitler, the economy of Germany regained at an impressive rate. The NNP increased to 122 from 66 billion RM in a period between 1932 and 1938. The reason as to why Germany was hard hit by the Great Depression is because they were not so much dependent on exports as they were on US loans that had served as support to Germany economy since the year 1924. When US financial systems started to ask for existing loans it did not issue further loans from late 1929. Although Germany was experiencing impressive growth before the Great Depression, its economy was unable to handle this retraction of capital and cash. Banks limped to offer credit and money; in 1931 there existed runs on Austrian and German banks and many of them folded. Another reason as to why Germany was hardest hit by this crisis is because United States established tariff barriers in 1930 in order to protect its domestic industries, taking into account that US was the major purchaser of industrial exports from Germany. Industries from Germany were major losers in this move by combination of losing accessibility to obtain credit and loosing accessibility of United States markets. As a result, various industrial companies and industries either shrank or closed down rapidly. Within the year, the industrial production in Germany had shrunk to 58% of its levels in 1928 (Alpha History, 2013). The impact of this was sharp increase in unemployment rate. By the late 1929 approximately 1500,000 German citizens were unemployed and within one year this number had increased in two folds. In the mid-1933, the rate of unemployment had hit unimaginable number of 6,000,000 persons (Solomou & Weale, 2000). Conclusion In conclusion, the Great Depression has been termed as one of the most grievous economic crises in the recent history. It started in early 1929 and extended until late 1930s. One of the main cause for Great Depression is crashing of stock market on wall street. DJIA has been used to illustrate how the stock crashed and how the term Black Tuesday was obtained. The phenomenon of stock crashing in various countries resulted to a huge and sharp reduction in firm and consumer spending. Another cause that has been discussed in this paper is panic in the banking system that occurred between 1930 to 1933. This resulted to reduction in aggregate demand in various countries and banks were unable to extent further credit asistance. The main reason as to why Germany was hardest hit by this depression is because of trade barriers that was erected by its major trading partner such as US. References Cohn, R. (1992). Fiscal policy in germany during the great depression. Explorations in Economic History, 29(3), 318-318. Dennis, S. (2010). The Role of the 1929 Stock Market Crash and Other Factors That Caused the Great Depression. Berlin: Grin Verlag. Eichengreen, B., & Irwin, D. (2010). The Slide to Protectionism in the Great Depression: Who Succumbed and Why? The Journal of Economic History, 70(4), 871-897. Elmus, W. (2000). The Banking Panics of the Great Depression. Cambridge: Cambridge University Press. History, A. (2013). Retrieved April 29, 2013, from The Great Depression in Germany: http://alphahistory.com/weimargermany/great-depression/ Jakob, M. (2001). Trade Barriers and Collapse of World Trade During the Great Depression. Southern Economic Journa, 67(4), 848-868. Kenneth, M. (2010). The Causes of the Great Depression: A Retrospective . 1-13. Mark, W. (2003). Some Observation on the Great Depression in Germany. Berlin: Spandauer. Romer, C. (1990). The Great Crash and the Onset of the Great Depression. The Quarterly Journal of Economics, 105(3), 597. Solomou, S., & Weale, M. (2000). Unemployment and real wages in the great depression. National Institute Economic Review, 214, R51. Read More