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The Great Depression: Causes - Essay Example

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World economy developed greatly in the 20th century. There are many great changes that occurred in 20th century and all these changes had a great impact on the field of economics.The Great Depression of 1929 is one of those events that changed the shape of modern economics forever…
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The Great Depression: Causes
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The Great Depression: Causes

Download file to see previous pages... World economy developed greatly in the 20th century. There are many great changes that occurred in 20th century and all these changes had a great impact on the field of economics.The Great Depression of 1929 is one of those events that changed the shape of modern economics forever. It all started in 1929 and the world trade shrank by more than 50 percent. The great depression is known as the worst economic decline in modern economics history. Employment decreased greatly all over the world and poverty reached new levels. After the great depression new methods of government intervention were introduced and world organizations like International Monetary Fund (IMF) were founded. The causes of this economic disaster are many and they will be the topic of discussion of this essay. These causes will help us understand why the great depression lasted for such a long time and why it could not be stopped even after government intervention. The main reasons of the great depression of 1929 are the stock market crash, the default of Banks, decrease in international demand and decrease in international trade. All these factors caused the world economy to stay in depression for such a long period. Causes of Depression In this section some major issues will be discussed which eventually led to great depression of 1929. Stock Market Crash of 1929 Great depression is market by a stock market crash in October 1929. It is probably the most widely known cause of the great depression. Stock prices plummeted on 29th October and people lost a great amount of money. In order to understand this particular cause we will have to look at the background of the stock market in 1920’s. There is no doubt that 1920’s was a great time for investors in the New York stock market. They were earnings high returns on their investment so many people started to invest money in the stocks (Walton & Rockoff, 2009). Due to highly unregulated stock markets it was very easy for investors and speculators to trade stocks. Initially dividend given by the companies was also high and this was another reason why long term investors wanted to invest money in the stock markets instead of investing it elsewhere. With everyone investing in the stock market investment in other sectors was decreasing and this was the start of a problem. Prices of stocks were increasing put not the production capacity of the companies. Production base was not increasing with the same pace so the stocks were severely overpriced. Investors were bidding the prices of scrip up but this was not representative of the performance of the company. When investors realized this they started to pull their money out of the stock market and as a result the stock market crashed. People lost a huge amount of money as a result and in turn their consumption decreased. The decrease in demand affected the profits of the companies so they started to lay off employees which in turn further decreased the demand. In this way a vicious cycle started and unemployment reached new heights (in some countries more than 33% decrease in employment was seen). This is how stock market crash started an economic recession that led to the great depression. Increase in Import Tariffs The demand was decreasing rapidly so governments wanted to protect the domestic companies. As a result import tariffs were increased. This step was taken by governments to counter the effects of depression but it further worsened the economic health of the countries. International trade shrank rapidly and this caused great problems for economies all over the world. International trade was very beneficial for the economy of many countries. It was a source of revenue and also increased the employment opportunities. By restricting international trade governments dug their own grave. They thought that it will protect their domestic industries but instead it was the means through which ...Download file to see next pagesRead More
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