Analysis of the Great Depression of the 1930s and the Reason Why It Had Severe Effects in Germany - Essay Example

Surname: Presented to Institution Name, Location Date Analysis of the great depression of the 1930’s and the reason why it had severe effects in Germany Introduction The great depression was a harsh global financial depression that just before the occurrence of the Second World War. The time in which the global menace occurred varied depending on the countries with many experiencing it between the early 1930’s and stanching to the late 1930’s. In some other nations the economic depression went up the mid of 1940’s. This particular depression was the longest, deepest and highly spread throughout the world. The great depression occurred in the 20th century and it is used in the 21st century to show how far the world can sink into an economic crisis. The origin of the depression was the United States, this come to be after the most discouraging fall of the stock prices around the fourth of September 1929, this shocking news were released on the 29th day of October 1929. This day was renamed the black Tuesday by scholars. The great depressions effects did not exempt any country neither the rich nor the poor. All the revenue, individual income, tax, prices and the profits made in the market reduced. The global trade was plunged by more than 50% of joblessness in the United States, this rate rose to about 25% and some other countries it increased to a devastating percentage of 33 All the great cities in the world at that time were hit the hardest; this was even optimised in cities that depended mainly in the heavy industry. The rate at which constructions were being curried out in the cities was almost nil in many countries. The farmers in the rural parts of the countries suffered a great loss as the prices of the crops fell to about 60%. The countries that depended mostly on the primary sector including mining, growing of cash crops, and logging were the one that suffered a lot. Some countries recovered from the crisis in the middle of 1930’s while in other nations it lasted up to the end of the Second World War. This depression was not only an economical catastrophe but also a social and political crisis as well. Analysis of the great depression While analyst attempt to evaluate and identify the cause of any event or crisis it is almost obvious that he/she will discover not just a cause but a series of causes. When they start with immediate cause then going back to the ultimate cause this will give many causes in the same way the causes of the great depression are many and varied(Eggertson, 2004). Many economists from different places in the world have faith in the fact that an economic activity that is set up in any place changes alternatively between periods of expansions and contraction, this means that there is a continuous take of turns between the times of economic growth and the challenging times of shorter recession. It is clear then to any business or economic setup depression is part of it but the real question is what really made the great recession unique(Frank & Bernanke, 2007). One of the factors that set the great recession in motion is the crash of the stock market in the year 1929, although this is though to be the main cause, recent research has it that the stock market crush was less of a cause than a symptom of the great depression. In the early 1920’s the stock market was great and booming since the prices of stock had inflated by a factor of four in the past ten years. The stock market experienced the stock market bubble in late 1920’s and this made the speculation of having a better life from the stock market. The stock market begun to show signs that it was going to fall and the investors who were very eager to invest in the market withdrew their optimism in it. On the 24th of October 1929 those who had invested rushed to sell their stock hence marking the beginning of the beginning of the rapid reduction of the market which lost a third of its value. On the same day those who had invested lost an average of about $10 and $15 billion. This trend in the stock market continued for almost a decade and in 1933 the market had lost almost the third of its value (Eggertson, 2004). The earlier fall in the stock market was increased by entrepreneurs who had purchased their stock ‘on the margin’. Buying stock on the margin is an activity that gave opportunity investors to buy the stock using credited cash, using the worth of the stock as guarantee. The act of buying stock on the margin as they call it was very efficient when the stack market was climbing the ladder but when it crumbled their guarantee which was the value of the stock became worthless and they were asked to add more collateral or pay back their loans with immediate effect. To save the situation the investors were put under pressure to sell their stock. This was the only way out for many investors and this made the market to crumble totally (Eggertson, 2004). Another cause of the great depression was the failures of the banks. Although the failure of the bank was not the initial cause of the depression it had very great effects on the length and the harshness of the depression. Many investors who had borrowed money from the bank in order to buy the stocks were not able to repay back the loans leading to the fall of the banking system. Since the deposits in the bank were not insured at that time as it today, the customers who had kept their money in the banks lost everything they had saved in their bank accounts. The rush by the customer to withdraw their savings from the banks increased the rate at which the banking system crumbled (Duhigg, 2008). Another factor that increased the harshness and length of the depression was the dropping of the demand by the consumer, the rate at which people spend during the period of depression was very low, and this rate self-reinforcing in some particular way. This particular situation made the production sector give out what the people could not afford to use. As expected there was very high rate of joblessness and low production which brought down even more the ability of the consumer to spend. This led to the double digit joblessness that was experienced in between 1929 and 1941. This was an example of people suffered due to the recession (Frank & Bernanke, 2007). The unemployment rate in the US 1910–1960, with the years of the Great Depression (1929–1939) highlighted As it shown clearly in the graph above the economy in the united states fell from almost full employment to a percentage of about 3.2 unemployment in the year 1933 from 1929 when the percentage of employment was about 25 percent. The answer to the question that most people ask which the reason is for the rise of unemployment is that the out put that the economy produced was not enough as compared to when there was full employment. The economy was not producing to it potential since there was no enough demand for the products (Frank & Bernanke, 2007). There are theories that strive to give explanation on why the expenditure of the consumer fell, and why it never rose again. This fact is always taken as one of the most significant start ups of the great depression. These theories hence make effort to show the origin of the great depression. These include the fact that the purchasing power of the consumers was reduced and gave them a bad viewpoint on investments and the credit. This led to personal economic actions leading to great depression (Eggertson, 2004). The growth of the economic during the 1920’s was very unevenly dispersed this formed a structural economic difficulty before the crash of the market. Many countries then had no ability to keep the manufacturing companies running hence making low demand to reduce further. The supply of the money and the value of the currency that was in circulation alongside with the deposits kept in the banks and monetary institutions reduced at the initial stage of the great depression. The reduction of the money in circulation reduced the demand of he consumers. The reduction of the supply of money was due to an act or ignorance by the Unite d States Federal Reserve (Duhigg, 2008). USA annual real GDP from 1910–60, with the years of the Great Depression (1929–1939) highlighted. The productivity of an economy is calculated by its Cross Domestic Product (GDP). The drop in the GDP is not good at all as it affect greatly on the on the rate of unemployment, this is due to the fact the rate of unemployment reflects on what was not produced but could be produced. If one could come up with a graph that shows the percentage of the people who are employed it could resemble the GDP (Eggertson, 2004). While the depression was hitting hard it is important to keep in mind that at the brim of it there were about 74 percent who were on their jobs. To answer the question that why the rate of production had gone down much in 1933 than formerly in 1929, it is very important to look at the components of demand for the states output. The output of any country is bought in four main features these include the buyers, investors, government and overseas exports. The United States exports had offset its exports as shown in the table bellow (Frank & Bernanke, 2007). The table bellow the purchases of the customers had dropped fairly while that of the government had not dropped at all as compared to that of 1929 but as it is shown there was a very disastrous fall of the value of assets that were bought. Both the exports and the imports fell this made it happen, hence, there was no great deal of variance in the grid exports. YEAR GDP CON SUMP TION INVEST MENT GOVERN MENT PUR CHASES EXPORTS IMPORTS NET EXPORTS 1929 790.9 593.9 92.4 105.4 35.6 46.3 -10.7 1930 719.7 562.1 59.8 116.2 29.4 40.3 -10.9 1931 674.0 544.9 37.6 121.2 24.4 35.2 -10.8 1932 584.3 496.1 9.9 117.1 19.1 29.2 -10.1 1933 577.3 484.8 16.4 112.8 19.2 30.4 -11.2 The interest rates have very high effect on investments; interest rates have to be considered although it is not the sole factor that determines the amount of investments and not the most significant determinant of the success of an investment. The most important concern that the interest rates make it considerable is because it is not the nominal rate, which is the rate at which the lenders charge. That is very significant but as an alternative it is the interest rate that is in relation to the rate of price rises, this is the so called genuine interest rates. The real interest rates refer to the difference that comes between the nominal rate and the so called rate of inflation. The problem that cropped up in the early 1930’s was that there was a greatly negative rate of inflation that is to say in other woods there was a deflation as a substitute of inflation and this clearly meant that those who had borrowed had to return a payback of more valuable dollars than the real value that they had borrowed (Duhigg, 2008). The following graph shows the trends. In 1932 the real interest rate was almost 16 percent per year. The long term average real interest rate for the U.S. is about 3 percent. YEAR PRICE INDEX RATE OF INFLATION % NOMINAL INTEREST RATE % REAL INTEREST RATE % 1929 13.12   5.85   1930 12.60 -3.96 3.59 7.87 1931 11.34 -10.00 2.64 14.04 1932 10.05 -11.38 2.73 15.92 1933 9.78 -2.96 1.73 4.54   As shown in the above table the nominal interest rate was diminishing during the time when there was economic recession between 1929 and 1933 but due to the rate of inflation which was negative the real interest rate higher as compared to the real nominal interest rate(Eggertson, 2004). The Weimar republic of Germany was among the nations who were hit very hardly by the great depression. Germany as a nation was taking loans from United States in a bid to build their economy before the depression. When the recession stroke the loans were stopped and the unemployment in the country soured greater heights especially in the large cities and the political systems diverged their energy towards fanaticism. In the year 1932 the rate of unemployment in the country had reached about 30% hence they bolstered a lot of support from Nazi (NSDAP) and the communist (KPD). These are the two parties that rose to have the majority in the elections of July 1932(Frank & Bernanke, 2007). The repayments of the loans that had been taken due to German preparation for the war were suspended in 1932 following the Lausanne conference of the year 1932. By this time German had repaid one eight of the loans and Hitler took power with the Nazi party coming to power in 1933 leading the country to totalitarian single party state and initiating the second word war. This situation in which Germany found itself made them more vulnerable (Duhigg, 2008). Conclusion There has never been any single answer that explain the cause of the great depression many economist and historians are still studying and attempting to come up with the causes and the effects of the of the great depression, this way they have developed sophisticated theories that attempt to give an explanation on the issue. From the research done it is logical to conclude that the great depression was caused by contraction of the supply of money in the United States. This was very argumentive especially from many economists like Ben Bernanke, who is the current chairman of the Federal Reserve. References Duhigg, C. (2008). Depression, You Say? Check Those Safety Nets. New York Times , p. 98. Eggertson, G. (2004). A Reply to Steven Horwitz's Commentary on "Great Expectations and the End of the Depression". Econ Journal Watch 7(3) , 197–204. Eggertsson, G. B. (2010). A Reply to Steven Horwitz's Commentary on 'Great Expectations and the End of the Great Depression. 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