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Stock Market Crash:
Post the era of World War I, of all the countries it was only USA which was in win win situation. Both during and post war times, US economy has seen a boom in their income with massive trade between Europe and Germany. As a result, the 1920’s turned out to be a prosperous decade for Americans and this led to birth of mass investments in stock markets. With increased income after the war, a lot of investors purchased stocks on margins and with US Stock Exchange going manifold from 1921 to 1929, investors earned hefty returns during this time epriod which created a stock market bubble in USA. However, in order to stop increasing prices of Stock, the Federal Reserve raised the interest rate sof loanabel funds which depressed the interest sensitive spending in many industries and as a result a record fall in stocks of these companies were seen and ultimately the stock bubble was finally burst. The fall was so dramatic that stock prices were even below the margins which investors had deposited with their brokers. As a reuslt, not only investor but even the brokerage firms went insolvent. Withing 2 days of 15-16 th October, Dow Jones fell by 33% and the event was referred to Great Crash of 1929. Thus with investors going insolvent, a major shock was seen in American aggregate demand. Consumer Purchase of durable goods and business investment fell sharply after the stock market crash. As a result, businesses experienced stock piling of their inventories and real output fell rapidly in 1929 and throughout 1930 in United States.
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The Gold Standard
Apart from stock market crash, there are some other section of economists who believe that the Great Depression was the cause of ill effects of abandoning Gold Standards. After World War I, many countries, both new and existing abandoned the use of Gold Standards and adopted flexible currency system so they could print the curreny to pay for the war effects. Although, US had not abandoned the Gold Standard in its economy but still there is ongoing debate about the role of gold standard in limiting U.S. monetary policy but there is no question that it was a key factor in the transmission of the American decline to the rest of the world. (Romer)
Of all the economies, it was the Great Britian which was largely affected by the Gold Standard. After it abandoned the use of Gold Standards in 1925, Britian decided to return to Gold Standard at pre war parity. Going back to pre war parity means adopting low prices in the economy, low output and high unemployment. Thus, with increase in interest rates not only British Economy but other economies which were dependant on pound sterling and British Capital Markets were largely affected and a substantial decrease in consumer spending was seen which was obvious because of high unemployment. However, the effect was not only restrained to Britian but also in other countries that relied on the pound sterling and British Capital Market for their financing and thus deflation spread to rest of the world. Later, on Spetember 19th, 1931, the british government decided to go off the gold standard and pound sterling depreciated by one third of its value on the foreign exchange market. Thus, it was all because of first collapse and then restoration of gold standards that accelerated the great depression in the global economy. Also for US Economy, once it began to contract severely, the tendency for gold to flow out of other countries and toward the United States intensified. This took place because deflation in the United States made American goods particularly desirable to foreigners, while low income reduced American demand for foreign products. The result was a decline in output and prices in countries throughout the world that also nearly matched the downturn in the United States.
Sudden Fall in Credit from US:
Post World War I, US economy invested heavily in new and growing sectors of Europe and Gemany through Foreign Direct Investment. However, at times of stock bubbles burst and with mass insolvency of US firms, the flow of credit by US economy to other nations were largely reduced and as a result, rest of the world saw a drastic fall in their output levels. The effects of reduced foreign lending may explain why the economies of Germany, Argentina, and Brazil turned down before the Great Depression began in the United States.
Why did Great Depression last so long?
The Great Depression lasted for around 10 years from 1929 to 1939. Many economists and scholars argue that it lasted for more time than it should have. After 1933, the global economy saw a rise on output levels, stable liquidity and increased consumer demand as Federal Reserve was now more than its currency base. Thus, desite of such positive factors, depression extended till 1939 and the reason for the same was inefficiency of economic programmes launched by President Roosevelt to restore prices to pre-depression levels. Also the labor rates/wages were well above the sustainable level. However, it was only during the end of 1930’s when the policy of NIRA was replaced with Taft-Harley Act and thus labor hours began to rise. Further, the industrial wages were back in line with productivity and market trends and per capita hours worked were back to their normal level and depression was finally over in late 1939. (Ohanian)
Ohanian, Lee E. Why Did The Great Depression Last So Long? 5 January 2009. Web. 12 December 2013.
Rockoff, Gary M. Walton. Hugh. History of the American Economy. USA, 2014. Web.
Romer, Christina D. "Great Depression." Research Paper. 2003. PDF Document.