Transcript causes of the great depression

AMAN UPADHYAY R.
14773
FIRST YEAR
B.S.CHEMISTRY
THE GREAT DEPRESSION
A HISTORICAL OVERVIEW.
It all started when the stocks
market crashed on the so-called
Black Tuesday—29th October 1929.
MACROECONOMICS
 Macroeconomics, branch of economics concerned with the
aggregate, or overall, economy.
 Macroeconomics deals with economic factors such as total national
output and income, unemployment, balance of payments, and the
rate of inflation.
 Not even the most liberalized national economy works without
macroeconomic co-ordination; it makes no sense to suppose that
the world economy is any different.—Anthony Giddens……
 Gross National Product : The GNP is the total value of goods and
services produced in an economy during a given period of time,
usually a year.
 The measure of what a country's economic activity produces in
the end is called final demand.
 The study of macroeconomics is relatively new, generally
beginning with the ideas of British economist John Maynard
Keynes in the 1930s.
There have been two models of macroeconomics so far.
1. The Classical Model
2. The Keynesian Model
 The Classical Model was extremely successful until the
world was hit by devastating economic conditions which
The Classical Model failed to rectify.
 This led to the advent of The Keynesian Model during the
Great Economic Depression.
Let’s analyze them one by one.
WHAT IS DEPRESSION ?
DEPRESSION IS A VERY SEVERE RECESSION; A PERIOD OF SEVERELY
DECLINING ECONOMIC ACTIVITY SPREAD ACROSS
THE ECONOMY (NOT LIMITED TO PARTICULAR SECTORS OR REGIONS)
NORMALLY VISIBLE IN A DECLINE IN REAL GDP,
REAL INCOME, EMPLOYMENT, INDUSTRIAL PRODUCTION, WHOLESALE-RETAIL
CREDIT AND THE LOSS OF THE OVERALL
CONFIDENCE IN THE ECONOMY.
The Roaring Twenties (The Jazz Age)
 This term refers to the period in US before The Great
Depression.
 The Roaring Twenties were the period of sustained economic
prosperity and the distinctive cultural edge during the 1920s
chiefly in US.
 The French called it the "années folles" ("Crazy Years").
 Normalcy returned to politics in the wake of hyper-emotional
patriotism after World War I, jazz music blossomed, the flapper
redefined modern womanhood and Art Deco peaked.
THE ADVENT OF GREAT DEPRESSION
 Misconception--It all started with the crash of 1929 [ happening in
three phases-Black Thursday, Black Monday and Black Tuesday] .
 But it had already begun in the so-called roaring twenties.
 As is typical of post-war periods, Americans in the Roaring
Twenties turned inward, away from international issues and social
concerns and toward greater individualism.
 Prosperity could continue only if demand was made to grow as rapidly
as supply.
 Masses were encouraged in US to spend money on luxuries. The mass
consumption kept the economy going through most of the 1920s.
 But there was an underlying problem because the income was
distributed unevenly.
Let us look at the causes of The Great Economic Depression::::::::::
CAUSES OF THE GREAT DEPRESSION
1. HIGH TARIFFS AND WORLD WAR 1ST DEBTS.
2. UNEQUAL DISTRIBUTION OF WEALTH.
3. OVER-PRODUCTION IN AGRICULTURE AND INDUSTRY.
4. STOCK MARKET CRASH and FINANCIAL PANIC.
5. MONETARY POLICY [Republican government].
1. High Tariffs
• United States maintained high tariffs on goods imported from
other countries by passing Hawley-Smoot Act in 1922.
• If other nations could not sell their goods in the United States,
they could not make enough money to buy American products
or repay American loans.
• All major industrial countries pursued similar policies of trying
to advance their own interests without regard to the
international economic consequences.
World War 1st Debts
 After World War I the United States became the world’s chief
creditor .
 Many American bankers were not ready for this new role.
 They lent heavily and unwisely to borrowers in Europe, especially
Germany, who would have difficulty repaying the loans.
 These huge debts [ $ 10 billion {115 $ in current dollar} ] made the
international banking structure extremely unstable by the late
1920s.
2.Unequal distribution of wealth
3. OVER –PRODUCTION IN AGRICULTURE
AND INDUSTRY
 Factories were producing products, but wages for workers were not rising
enough for them to buy the goods.
 Similarly farmers were producing more than people were consuming.
 Farmers lost so much money that they couldn’t pay the mortgage on their
farm.
 The surplus products could not be sold overseas due to high tariff rates
and lack of money in Europe.
4. STOCK MARKET CRASH
 In 1928 and 1929, the Federal Reserve had raised interest rates in
hopes of slowing the rapid rise in stock prices.
 Panic selling began on “Black Thursday,” October 24, 1929. Many
stocks had been purchased on margin, that is, using loans secured
by only a small fraction of the stocks’ value.
 The price declines forced some investors to liquidate their
holdings, thus exacerbating the fall in prices.
 Between their peak in September and their low in November,
U.S. stock prices (measured using the Cowles Index) declined 33
percent.
 Because the decline was so dramatic, this event is often
referred to as the Great Crash of 1929.
 The biggest reason why the economy deteriorated further
after this is because people lost their trust in stocks.
 The aggregate demand and hence supply reduced substantially.