THE GREAT DEPRESSION

The Great Depression

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Elizabeth Jacobs was born in 1920 and has lived in the US all her lifetime. When the Great

Depression of the 20th century was being experienced, she was only nine years old but she can

actually remember how tough life became during the crisis. She says that the crisis had begun in

the early 1920s but it became more severe in the late 1920s. This has been supported by Romer

(2003) and Matthews (n.d) who acknowledge that the economic depression was an economic

downturn that was experienced globally from 1929 until 1939. According to the interviewee,

Elisabeth Jacobs, many people lost their jobs. “ I vividly remember the evening when my father

came home with a depressed look on his face and broke the news that he had lost his job at the

stock exchange market where he had been a stock broker almost half of his life time”, says

Elizabeth. She further gives the information that most of her relatives and neighbors lost their

jobs and people had to literally depend on others for survival. According to Elizabeth, “people

only bought what was necessary; luxury was a forgotten vocabulary in most American homes.”

As evidenced by Romer (2003), this grave crisis caused declines in economic output, loss of jobs

and high levels of unemployment and acute deflation worldwide. In the United States it has been

ranked as the second worst crisis in American history after the Civil War especially due to the

social and cultural implications it had on the American population However, the great depression

was experienced at varying times and its severity was varied across countries but generally it is

the industrialized countries that felt the greatest impact of this economic crisis.

In the United States the Great Depression started in the summer of 1929 and was experienced

until 1933. This led to a 47 percent decline in industrial production and the real Gross Domestic

Product fell by 30 percent (Romer, 2003). It also led to deflation whereby the wholesale index

price fell by 33 percent (Romer, 2003). On the other hand, the Great Britain experienced

recession after 1925 when it decided to use the gold standard with an overvalued pound (Romer,
THE GREAT DEPRESSION

2003). However, the depression became severe in the first quarter of 1930 with great declines in

industrial production. For France, according to Romer (2003), the depression began in the early

1930s but recovery strategies were adopted in 1932-1933 though they were short-lived as

industrial production and prices fell substantially from 1933 until 1936. In Germany, the

economic crisis started in early 1928 but stabilized for a while and started declining in the third

quarter of 1928. Romer (2003) observes that the decline in industrial production in Germany was

almost equivalent to that in the United States. According to Matthews (n.d), the great depression

caused deflation that saw prices falling by 25% in the Great Britain, 30% in Germany, 30% in

the United States and 40% in France all of which were the four largest economies of the world

during that time.

The great depression was caused by several factors but in the US it was particularly caused by a

decline n aggregate demand that in turn led to a decline in industrial production that later spread

to other industrialized countries through the gold standard (Romer, 2003).Matthews (n.d) argues

that this economic crisis was caused by “historical factors, central bank policies and political

decision making.”

The US monetary policy aimed at limiting stock market speculation led to the eventual crash of

the stock market (Romer, 2003). In the US, the stock market prices had increased almost four-

fold in 1921 and reached unjustifiable low levels by the end of 1929 hence discouraging

investors who had lost confidence in the stock market. The decline in stock market prices in turn

reduced American aggregate demand that consequently led to decreased demand of durable

consumer goods. The decreased demand forced industries to produce fewer goods.
THE GREAT DEPRESSION

In 1930, people lost confidence in banks and demanded they be paid back their cash, a move that

led to the collapse of banks (Romer, 2003). Most banks were declared bankrupt and could not

raise fund s for financial investment. Loss of confidence and disruption of money lending by

banks caused monetary contractions.

Another cause of the great depression was the gold standard which was used by countries to set

their currency’s value in terms of gold. The imbalances in trade led to international gold flows to

the US especially in the purchase of assets like stocks and bonds (Romer, 2003). When the US

economy started contracting, the same effect was transferred to other countries due to the gold

standard.

Finally, the decline in international lending and trade contributed to the Great Depression. This is

so because most borrower countries could not borrow from or trade with developed countries

due to the inflation being experienced in such countries (Romer, 2003).

THE GREAT DEPRESSION

References

Romer, C. D. (2003). Great Depression. Available at

http://elsa.berkeley.edu/~cromer/great_depression.pdf [Accessed 4 November 2011]

Matthews L. (n.d). What Caused the Great Depression of the 1930's? Available at

http://www.medifix.org/safec/files/What%20Caused%20the%20Great%20Depression%20of

%20the%201930.pdf [Accessed 4 November 2011]