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Sabyasachi Sahu MACROECONOMICS ASSIGNMENT 1501100

Why is the great depression so important in the anals of the orld e!onomi! history"

The great depression officially began after the stock market crash on October 29 1929, after a

lengthy period of economic prosperity. It changed the life of millions of investors, who hadinvested in the stock markets, and in turn the banks which had also invested large portions of

money in the stock markets. ecause of this, banks suffered closure. !ompanies and

individuals became bankrupt. The investor sentiment having waned, people started

withdrawing all of their savings from the banks, leading to a bank run. "hortage of funds

affected the industrial and construction sector since there was no capital for investment.

!onse#uently, firms started laying off workers and$or cutting back wages, thus leading to

reduced consumer spending. %oreover, the onset of dust storms had a devastating effect on

the agricultural production, thus leading to unemployment across the agricultural sector. &s

most of the investment in the stock market was made through loans from banks, the banks

were faced with shortage of funds which eventually led to their shutdown. The failure of the

banks made the situation worse as the savings of the people which were deposited with the

banks had also gone and they were left with money. The whole economy plunged into a

vicious cycle of low consumer spending, loss of capital for industries, pilling up of inventory

and stagnated growth of industrial production. 'nemployment touched 2(), wages fell *2)

and the +- fell by half.

The great depression coincided with the fall of industrial production in other capitalist

countries like The +reat ritain and thus the problems in the 'nited "tates of &merica was a

symptom of the problems in the world economy and hence, it is important in the annals of

the world economic history.

What lessons !an #e gleaned from the great depression"

The +reat epression was a watershed moment in the economic history. Then, 2()

employment rate was a reality. ecause of this, survivors of the +reat epression, along with

the +overnment have realied a few important lessons. To combat deflation, the !entral ank

has to increase the supply of money into the system, lest the economy falls into the vicious

cycle of less investment, lower wages and lower consumer spending. &lso, the +overnment

has to have policies fail/safes in place to prevent bank runs, so that the financial system does

not fail. &lso people have to realie that stock markets are driven more by speculation than by

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Sabyasachi Sahu MACROECONOMICS ASSIGNMENT 1501100

science and taking loans$mortgaging gold to invest in the stock market, though can be a path

to prosperity, can also be a road to bankruptcy. "econdly, the +overnment should not have

established measures of unnecessary monetary tightening. In the case of the great depression,

the catastrophe could have been prevented if the government had followed a e0pansionary

fiscal policy, where the country saves during good times and spends during good times.

inally, policy makers have to move away from a fi0ed rate e0change, since drop in demand

causes balance of payment crises and the countries have to deflate their economies to protect

the fi0ed value of their currencies in this case, gold.3

What a!!ording to yo$ are !han!es of another great depression affe!ting the orld

e!onomi! order"

The difference between the 2445 recession and The +reat epression of 1929, is the timely

intervention of the +overnment to counter the effects of a stock market crash or a decrease in

demand etc. !entral banks these days have realied the importance of monetary policy in

regulating the economy. 6ence institutions were set up in place to regulate practices in the

stock market "7!,"7I3 etc. It has also realied the importance of the financial system to

the health of an economy and has hence established practices in place that prevents a bank

run. esides, economies avoid unnecessary monetary tightening and instead in the case of

deflation, follow an e0pansionary fiscal policy to spur economic demand and set the economy

back on track. &lso, the global economy is integrated and central banks work in tandem to

prevent this kind of economic failure. 6owever, there are pitfalls. &s of now, prices of

commodities are falling, industrial production and consumer spending is at a ( year low, and

unemployment is rising in developed countries. &lso the +reece ebt crisis and the stock

market crash in !hina and its effect on both developed and developing countries are but

indicators of an imminent recession. These are events that central banks and investors have to

be wary of and put measures in place so as to keep the effect of an economic downturn

minimal.