The great depression of 1930s was a world economic crisis. In the United States, there was unemployment, decline of industrial production and decline in stock prices. Stock market crash occurred on “black Tuesday” 29/10/1929. This was the major cause of this great depression. The market lost about $9 billion, and business people with bought stocks using borrowed money, sold them without profit to meet their debt deadline.
The second cause of depression was failing of banks. The number of banks deposits decreased at a high rate and many people lost their savings. So many investors became bankruptcy and lost a lot of money during this period. The few banks, which were surviving, stopped giving loans to people as while as creating new loans. This reduced expenditures of people because of unavailability of enough money to meet their needs. Consumers who had suffered losses in the stock markets reduced their expenditures by 15%. Interest rates dropped, and deflation picked up making many consumers reduce their expenditures. Investors started holding money, and due to low prices of goods, a little amount of money bought many items leading to low demand.
The third reason was a decrease in purchasing power. People from all types of classes reduced their purchasing willingness because they feared further economic problems. The number of items produced reduced tremendously. Many people lost their jobs in production industries. AS results, they lost their properties to banks after failing to pay their installment. The unemployment raised by about 26% leading to less spending power because there were no wages and salaries.
The next one was the policy between America and European countries. America charged high tax on imported goods from Europe. This reduced the trade between the two continents. The main reason for this was to protect local industries in the country forgetting that foreign trade contributed much on its economic activities. Businesses in both countries started failing. This resulted to further deterioration of the world economy especially to countries which depended on foreign trade. Export declined from about $5.3 billion to $1.5 billion leading to fall of prices of commodities (Bernanke, 2000).
The other one is drought conditions in Mississippi valley. Many farmers failed to pay taxes and debts, and forced to sell their farms to enable them pay debts and loans. They made no profits and remained poor after losing their farms to banks and other investors. This was referred to ‘’the dust bowl”.
In addition, monetary institutions contributed to this depression by making poor monetary policies. These policies caused a reduction of money supply to some people who depended on borrowing from lending institutions. This recession contributed to the great depression of 1930s. Banks like New York Bank of the United States did not respond by lending failing banks money contributed to this depression because of lack of liquid money. There was no money in banks for business people who were willing to borrow loans for investments and paying back loans (Chultz, 1999).
There is no likelihood of occurrence of another depression. This is due to improvement seen in banking sectors. Demand and supply of money is under great control from government especially in central banks of different countries. This method ensures that currency distribution is done according to the markets demand (Hamilton, 1987).
In conclusion, the great depression of 1930s was due to factors which could be controlled in a way. Many people lost their money to banks and other lending institutions. There is a need to develop strategies to prevent occurrence of such events.
Hamilton, James (1987). "Monetary Factors in the Great Depression". Journal of Monetary Economics.
(2000). Essays on the Great Depression. .
Chultz, Stanley K. (1999). . American History 102: Civil War to the Present.