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Analyzing The Causes And Solutions Of The Great Depression

2695 words - 11 pages

Analyzing the Causes and Solutions of
The Great Depression

The Great Depression was a disastrous time for not only Americans but for many people across the entire world. The depression was felt in a great deal of places, from both North America, South America, all the way to Europe, and even Japan. From cotton farmers, commonly known as “Okies”, to bankers in the big city, everyone felt the impact from the depression (Smiley, 2008, p.1). Although economists argue the main causes of the Great Depression, there were many different contributing factors that led to the worst financial crisis in America’s history. As the depression wore on many politicians and economists attempted to ...view middle of the document...

Most of these investors had bought these stocks on margin, meaning the investors only paid a small percentage of what the stock was worth and paid the rest when the stock was sold. When the stock market crashed investors were forced to pay for stocks that were now worthless. Since most investors had used loans from the bank, when they could not repay these loans most banks were forced to foot the bill. Because of the stock market crash, many companies were uncertain about the future and what their income would be. This thought of possibly losing income caused many consumers to reduce spending on durable goods. The aggregate demand, or spending on GDP, came to a rapid halt. In the worst years of the Great Depression real gross domestic product fell nearly 30 percent (Pells, 2012, p.1). GDP is equal to totla consumption, investments, government spending, and net exports. The largest contributing factors in the reduced GDP during the great depression were from a large decrease in consumption and a screeching halt of investments. This in turn led to a decline in production and an increase in unemployment (Pells, 2012, p.4). As the producers could not afford to keep employees because of a decrease in demand for their products, these employees were no longer able to purchase goods for themselves, thus continuing the decrease in goods that were purchased. Although the stock market crash was indeed a contributing factor to the Great Depression, it was not the largest factor.
Banking failures in both rural communities and large metropolitan areas were another contributing factor to the Great Depression. As World War I was being fought, many farmers had taken out loans to increase production to support the war effort. As the war ended, production decreased and farmers struggled to keep up with payments on their loans. The Dust Bowl years came amid the start of the Great Depression as well. This destroyed what crops most farmers had. As a result, farm debts increased even more and led to many rural banks going out of business (Pells, 2012, p.5).
As the depression began to take its toll, many Americans were worried about leaving their money in banks. These panics led to an increase in individuals who wanted to hold onto their currency instead of leaving it in their bank deposits, also known as “bank runs” (Smiley, 2008, p. 4). These “bank runs” were harmful to banks as they only keep a small percentage of deposits as cash reserves and had to liquidate loans in order to raise the cash required to fund everyone’s withdrawals (Pells, 2012, p.5). These circumstances caused many banks to fail and as a result many Americans lost what savings they had accrued over the years. As more and more banks went bankrupt, the demand for people wishing to withdraw their savings increased. By 1933, one-fifth of the banks in existence at the start of the 1930’s were bankrupt (Pells, 2012, p.4). As a result, more individuals began to hold on to...

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