The Great Economic Depression Term Paper Example | Topics and Well Written Essays - 1250 words

The Great Economic Depression - Term Paper Example The Great Economic Depression Indeed, the stock market crashed, the economy eventually collapsed and the U.S was marred by a long spell of economic depression. This paper analyzes the major causes of the Great Depression, and the reasons why it lasted so long. The Great Economic Depression Introduction The Great depression of the 1930 is one of the darkest moments in the economic history of the United States. It was characterized by a crash of the stock market, collapse of the economy, which eventually escalated into a prolonged period of economic depression. The Great Depression caused enormous of hardships to millions of people and resulted to the collapse of a large fraction of the country’s banks, farms and businesses. Besides many other long-term causes which developed prior to the depression such as bank failures, decline in spending and the drought conditions, the stock market crash of October 1929 is perceived as the immediate cause of the Great Depression. The crash of the stock market The crash o f the stock market in October 1929 has been believed to be the major spark that marked the onset of the Great Depression. Initially, the stock market thrived through the 1920’s. The more it grew, the more people invested their money into it. Nonetheless, on Tuesday October 29, 1929, otherwise known as the Black Tuesday, the stock market crashed (Bernanke 16). Within two month after the crash of the stock market, stockholders had lost over $40 billion.... Bank failures The other major factor that contributed to the onset of Great Depression is the bank failures. Prior to the depression, many banks, especially in the rural areas had overextended their loans to farmers, most of who could not repay. Conversely, most big banks had overextended their credit to foreign countries in the aftermath of the First World War. As times became tougher, most of the banks halted their lending and many debtors defaulted on their outstanding loans. Consequently, many banks went bankrupt. Be that as it may, more than 9000 banks in the United States had collapsed by the end of the 1930’s (McConnell, Brue and Flynn 28). As a result many people lost their savings as most of the bank deposits were uninsured. As the Great Depression continued to hit even harder, more and more banks were forced out of business due to bankruptcy. In addition, the few surviving banks were worried and became more concerned with their ability to continue running. As a resul t, most of them became reluctant to offer new loans. This aggravated the situation as it led to less expenditure. Thus, the increased closing of banks and the panics by the surviving banks almost completely shut down the banking system of the United States. Decline in spending Scores of economists have attributed the onset of the Great Depression to a decline in spending. This is based on huge decline in output and prices during the Great Depression. An adverse demand shock leads to a reduction in aggregate demand for goods and services at a given price. As a result of the stock market crash and increased fears regarding the future economic problems, many people stopped purchasing goods and services. This