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The Role of Financial Factors in the Great Depression

During the decade of 1929 to 1939 the industrialized areas suffered from a worldwide economic depression. This depression was the longest and toughest downturn for the economy and industrialized areas. This collapse was especially the worst because it affected both the rich and poor. The economy was not always in bad shape; before the Great Depression there was a decade of economic growth, this decade is known as “The Roaring Twenties”. During the 1920s the nations wealth was rapidly increasing. A bubble in the stock market was formed during the rapid economic growth of the 1920s (White 1990, 67). This bubble eventually became bad for the economy and had great affects. It was a time of prosperity and everyone was deciding to put his or her money into stocks leaving stock prices higher than their actual value. Everyone decided to become an investor because there was easy access. Rising stock market made it attractive for companies to issue new stock. Although to everyone it seemed like a promising thing to do for the future, it is this what helped the origin of the Great Depression. Many financial factors played as critical contributing symptoms in the Great Depression and its length.

Financial factors are identified primarily with money-supply shocks and stock market influences, which in turn affect investment and consumption demand (Calomiris 1993,67). Changes in money supply is what started this decade of the Great Depression. The Great Depression began after the stock market crashed on October 1929. This initial downturn in 1929 greatly affected the economy for the next 10 years or so. On what is known as “Black Thursday” is when about 13 million shares were traded and investors lost billions. As people became to feel a bit of panic, they started selling on Black Thursday and Black Tuesday. These losses from the stock market crash helped create the depression. During this time, millions of shares ended up being worthless and wiped out millions of investors.

Banks were greatly affected; moreover, bank failures rose to historically unprecedented heights with historically unprecedented costs to depositors (Calomiris 1993, 68). Banks had a lot of loans that could not be liquidated and caused many country banks to fail. Many were affected including their employment status. During this time many companies and industries were forced to lay off millions of employed workers. Those who did remain employed had a decline in their wages as well. A decline in spending also led to a decline in production and output. All of these financial factors forced many to fall into debt for a long period of time. The stock market crash, bank failures, reduction in purchasing, and policies all contributed to the origin and amplification of the Great Depression.

Works Cited

Charles Calomiris, “Financial Factors in the Great Depression, Journal of Economic Perspectives, 7, 2 (Spring 1993), pp. 61—85.

Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited,” Journal of Economic Perspectives, 4, 2, Spring 1990, pp. 67-83.