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The role played by financial factors in the origin and amplification of the great depression

Financial factors played a big role both in the origin and amplification of the great depression. The great depression is in a way an economic crisis and as such financial aspects are the majority contributing factors. Specific events that took place at the time of the Great Depression directed its course at the origin and resulted in the amplification.

An initial stock market crash occurred and it triggered a panic sell-off of assets. It led to deflation in assets and commodity products causing drastic drops in demand and credit. The result of all this was trade disruption that caused very high levels of unemployment. The financial crisis led to a consistently reduced consumption and investments.

The depression led to a fall in income, prices and employment as a result of the restricted and decreasing money supply (Calomiris, 1993).

During the depression, there was an exogenous disturbance in the market for money balances. The effect of the exogenous changes played a part in extending the effects of the depression. Subsequently, there were effects and acute influences on the money supply but what had far reaching impacts in the amplification of the great depression were the acute contractions experienced on the money stock during the banking crises (Calomiris, Financial Factors in the Great Depression, 1993). The securities in the market trading hiked the demand for money. The money demand was so high that it could not be offset by expansions in supply.

Most firms failed due to the greatly reduced production that could not sustain the processes. Debtors became unable to pay their debts and banks started experiencing real troubles as debtors could not pay their debts and depositors made attempts to withdraw their deposits. Bank failures resulted in the loss of billions of dollars in assets. The outstanding debts became heavier as the prices and incomes fell drastically. The bank failures led to a close of many banks with the surviving banks unwilling to freely lend (Walton & Rockoff, 2014). The banks built up capital reserves for themselves and made even fewer loans leading to a high intensity of the deflationary pressures. As a result, a vicious cycle was developed and the spiral downward the great depression accelerated.

The interaction of these financial factors formed the initial stages of the great depression and the monetary policies introduced did not lead to a resolution out of the crisis. They further caused the amplification of the great depression.

References

Calomiris, C. W. (1993). Financial factors- great depression. Journal of Economic Perspectives, 65.

Calomiris, C. W. (1993). Financial Factors in the Great Depression. Journal of Economic Perspectives, 79.

Walton, G. M., & Rockoff, H. (2014). The Great Depression. In G. M. Walton, & H. Rockoff, History of the American Economy (pp. 428-430). New York: Cengage Learning.