The Great Depression: An Explanation

The Great Depression: An Explanation

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Overview

– The Great Depression was a severe worldwide economic depression in the decade preceding World War II

– Two Big Shifts in Aggregate Demand: The Great Depression and World War II. From 1929 to 1933 (The Great Depression), GDP fell by 27 percent. From 1939 to 1944 (World War II), the economy’s production of goods and services almost doubled

– It started in 1930 and lasted until the late 1930s or middle 1940s. This period consists of a decline in economic activity (1929–33) followed by a recovery (1934–39). It was the longest, most widespread, and deepest depression of the 20th century.

– The depression originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday). Sharp asset price declines: the stock market fell 13% on October 28, 1929, and fell 89% by 1932.

– Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.

– Over 1/3 of all banks failed by 1933, due to loan defaults and a bank panic. Over 9,000 banks closed and money supply fell 28% from 1929-1933. This drop in the money supply may have caused the Great Depression. It certainly contributed to the severity of the Depression. During that period, business investment fell nearly 80%, consumption of durables goods declined almost 55%, consumption of nondurables goods and services declined almost 29%.

– A credit crunch and uncertainty caused huge fall in consumption and investment. Falling output magnified these problems. Federal Reserve allowed money supply to fall, creating deflation, which increased the real value of debts and increased defaults.

– US Real GDP Per Capita Trend (2000 dollar):

Great Depression on US Real GDP Percapita Trend

Great Depression on US Real GDP Percapita Trend

– Unemployment and Real GNP on Great Depression

US Great Depression and unemployment

US Great Depression and unemployment

Next page, the causes of Great Depression

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