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Contemporary Issues in Economics

The Great decline in the US stock market was held on October 29, 1929, on this day the country had started encountering the huge decline in the US economy. The country has faced challenges in its exact output. It has also encountered the highest unemployment rate that led policymakers and they started implementing numerous policies to prevent the country from depression. However, the country was healing very slowly and overcoming the whole situation at the slower phase. That is the reason it is known as black Tuesday. This also created the customer uncertainty related to future earnings and it cut the purchase of consumers for durable goods. On the contrary consumption of perishable goods has increased as compared to durable products after the huge decline in the US stock market. The consumption of durable products had been decreased at the end of the year 1929 and this had brought instability in the output of the country. As many economists elaborated that the main issue had aroused after implementing the policies which cause overproduction. This factor had become a hurdle to bring recovery in the economy at that time (Hansen and Ziebarth 2017). 

The depression in the country has multiplied the depression in the country and was caused by some of the following reasons which have been implemented by the Federal Reserve. The bank had implemented the strict monetary policies which have wrongfully affected the country's output. According to researches there are five mistakes which are pursued by the central bank: first the Federal Reserve had started increasing the fund rates in the year 1928 at the time of spring season. It keeps on increasing the recession that initiated in august 1929 (Hausman, Rhode and Wieland 2017). When there was a decline in the number of investors in the stock market shift to the currency market. In that scenario the gold standard was supported by the value of the currency which was held by the US administration. Speculators started trading in their dollars for gold in September 1931, it has made a run on the dollar (Hausman Rhode and Wieland 2017).

Third, it has raised the interest rate again to save the value of the dollar. That had made the currency available for pursuing businesses. This way more insolvency is being followed. Next, the Federal Reserve did not maximize the supply of currency to combat deflation. Investors removed all their deposits from the banks and this created the situation more unstable. It ignored the plight and also destroyed the trust of investors from financial institutions. Most of the people started keeping cash under their mattresses. This has decreased the money supply. The Federal bank does not put money in the market for circulation to accomplish the economy back from the declined position. Apart from this it also enabled the total supply of US legal tender in the market (Hansen and Ziebarth 2017).

The great depression has increased the unemployment rate which reached up to 25 per cent. It has affected all factors of society. In the year 1933, it had reached from 3 per cent to 25 per cent of the country's manpower (Ghosh and Qureshi 2017). Wages for people or citizens who have jobs fell. U.S. GDP was cut down half from $103 billion to $55 billion, which causes partly deflation. The CPI (consumer price index) fell by 27 per cent from November 1929 to March 1933. The tensed government leader has passed the smooth Hawley tariff in 1930 to safeguard the domestic industries and jobs but it has made the worst condition. World trade has fallen by 66 per cent as measured in US dollars between 1929 and 1934 (Ghosh and Qureshi 2017). This crisis affects the lifestyle of the numerous farmers’ encountered losses from their farms. At the same time, years of drought and over-cultivation has caused many problems related to agricultural production. Many people are migrated to California in search of food and fodder. 

Moreover, the bank had raised rates of funds to lend Federal Reserve funds but it does not work. It has been explained by the different researches that it is the major decline in private investment. People are not ready to invest they are keeping money privately. Thus, it decreases the circulation of legal tender in the market (Eichengreen 2017). As this was the slowest recovery depression in the whole history. Some points created the situation of recession. The manufacturing sector for commodities and services decreases. The final crisis was of the highest unemployment rate. In that scenario there was low usage of plant and machinery in the economy.

Depression is called when the economy is giving low outputs. This is often recognized as an unemployment rate of 15 per cent or above. When unemployment is increased, it does not mean that the recession has occurred. The recession occurs when the unemployment rate increases if the rate of real output is less than the rate of the workforce plus labour productivity (Eichengreen 2017). Therefore, the growth in production could be healthy 3 per cent if the rate of labour productivity is 1.6 per cent then the rate of developing jobs is only (3.0-1.6) which would turn 1.4 per cent. If the rate of increase in the workforce is 2 per cent, then there will be an increase in the rate of unemployment. These factors can promote the recession. It takes the supernormal growth rate in the production to eradicate the accumulated pool of low employment rates. Therefore, the recession that creates depression can end but the depression can continue for a longer time.

Post-Keynesians is a new method, it is the theory that elaborates the look to build different opinions about practicality. This theory rejects the validity of Neo and New Keynesians' mechanisms. It is a broad church that encompasses all such attempts (Eggertsson and Egiev 2020).

This theory was formulated by Joan Robinson, Roy Harrod, Hyman Minsky, Michal Kalecki, and Nicholas Kaldor. The best illustrations for Post Keynesians are Randall Wray, Victoria Chick and Steve Keen. Among the above-stated personalities many of them connected these economics with the political subject.

According to Keynes it has been explained the reason for the great depression was fall in demand across the nation which leads to this situation also disturbed the equilibrium of the country which created the loss in the employment rate. This is the only situation in which depression is present every time. This explanation can be easily understood by knowing the economy (Eggertsson and Egiev 2020). When the economy was stable, everywhere there is prosperity and people are happy, there is a high employment rate in the nation, people are consuming more goods, and demand for commodities is also increasing. Whenever the consumption of goods is high, it becomes the nature of the human being to spend more. When one individual spends that money which is spent becomes the income of another person. This is a cycle that goes on a daily basis or daily lifestyle of the people. The vice versa situation happens at the time of depression and the market started declining. The spending of the people becomes low with lesser demand for commodities. This causes the buyer to spend less portion of his income (Edwards 2019). When the person started cutting his spending then automatically the income of another person cuts down or decreased. Therefore, a vicious cycle is shaped in which an individual loses their trust in the market or industry, It minimizes his spending which in turn put the impact on the market condition.

Keynes also elaborated “general theory of employment, interest, and money’ about the theories which help understand the great depression. One important reason that has been explained for a non-interventionist policy was the recession. This theory was if the spending is minimized due to savings then saving will be one of the factors which lead to a decline in interest rates. Post-Keynesians also stated that lower interest rates may cause more investment, spends and would also the reason for the increase in demand (Edwards 2019).

However, it points out that trade and commerce is also dependent upon profit. People will invest money only when they believe that they can gain profit through that investment or through investing funds in the market. Whenever the consumption declines all businesses started investing less and they started believing that sales in the future will also decline (Cortes and Weidenmier, 2019). Thus, businesses always tend to invest less if the manufacturing increase in the future and if the interest rate makes the capital more economical. It has been concluded by Keynes that if there is a decline in interest rates then automatically there will be a decline in an investment they are directly proportional to each other. This will lead to a slow down in the economy because of less consumption. It has been suggested that this was the major reason of great depression in the market was getting declined and there were no changes seen to increase the growth of the market. There is little hope for the economy to boom (Cortes and Weidenmier, 2019).

The monetarist has explained presumed that markets can perform only when there is coordination in economic activities (Benmelech Frydman and Papanikolaou 2019). It had also been that there are problems related to legal tender which has a medium of exchange, the measure of value and way to hold wealth, disturbances in the stock market and also disturbances in exchange for goods and services. Most of the Keynes believe that the supply of money is very necessary to sustain in the private sector and this creates a monopoly opportunity for the government in the market. They believe that whenever the government initiates to control monetary policy, it always becomes a failure in the market or industry (Benmelech Frydman and Papanikolaou 2019).

It has been argued by the post-Keynes theory that measures or the policies which are framed are both created and sustained the depression. The federal reserve of the system brought a rise in investment rates in 1928 timely which reduces the trust in business acquiring and using or seeks to make creation just after the summer. They were brought up in 1930 and 1931 and it was the time when the banks started fizzling in substantial numbers at the year-end of 1930, the Federal Reserve System does not show many effective results at that time (Babina Garcia and Tate 2017).

This system had been formulated by congress in the year 1913 because of averting the bank’s failure, this was the time when the many clients withdrew their stores as money, which constraints the bank to close since all its money was drained (Babina Garcia and Tate 2017). In such types of cases, Federal Banks were to supply manages an account with sufficient legal tender to reach the client's satisfaction level, but then also there was a decline in the banks. It has been elaborated by Friedman and Schwartz, the Federal banks in the 1930s had fallen due to assistant which has given to banks that they thought were unpractical to reimburse them, some banks were fully established came into liquidation. Whenever there is a decline in the banking sector, then the outlets of the nation never be used, the measure of cash flowing in front of the citizens fall, this discourages the interest for commodities and administrations both (Anderson Bordo and Duca 2017).

The personalities who are in favor of Austrian clarification, they contended that the market can work smoothly by implementing various methods that work well to investment practices. It has been intended that political views also affect the situation of the great depression. Even though it is very difficult to find out the exact reason for the great depression but the main reason can be considered was politics as changing of government and it became the whole thing complex. Political factors are the base of every country through which legal and these economic factors are inter-connected with each other (Anderson Bordo and Duca 2017). 

References for Post Keynesians on The Great Depression

Anderson, R.G. Bordo, M. and Duca, J.V. 2017. Money and velocity during financial crises: From the great depression to the great recession. Journal of Economic Dynamics and Control81, pp.32-49.

Babina, T. Garcia, D. and Tate, G.A. 2017. Friends during hard times: evidence from the great depression. Columbia Business School Research Paper, (16-67).

Benmelech, E. Frydman, C. and Papanikolaou, D. 2019. Financial frictions and employment during the great depression. Journal of Financial Economics133(3), pp.541-563.

Cortes, G.S. and Weidenmier, M.D. 2019. Stock volatility and the Great Depression. The Review of Financial Studies32(9), pp.3544-3570.

Edwards, S. (2019). Change of Monetary Regime, Contracts, and Prices: Lessons from the Great Depression, 1932-1935 (No. w26085). National Bureau of Economic Research.

Eggertsson, G. B. and Egiev, S. K. (2020). Fundamental Driven Liquidity Traps: A Unified Theory of the Great Depression and the Great Recession. London: Working paper.

Eichengreen, B. 2017. The Great Depression and the Great Recession in a historical mirror. Confronting policy challenges of the Great Recession: Lessons for macroeconomic policy’, WE Upjohn Institute, p.13.

Fischer, C. 2017. A Vision of Europe: Franco-German Relations During the Great Depression, 1929-1932. London: Oxford University Press.

Hansen, M.E. and Ziebarth, N.L. 2017. Credit relationships and business bankruptcy during the great depression. American Economic Journal: Macroeconomics9(2), pp.228-55.

Hausman, J.K. Rhode, P.W. and Wieland, J.F. 2017. Recovery from the Great Depression: The farm channel in Spring 1933 (No. w23172). National Bureau of Economic Research.

Jaremski, M. and Wheelock, D.C. 2020. The Founding of the Federal Reserve, the Great Depression, and the Evolution of the US Interbank Network. The Journal of Economic History80(1), pp.69-99.

Koch, C. Richardson, G. and Van Horn, P. 2016. Bank leverage and regulatory regimes: Evidence from the great depression and great recession. American Economic Review106(5), pp.538-42.

Mitchener, K.J. and Richardson, G. 2019. Network contagion and interbank amplification during the Great Depression. Journal of Political Economy127(2), pp.465-507.

Wilson, M.R. 2018. Kenneth J. Bindas. Modernity and the Great Depression: The Transformation of American Society, 1930–1941.

Zárate, S. 2018. Labor Activism during the Great Depression, 1930–1939. 50 Events that Shaped Latino History: An Encyclopedia of the American Mosaic [2 volumes], p.364.

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