Question

Discuss the causes of the Great Depression in terms of what you know about the economy today. Do you think another Great Depression is possible? why or why not

Answer 1

The market plunged into the opening bell on Thursday, October 24, causing a panic. Although investors succeeded in stopping the slide, the market crashed just five days later on "Black Tuesday," losing 12% of its value and wiping out $14 billion of investment. Shareholders had lost more than $40 billion dollars two months later. Although by the end of 1930 the stock market recovered some of its losses, the economy was devastated. America has reached what is known as the Great Depression.

The stock market crash's effects ripped across the economy. In the waning months of 1929, almost 700 banks failed and more than 3,000 collapsed in 1930. Federal deposit insurance was still unheard of, and people lost all their money if banks failed. Some people were panicking, causing bank runs as people withdrew their money desperately, forcing more banks to close. Over 9,000 banks had failed by the end of the decade. Surviving institutions were reluctant to lend money, unaware of the economic situation and uncertain about their own survival. This exacerbated the situation, resulting in fewer and less expenditures.

With the investments of people worthless, their savings decreased or depleted, and credit tight to non-existent, consumer and business spending stagnated. Workers were laid off massively as a result. They were unable to keep up with paying for items they had purchased through installment plans as people lost their jobs; repossessions and expulsions were commonplace. Inventories that were gradually unsold started to accumulate. The unemployment rate has risen above 25%, which has meant even less expenditure to help alleviate the economic situation.

The government was forced to act as the Great Depression tightened its grip on the nation. Congress passed the 1930 Tariff Act, better known as the Smoot-Hawley Tariff, to protect U.S. industry from overseas competitors. The law levied on a wide range of imported goods near-record tax rates. A number of American trading partners have retaliated against U.S.-made goods by imposing tariffs. As a result, two-thirds of world trade fell from 1929 to 1934. By then, Franklin Roosevelt and a Democrat-controlled Congress passed new legislation allowing the president to negotiate with other nations significantly lower tariff rates.

Depression can result from stock market crashes by wiping out the life savings of investors. When people have borrowed money to invest, then all they have to pay back the loans will be forced to sell. By this leveraging, derivatives make any crash even worse. Crashes also make it hard for businesses to raise the funds they need to grow. Finally, a stock market crash can kill the confidence necessary to get the economy back on track.

Higher housing prices and consequent foreclosures totaled at least $1 trillion in losses on the secondary market to lenders, hedge funds, and other holders of subprime mortgages. While housing prices have risen, banks continue to hoard cash. The losses from one million foreclosures are still being digested.
Business credit is necessary for companies to continue to operate on a daily basis. Small businesses can not expand without credit, stifling the 65% of all new jobs they create.Bank near-failures scared depositors to take their cash out. Although these deposits are insured by the Federal Deposit Insurance Corporation, some were concerned that this agency would run out of money as well. Commercial banks rely on deposits from consumers to fund their daily business as well as make loans.