Sabyasachi Sahu

MACROECONOMICS ASSIGNMENT

1501100

Why is the great depression so important in the anals of the world economic history?
The great depression officially began after the stock market crash on October 29 1929, after a
lengthy period of economic prosperity. It changed the life of millions of investors, who had
invested in the stock markets, and in turn the banks which had also invested large portions of
money in the stock markets. Because of this, banks suffered closure. Companies and
individuals became bankrupt. The investor sentiment having waned, people started
withdrawing all of their savings from the banks, leading to a bank run. Shortage of funds
affected the industrial and construction sector since there was no capital for investment.
Consequently, firms started laying off workers and/or cutting back wages, thus leading to
reduced consumer spending. Moreover, the onset of dust storms had a devastating effect on
the agricultural production, thus leading to unemployment across the agricultural sector. As
most of the investment in the stock market was made through loans from banks, the banks
were faced with shortage of funds which eventually led to their shutdown. The failure of the
banks made the situation worse as the savings of the people which were deposited with the
banks had also gone and they were left with money. The whole economy plunged into a
vicious cycle of low consumer spending, loss of capital for industries, pilling up of inventory
and stagnated growth of industrial production. Unemployment touched 25%, wages fell 42%
and the GDP fell by half.
The great depression coincided with the fall of industrial production in other capitalist
countries like The Great Britain and thus the problems in the United States of America was a
symptom of the problems in the world economy and hence, it is important in the annals of
the world economic history.

What lessons can be gleaned from the great depression?

The Great Depression was a watershed moment in the economic history. Then, 25%
employment rate was a reality. Because of this, survivors of the Great Depression, along with
the Government have realized a few important lessons. To combat deflation, the Central Bank
has to increase the supply of money into the system, lest the economy falls into the vicious
cycle of less investment, lower wages and lower consumer spending. Also, the Government
has to have policies fail-safes in place to prevent bank runs, so that the financial system does
not fail. Also people have to realize that stock markets are driven more by speculation than by

Sabyasachi Sahu

MACROECONOMICS ASSIGNMENT

1501100

science and taking loans/mortgaging gold to invest in the stock market, though can be a path
to prosperity, can also be a road to bankruptcy. Secondly, the Government should not have
established measures of unnecessary monetary tightening. In the case of the great depression,
the catastrophe could have been prevented if the government had followed a expansionary
fiscal policy, where the country saves during good times and spends during good times.
Finally, policy makers have to move away from a fixed rate exchange, since drop in demand
causes balance of payment crises and the countries have to deflate their economies to protect
the fixed value of their currencies (in this case, gold.)

What according to you are chances of another great depression affecting the world
economic order?
The difference between the 2008 recession and The Great Depression of 1929, is the timely
intervention of the Government to counter the effects of a stock market crash or a decrease in
demand etc. Central banks these days have realized the importance of monetary policy in
regulating the economy. Hence institutions were set up in place to regulate practices in the
stock market (SEC,SEBI) etc. It has also realized the importance of the financial system to
the health of an economy and has hence established practices in place that prevents a bank
run. Besides, economies avoid unnecessary monetary tightening and instead in the case of
deflation, follow an expansionary fiscal policy to spur economic demand and set the economy
back on track. Also, the global economy is integrated and central banks work in tandem to
prevent this kind of economic failure. However, there are pitfalls. As of now, prices of
commodities are falling, industrial production and consumer spending is at a 5 year low, and
unemployment is rising in developed countries. Also the Greece Debt crisis and the stock
market crash in China and its effect on both developed and developing countries are but
indicators of an imminent recession. These are events that central banks and investors have to
be wary of and put measures in place so as to keep the effect of an economic downturn
minimal.