The Great Depression was the world’s worst economic downturn that lasted for more than a period of ten years. It was a low time because it followed the rapid economic expansion that had been witnessed between 1920 and 1929, multiplying America’s total wealth to the point of dubbing the period “the roaring twenties.” The New York Stock Exchange (NYSE) had been filled with savings stocks form from all people of all walks of life, in a bid for reckless speculation. The NYSE reached its peak in 1929 and left the prices of stock overvalued. By the same time, production had also started declining as the agricultural sector glared at a drought fueling the unemployment rate. Consequently, consumer debt started proliferating, and the economy ushered in a mild recession in the summer of 1929. By mid-1933, most workers were rendered jobless in the aftermath of the economic calamity. Approximately 15 million US citizens were left unemployed, and almost half of the banks in the country had stopped operations by the end of the same year. During the entire Great Depression, the United States stock market dropped by almost 50%, whereas the cooperate profit recorded an over 90% decline (Woods, 2009). The subsequent years of the Great Depression were characterized by a significant decline in investment, and consumer spending. The events also resulted in a deepened industrial output and loss of employment slots. It is the culmination of these events that left the stock prices higher than their actual value.
British economist John Maynard Keynes argued that the economy is driven by aggregate expenditures and aggregate demand for goods and services. The stronger the economic demand, the stronger the economy, and vice versa (Marglin, 2018). Production was low, and unemployment stayed high during this the Great Depression. Keynes’ argument, together with new approaches to handling the economy, greatly influenced decisions made by policymakers. Instead, he contended that once an economic downturn sets in, for reasons unknown, the dread and melancholy that it incites among organizations and financial specialists will, in general, become unavoidable and can prompt a continued time of discouraging economic action and joblessness. In his view, Keynes advocated for the government’s engagement in a countercyclical policy of demand management to help restore the stability of the market economy. He argued that the government can minimize welfare spending and raise charges to create a balance in the national books. In his perception, Keynes explained that the government could spur consumer expenditure by offering a temporary tax break. He recommended that the government goes through more cash, which would build consumer purchasing power, thus improving the economy. In so doing, the economy would expand, leading to economic recuperation from depression and a decline in joblessness. According to Keynes, a combination of the factors that pulled the US from the Great Depression and would still be applicable to boost the present economy. The factors that were implemented post-war included fewer go economic regulations by the government, increased international trade, lowered taxes for both personal and the corporate world.
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During the 1950s, Milton Friedman and Anna Schwartz started incorporating factual information on money-related factors with no specific plan or aim of toppling the prevailing clarification of the Great Depression (Lothian, &Tavlas, 2018). Their incorporations evidently indicated that the information was inconsistent with the standard Keynesian clarification. Because of analyzing all the information intently between 1929 and 1933, Friedman and Schwartz first presumed that the Great Depression was not the essential and direct consequence of the securities exchange crash of October 1929, which they credited to a theoretical speculation bubble (Dellas &Tavlas, 2018). The flying of the “bubble” may have been induced by the Central bank’s raising of the rebate rate—the financing cost the Fed charges on advances to business banks. After the 1929 occurrences, so much happened because besides the initial wave of the bank subsiding, another one followed in 1931. The waves of crisis continued to occur in all banks up to the spring of 1933. Friedman’ analysis was based on facts after a close examination of the period that the Great Depression lasted. Unlike Keynes’ argument, Friedman’s clarification has not been broadly perceived and acknowledged, particularly given its impact among market analysts. Friedman dismissed the Breton Woods Agreement, which seemed to attempt to fix currencies instead of letting them flow in the market freely. Keynes’ clarification, notwithstanding making another method for examining the economy in general, vigorously affected policymakers and normal individuals around the globe.
In sum, due to the effects of the Great Depression cascading in the entire American economy, millions were left battling unemployment. The jobless would beg for food and hawked wares on the corners of the streets to survive. The crisis had a harder hit on farmers who suffered a massive crop failure, and consequent price falls, contributing to banks’ failure and bankruptcy of the rendering savers bankrupt. After the then economic theories failed to explain the causes of the crisis, and public policy to adequately address it, an economic thinking revolution was spearheaded by John Maynard Keynes and Milton Friedman. While Keynesian employed the concept of achievement of optimal economic performance by government intervention through economic policies, Friedman’s blame was on FED for not keeping its promise of being the last resort sound lender.
References
Dellas, H., &Tavlas, G. S. (2018). Milton Friedman and the case for flexible exchange rates and monetary rules. Cato J. , 38 , 361.
Lothian, J. R., &Tavlas, G. S. (2018). How Friedman and Schwartz became monetarists. Journal of Money, Credit and Banking , 50 (4), 757-787.
Marglin, S. A. (2018). Raising Keynes: A General Theory for the 21st century. EconomiA , 19 (1), 1-11.
Woods, T. E. (2009). Warren Harding and the forgotten depression of 1920. Intercollegiate Review , 44 (2), 22-9.
