The great depression(conditions leading to the depression) - Assignment Example

The Great Depression Macro & Micro Economics Assignment 15 October Conditions Leading to the Great Depression The specific triggers of the Great Depression are clearly known to date and are still under discussion by economists. However, the conditions leading to the depression are thought to be depreciation in assets and price of merchandise, unemployment, poverty, and closure of the stock market. In addition, extensive fall in demand and credit, trade interruption and reversion to the gold standard method also contributed to the Great Depression.

Deflation in Assets and Price of Commodities There was overproduction leading to deflation of assets and prices of commodities. This problem affected industrial and agricultural sectors. In the early-mid 1920s, production by farmers was far more than the population consumed. Mechanization in production techniques meant there was an increase in output that was expensive thereby putting firms in debts. Falling food production and reduction in land prices resulted in agricultural losses leaving vast populations poor and unemployed.

With the demand dropping and supply increasing, the price of products reduced leaving the over-expanded firms short-changed leading to closure (Saint-Etienne, 2013).Widespread Unemployment and PovertyTop workers had their income rising by 75% while the bottom workers only enjoyed a 9% rise in wages. With industrial production growing by 50% in 1920s, there was wide a gap between high-income earners and those struggling in poverty leading to a reduction in disposable income to purchase the produce.

With extensive unemployment, the poor required aid from the already cash-strapped authorities further deepening the financial problems.Fall of the Stock Market Explosion of stock markets built on speculation as seen in modern capitalist economy caused investors to buy stock believing it was going to rise quickly so that they could sell their stocks later. Most stock purchases were on credit as investors were required to have 5% of the stock’s value with the rest being supplied by a loan ‘buying on margin’.

Speculation together with the short-term outlook of the investors did not offer consistency and stability for the system to yield economic benefits. The resulting tension led to selling of the stock causing a mini crash resulting in mass panic as the middle and upper classes lost money.Weak Banking SystemsThe presence of numerous small banks with insufficient resources to handle the high demand for their money in conjunction with increasing nervousness about the state of the stock market played a major part in initiating the Great Depression.

For this reason, they had to sell assets, borrow off other banks or shut down. Drying up of credit and reduction in lending meant banks had to close. Compensation mechanisms by factories were to sack workers leading to mass unemployment and further worsening the problem of low sales due to insufficient credit.Widespread Disruption Trade and RecessionThe effects of the First World War incapacitated Europe and America leading to the economic recession whose features were workforce depletion and large debts, mainly owed to the US.

The USA needed money to prevent its ongoing deflation and called its debtors to settle their debts. The weak European economies could not survive without the money hence relying on debts. Therefore, no state could buy America’s consumer goods with the high import tariffs causing a world trade meltdown.Reversion to the Gold Standard by Western StatesThe criterion where monetary value was in comparison with gold quantities also contributed to the eruption of the Great Depression. Countries had high-interest rates reserves to attract external investors who bought resources along with gold.

All governments had to ditch the gold standard to avoid the deflation from worsening in order to keep a fixed exchange rate. This expectation did not happen thereby worsening the economies.In conclusion, the collapse of the economy took place when recovery was supposed to occur. Consequently, unemployment increased; there was overproduction with dwindling consumption, prices decreased leading to the collapse of economic structures (Salisbury, 2010).ReferencesSaint-Etienne, C. (2013). The Great Depression, 1929 - 1938: Lessons for the 1980s.

Washington, DC: Hoover Institution Press.Salisbury, P., S. (2010). The current economic crisis and the Great Depression, Bloomington: Xlibris Corporation LLC.