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Theories on the Causes of the Great Depression

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´╗┐Katarina Hlavata The Great Depression The Great Depression is one of the deepest and longest lasting economic downturn in the history of Western industrialized world. It began soon after the stock market crash on October, 19 in 1929, also referred to as Black Tuesday, which brought Wall Street into panic and discouraged investors to invest into stocks, so the consumer confidence dropped significantly. As the consumer confidence decreased, the demand for the goods decreased, too. This caused that the goods began to pile up which slowed the production because the firms? sales went down so they started to produce less. Lower production also caused that there were less jobs needed, so the level of unemployment rose. ...read more.


That is why the government should encourage the consumers to spend their money again and this could be done only if the government increased its spending and created some jobs. The Austrian School Theory on the other side thinks that the main cause of the Great Depression was the creation of the Federal Reserve and the loss of confidence in the banking system. Federal Reserve caused that the government monopolized the money supply and credit and money. They believe that the increased money supply in that period caused that the prices have risen and therefore the consumer spending dropped. There has also been an expansion of credit in 1920s which means that goods or services are obtained without immediate payment, usually by agreeing to pay interest. ...read more.


As the banks closed down, the amount of money circulating in the economy decreased and this also caused that the aggregate demand for goods and services decreased, too. The economy started to recover when Franklin Roosevelt became a president on March 4, 1933 and immediately instituted The New Deal. The New Deal was that the federal government stepped in and created jobs. The ambitious New Deal program put 8,500,000 jobless to work, mostly on projects that required manual labor. Basically, The New Deal was that the government spending was increased and there were more jobs available. As the unemployment dropped, people had more money so the consumer spending and confidence have risen along with the aggregate demand. Moreover, a rise in aggregate demand caused that the production increased and the circular flow of money in economy came back to normal. ...read more.

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