Factors Which Caused The Great Depression Economics Essay

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In this project, our aim is to explore/analyse the factors which caused the Great Depression and how some European economies recovered from the deep recession during 1930s. Firstly we will be examining how the great depression began in the United Stated and migrated to Europe in the early 1930s. The research countries which we have chosen to focus on are France, Germany and Great Britain due to the varying effects of the Great Depression on each of the three super powers, excluding USSR.

Germany was affected by the Great Depression dramatically where the unemployment rate rose above 30%, similarly Great Britain unemployment rates rose up to 25% of the labour force. The employment levels in the staple industry such as coal and steel had experienced a drop, due to the increase in consumption of durable goods. France was not impacted greatly by the depression until 1932, where a small increase in the unemployment level was witnessed in comparison to Germany and Great Britain.

Secondary Research was conducted to find out the main causes of the Great Depression and the recovery process. The secondary research is mainly about(…………………………………………....)

It is significantly important to research and study of Great Depression in Europe because John Maynard Keynes led a revolution in economic thinking. He argued that Great Depression was caused by under consumption due to a lack of confidence in the market. Therefore consumers thought that they could avoid losses by exiting the market, as there is no outflow of money, it will result in recession and lead to the Great Depression. Also, there were many different views on how did Great Depression started in Europe such as Keynesian view and Monetary point of view. By understanding different point of view, it helps economists to tackle real world problems.

1.1 Background

The Great Depression did not start as a "Depression", it was viewed as a cyclical recession. In Europe the effects of the Great depression were experienced in 1929, and began to subside during 1939; however some countries experienced long term effects from the depression. The 1929 depression was a worldwide economic slowdown after World War I which had dramatically affected the global economy. The epicentre of the Great Depression was the United States, which led to European countries such as Great Britain, Germany and France to have a knock-on effect.

In Europe, many countries experienced a fall in output levels. As output reduces, expectations of deflation causes consumers to reduce consumption. Hence the demand of goods and services reduces which also raise the unemployment level. The Great Depression also led to Banking Crisis because the reduction in prices made it difficult to repay the loans. Therefore firms will find it difficult to obtain external credit hence that output will further reduce.

There were several myths on the causes of the Great Depression in 1929. One of them was the Wall Street stock market crash, which was assumed to be the reason of the Great Depression; however the Wall Street crash was not the main causes of the Great Depression, it contributed towards the depression. The real causes of Great Depression can be divided into four parts which is changes in the competition of production, operation of labour markets, changes in the international settlement patterns and changes in the operation of international monetary system. The change in the international settlement pattern where international trades have switched from Great Britain to United States. The changes in the composition of production and the nature of the international monetary system have also contributed to the Great Depression due to the decline of world trade makes it difficult to alter economic policies. The monetarist argued that the Great Depression occurred because the Federal Reserve did not increase the money supply to reduce the deflation. The Federal Reserve had increased the base rates which caused a shrink in the money supply, which leads to a fall in consumption, resulting in a reduction aggregate demand.

The European countries such as Great Britain, Germany and France started to experience the Great Depression mainly because of international debt. After World War I, US Banks were owed loans from most European countries. The high tariffs from the US and the slowdown in the US economy made it difficult for the European countries to pay back the loans. As the US government refused to lower the repayments, European countries had to borrow more in order to pay back the debt. When the Great Depression started to occur, the US banks recalled their loans, as the outflow of money in the European countries was significantly high, these economies started to experience the effects of a deep recession.

The effects of the Great Depression was minimised in the UK when they left the Gold Standard in 1931. This lead to an increase in the competitiveness of the UK exports as the government were able to depreciate their own currency. When the value of the exchange rate is low, exports from the exporting country will be relatively cheaper to the country purchasing the good, thus increasing employment opportunities for the exporting country.