GREAT DEPRESSION

The Great Depression (1929-1940)

THE GREAT DEPRESSION (1929-1940)

Introduction

It is wisely said that whatever we do in a financial crisis affects us in the next financial crisis. The history of American economy is full of such cases of financial crisis that had led to changes in the economy on a major scale. In nearly every scenario, the cause of the crisis was traceable, and most of the times it was due to the expansion or contraction of credit in the economy. Before the advent of institutions like FED, it was not possible to determine the cause of such problems; the reasons behind the expansion or contraction had been turbulent. The first real test of the Federal Reserve was during the famous “Great Depression” in America, in which the FED failed to response properly and could not play its part to stop the turn down in the economy. After that depression, the FED has learned a great deal about how to manage its policies during difficult times, and the recent house-financing crisis in the American economy was the biggest challenge for FED after the great depression.

The reasons behind the great depression are not clear, but many people blame the FED for the great depression. It was the responsibility of the Federal Reserve to handle the economy and avoid such crisis.

The backdrop of the Great Depression

In the mid of the decade of the 1920's, the FED decreased the interest rates in the economy to low level and this resulted in the increase of the money supply in the market. Due to the availability of funds at low cost, people started taking loans and started spending in the market. The demand and supply circle started and the sudden increase in demand caused the price levels to go up, and eventually resulted in inflation. (Michael 1987).There was an economic boom for the time being but, it was calling for a great disaster, because the demand level in the economy was constantly increasing, forcing the price levels to shoot up in the economy. It was an attempt by the FED to create a boom in the economy and boost up the production in the economy; this could have resulted in positive results if all variables had been in favor of the FED. The people, who had powerful inside connections, knew about this, they purchased many assets through taking debts from the banks. People like this, which were termed as voracious speculators were blamed for the great depression, because at that time the interest rates were artificially low and these people had abused this factor and forced the economy to go into turmoil. The large business were borrowing at interest rates as low as 2%, when the inflation was at around 10-11%, this caused huge problems for the small businessmen and the small farmers because they could not match the increasing demand and the increasing competition in the market and they were forced to expand their business through taking ...