“the third depression” historical analysis – the Great depression

The events that occurred during the 1930s (1929 to 1933 in the U.S) depression have aroused a significant interest in the wake of the current financial crisis. The great depression, as it came to be known, was characterised by massive declines in output (30 percent) and high increases in unemployment levels (Colander, 2008). Such unemployment levels were however not a result of the populations’ inability to work but the inability of the market to provide work to be done (Colander, 2008, p. 202). At the onset of the crisis was a government attempt to control various fronts of the economy – such as wages farm supports and construction (Rothbard, 2000). In the wages front the then president of the U.S, Hoover, was particularly influential in inducing financiers and industrialists to keep their wage rates constant and expand their businesses to provide more jobs (Rothbard, 2000). Economists have later argued that such unprecedented expansions were the catalysts for losses that were experienced thus leading to the collapse of many businesses and banking institutions (Rothbard, 2000). In line with such approaches to help borrowers acquire credit for expansion at easy rates, the government in early 1930 instituted significant reforms on its policies to ease the supply of money (Rothbard, 2000). The Fed’s rediscount rates were low to two percent by the end of the year from 41/2 percent in February (Rothbard, 2000, p. 240). Such happenings served to fuel inflation which ultimately lend to loan defaults and collapse of many financial institutions. 

The happening of the great depression however changed the way some economists viewed the role of the government in times of recessions. The initial approach of economists – the classical economists – that the market was better left uninterrupted and would sort out its troubles on its own, that supply creates its own demand , was rapidly getting overwhelmed by the suffering the population was undergoing (Colander, 2008). The people’s faith in the markets was vanished and the economists macro’ focus was challenged to look into the demand side of the market (Colander, 2008). Out of the shift of focus to include the demand side of things, a new perspective of economics – the Keynesian economics – emerged with its proponents following on the foot steps of John Maynard Keynes (Colander, 2008). The Keynesian economics largely dwelled on the contention that recovery efforts focussed on the short-run were at times important to ensure long-run recovery was eventually achieved (Colander, 2008). In such a perspectives it was contended that the cumulative cycle starting with decreased demand, decreased firm production, increased labour lay offs, decreased income thus decreased purchasing power and back to lower demand levels; could prove insurmountable for the market on its own to recover in an acceptable duration (Colander, 2008). Eventually, the role of government in creating demand in times of depression to ease the adverse short-term effects such as wages and price level that would better the achievement of the long-run economic recovery the laissez-faire proponents advocated for was proposed (Colander, 2008). Therefore the Keynesian economics favoured such aspects as increased government expenditure during depressions to increase demand while contractionary fiscal and monetary policies were recommended for inflation times to lower demand. go to part 4 here.

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