Question

What would you say was the primary cause of the Great Depression in the United States. How did the United States economy recover? How does this differ from the 2008 Recession in the United States?

How can I structure my answer to this question into an essay? I want to talk about the stock market crash of 1929 as the primary cause of the great depression.

Answer 1

The Great Depression of 1930’s is majorly marked by stock market crash. In the 1930’s many banks started to fail in United States because majority of borrowers defaulted on their loans. Since, borrowers were hardly repaying any of their loans the depositors became worried that banks might become insolvent and fail to repay the amount of their deposits. Hence, in order to save their money, the depositors tend to withdraw all their savings which were earlier deposited. Since, the borrowers failed to repay the loans banks were forced to liquidate their assets. Because of this liquidation, money supply in the economy shrinked leading to contraction of economy and a fall in investment.

In the 1930’s stock prices began to rise uncontrollably. The lucrative gains led many people to take the benefit from these rising prices by investing their money in shares. However, in October 1929 the stock market faced the inevitable price fall. This created a panic among the people who rushed to liquidate their shareholdings. This further exacerbated the panic as a result of which the investments and consumer spending on durable goods significantly declined. This further affected the output of industrial sector which declined sharply leading further to job losses and recessionary impacts.

In order to recover from the effects of Great Depression, the U.S. economy signed the new deal which was designed to create jobs, provide unemployment benefits, social security benefits etc. This helped in boosting the Aggregate Demand in the economy. It has been argued that apart from new deal, World War II also led to increase the demand and consumer spending in the economy thereby reducing the recessionary effects.

The Great Depression of 1930’s differs from 2008 recession in United States. It is because the 2008 recession was primarily a result of housing boom. In 2008, there was a boom in housing market and thus a rise in housing prices. The financial system of U.S. granted loans to borrowers with poor credit histories. But when the subprime crisis continued, the housing prices began to fall which led to recessionary impacts. Moreover, in 2008 Lehman’s Brothers declared bankruptcy leading to the largest bankruptcy in the history of United States. These were the prime reasons which led to recession of 2008 and made it different from the Great Depression of 1930’s.