What Causes Economic Depression ?   

      There is a common misconception floating around that the stock market crash in 1929 caused the Great Depression. However, what caused the Great Depression has much deeper roots than the stock market crashed.

       In the 1920s, Americans turned inwards and away from international issues and social concerns. They tended to give more importance to individualism. There was more emphasis on getting rich and enjoying the new trends, inventions and ideas. Modern industry was producing a whole lot of consumer goods and people were being persuaded to abandon traditional values like saving, postponing pleasures and purchases and buying just what they needed. Advertising methods developed to build support for World War I were being used to get people to buy automobiles, radio and other household appliances. This resulted in the prosperity of the 1920s before the economic depression.

      What caused the economic depression was the distribution of income, which was extremely uneven. The richer were getting richer. While business made substantial gains during the 1920s, workers saw very little of this gain. At the same time large tax cuts were made in the top income rates. Between 1923 and 1929, manufacturing output per person hour increased by 32 percent but during the same period workers’ wages increased by just 8 percent.

       The people who were listing to advertisers did not have enough money to purchase products. This led to the innovation of credit, where consumers could buy now and pay later. In addition, the farmers were already in economic depression during the 1920s and did not have money to buy any consumer products.

       In addition, the United States became the world’s main creditor after World War I as European countries struggled to their war debts and reparations. Many banks were not ready to become creditors and they ended up lending heavily and unwisely to borrowers, especially in Germany. This made the international banking structure highly unstable in the late 1920s.

       The US was also maintaining high tariffs on goods being imported from other countries while trying to export its own products and give out foreign loans. This was a recipe for disaster as the other countries could not sell their goods in the US, they did not make enough money to buy American products and they surely did not have enough money to repay the loans taken from America.

        All these events fueled the Great Depression and even in today’s modern world, these are the causes of economic depression, if viewed closely and minutely.

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What Is An Economic Depression

      The official definition of an economic depression is when the gross domestic product (GDP) growth is negative for 2 consecutive quarters or more. It is a severe downturn in the economic growth of a country. You will start feeling the effects of an economic depression long before it actually starts. Before the depression starts, it is preceded by slowing of growth but there is always a positive growth.More...




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