The Great Depression in Economics: A Breakdown

 The Great Depression in Economics: A Breakdown

Written by: Geoffrey X. 

The Great Depression is known as one of the worst economic depressions for the US and worldwide, lasting up to 10 years in the world. From the Great Depression rose new paradigms and theories for economics, like Keynesian economics -- which advocated for the government to actively adjust for recessions and inflations, contrasting the “classic” approach of letting the market fix itself. In this article, I’ll explore several major decisions that ultimately led to the Great Depression, as well as some choices that got us out of it.

* Here is a document explaining the graphs shown below.

The first indicator of the Great Depression started from WWI. WWI created a demand for food and basic necessities for the war. While these were government purchases, the effects rippled throughout the market. The government buying these materials en masse acted as a “consumer” for supplies, shifting the aggregate demand for those years rightward. Since producers observed more demand, they naturally expanded their production to compensate. While products were sold for a lesser price because of availability, more was sold, increasing the GDP for an economic upswing.

As the war settled down, however, food originally feeding 2.1 million active, hungry soldiers (also foreign supplying) had no more demand. While producers could technically lower prices, basic necessities needed for war typically reached a saturation point and couldn’t really be sold anymore. This lack of demand and market saturation resulted in farmers slowly looking elsewhere to make a profit.

As devastating as this was for the agricultural sector, it was really only a portion of the US’s aggregate supply, and didn’t heavily impact the overall economy. However, there were enough problems elsewhere that compounded this fault in agriculture. The stock market growth exploded during the 1920s as more looked towards investing, with the dollar losing value quickly from high inflation. Government tariffs, taxes, and contractionary policies, combined with some overvalued stocks in crippled industries from WWI, all led to the stock market crash. As a result, consumers had little savings and no motivation to spend, starting the Great Depression period.

Low demand meant products not selling, and products not selling meant unemployment. New farmers trying to make a living in the Midwest created the Dust Bowl from bad farming practices. There was no safety net for economic stress, and millions were unemployed. The government offered no help, with economists relying on “classical” economics, or the idea that the market would eventually return to the original market potential over time. However, as time passed, there was no economic upswing in sight.

The Great Depression gave way to Keynesian economics or a new model where the market potential was actually a curved slope itself. This meant that the economy would never actually return back to the original “market potential,” but rather stay at a crippled state. This new model called for government fiscal policy to force the aggregate demand back upwards. While this model has always been controversial, a middle ground between classical and Keynesian has been accepted as the standard today.

From 1932 onwards, Franklin D. Roosevelt became president and moved forward with several expansionary policies. For the initial steps of the New Deal, FDR paid farmers to cut production and guarantee prices, thereby reducing the uncontrollable supply -- at least temporarily. Other government expenditures, like spending money on alphabet agencies, relieved financial stress with an opportunity for work, encouraging consumers to buy. These changes helped recover consumer demand, bringing the economy back to the original market potential over time. And as WWII began to ramp up, demands crept up again, curing the economy of the decade-long depression.

Works Cited

Domitrovic, Brian. “Why Did People Buy Stocks In The 1920s?” Forbes, 15 Dec. 2020, forbes.com/sites/briandomitrovic/2020/01/09/why-did-people-buy-stocks-in-the-1920s/.

Duignan, Brian. “Causes of the Great Depression.” Encyclopedia Britannica, britannica.com/story/causes-of-the-great-depression. Accessed 16 Mar. 2021.

Karmakar, Diptimai. “The Great Depression of Aggregate Demand (With Diagram).” Economics Discussion, 30 Nov. 2015, economicsdiscussion.net/demand/aggregate-demand-curve/the-great-depression-of-aggregate-demand-with-diagram/15816.

Saylor Academy. Policy Interventions and the Great Depression. 24 Mar. 2015, saylordotorg.github.io/text_macroeconomics-theory-through-applications/s11-05-policy-interventions-and-the-g.html.

State Historical Society of Iowa. “Great Depression and Herbert Hoover.” IDCA, 18 Sept. 2020, iowaculture.gov/history/education/educator-resources/primary-source-sets/great-depression-and-herbert-hoover.