Table of Contents
The great depression is known as the worst and longest economic crisis to have ever hit the western economies (Rothbard, 2000). During the 1930s, almost the entire plains of the US were experiencing drought. A lot of crops were damaged due to the high temperatures, insufficiency in rainfall, high winds and the infestation by insects on the crops. It is argued that this depression in the agricultural sector played a high role in bringing about the great depression. The depression began in the United States immediately after the crash of the New York stock market in 1929. The crisis lasted till 1939. It is identified that by the year 1932, the values of stock had fallen very fast to around 20% from their original value, and in 1933, around 11,000 out of the 25,000 banks and financial institutions in the united states had collapsed due to a number of reasons that included a decline in the value of property, lack of customers due to the panic that arose and loan defaults (Bernstein, 2004). Apart from these factors, other factors that were related to the issue of monetary policy made the situation worse especially those that were associated to adhering to the gold standards.
As indicated above, this was the period when the highest unemployment rates and low incomes were experienced; business was also low especially keeping in mind that these were modern times. The depression led to factories, banks and major business entities collapsing leaving thousands of citizens both jobless and with no money to put food on the table. Hebert Hoover was the United States president when the great depression picked and when Franklin Roosevelt took office in 1932 (Micheal, 1992), he came up with new reforms that empowered the government with powers and authorities that helped ease the crisis.
There was a sharp fall in the world market as all the countries tried to increase their taxes as a way of trying to salvage their domestic industries that had heavily been impacted on by the crisis. According to Brasch, (2009), the effect o the crisis led to a number of states and countries changing their leaders and government as a way of trying to respond and come up with ways of tackling the problem. The crash in the stock market was faced in 1925-1929 and during this time, the price doubled in the New York stock exchange market for the common stocks. The rise in stock price means that investors were attracted into investing in the stocks with an anticipation of making high returns due to the rise in the same stocks' price in future. Instead of thee rise of prices as most of them anticipated, there was a drop in the prices.
The drop in the stocks that took place in the 24th of October 1929 was termed to as the Black Thursday (Rothbard, 2000). The two days following the black Thursday saw a maintenance of steady prices of the stocks and on Monday, there a was another decline in the prices. This continuous decline in the stock prices caused a lot of panic among the traders leading to majority of them selling their stocks on the next day, Tuesday the 29th. A record of 16,410,030 shares of stock was sold on that day. Bernstein, (2004) asserts that the depression led to millions of American citizens falling victims of malnutrition due to unbalanced diets, millions of others were thrown out of their homes due to their incapability of paying their mortgages and it is approximated that about 25,000 families had lost their homes and were roaming the streets in search of food, shelter and cloths with an addition of 200,000 people in search of the same. The great depression came with it a number of changes in the United States, it led to the formulation of new laws. These laws ensured that a lot of powers were given to the government meaning that it controlled more powers than it had done in any other time. At the same time, a new outlook in terms of life was given to the Americans in general.
The great depression was not in itself unprecedented. Past periods had been considered as slumps that may have triggered failures by banks and over speculations that led to a number of years that experienced a fall in production, employment and total hardships (Brasch, 2009). The first and second world wars had a great impact on the economies of the Europe. It is assumed that after these wars, what followed were rock years on these economies till the 1920s. The war is known to have ked to inflation which particularly hit Germany so hard especially as the prices of commodities and services soared each single day leading to higher quantities of currencies being required to do any ordinary purchasing. What helped it was the forceful action that the government took. Despite countries like Italy and France being less hit by the depression, in 1931, these countries were seen drowning into the vortex (Micheal, 1992).
The economic crisis that ensued in American economy as a result of the collapse of the Mortgage market left enormous effects on the economy. The financial crisis has affected virtually every sector of the economy and thus affecting the livelihood of the people in those countries. All over the world financial institution are collapsing; stock markets are experiencing a down turn as people are not ready to invest in the stocks of the companies. The financial crisis has also caused the government to come up with the programs that are meant to bail the companies out and minimizing the effects in the economy for instance jobs loss. The effects of the financial crisis include;
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Collapsing financial institutions
Financial melt down has led to the collapsing of the largest financial institutions in the world. Other financial institutions are being bought at a loss by their competitors thus leading to capital loss to the investors. Financial institutions are very important to any economy as they help to advance credit to the citizens and thus help to increase the investment in the country. Collapsing of the financial institutions thus means that the customers are not in position to access credits and thus investments in the country are curtailed. For any economy of the world to develop, there must be people who invest in the economy and thus create employment opportunities to the citizens of the country. Investments would also be sources of revenue to the government as the government imposes corporate taxes to those businesses. The collapsing of the financial institutions in the country would mean that the deposits that the customers had kept with them would also go with the bank (Ovanhouser, 2008).
The deposits kept with the financial institutions involve the money that hard working citizens have worked for and saved to be used later for investments. Due to the effects of the collapsing of the financial institutions and thus affect the common person in the society, the government intervened with coming with the programs that were meant to bail the financial institutions out and thus minimize the effects of their collapsing to the common person. The United States government for instance, spent a total of $ 2.8 trillion to bail out the financial institution. The critics were against the government bailing out the financial institutions that were at the brink of collapsing because they believed that they were the cause of the problem and thus they should be left to create the problems that they themselves had created. Another reason as to why people against the bailing of the financial institution from collapsing by the government was that the government would use the tax payers' money and thus it would mean that the government would raise taxes so as to be in position to meet other financial obligations in the economy (Collyns, Kincaid & International Monetary Fund, 2003).
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Loss of Jobs
Another effect of the financial crisis in the United States is the loss of jobs. Due to the collapsing of many companies in United States as result of the decrease of the demand of the goods and services they were offering due to the reduction of purchasing power of the customers necessitated companies to cut operations to reduce cost and avert making losses further. For the companies to reduce costs of operations, they had to lay off staffs and reduce the salaries and other benefits of those who were retained. Loss of jobs in the economy as the companies reduces their operations led to the evil of the rapid unemployment. The government had to intervene and bail out the crucial companies in the economy from collapsing and thus reducing the rate of unemployment in the country. The reduction of the wages and other benefits by the companies resulted to the reduction of the purchasing power of the customers and thus increasing further the problem of lack of demand of goods produced in the economy and thus accelerating economic crisis (Smith, Horisaka & Nishijima, 2007).
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Virtually very person in the society felt the effect of the financial crisis in the economy. Some of the parties that were mostly affected by the financial melt down include the government, the individuals and the companies. It is the sole responsibility of the government to see that their citizens are protected from unwanted occurrence in the economy. Thus the government had the duty to see into it that her citizens are not severely affected by the financial crisis hence the importance of the bail out programs that were adopted by the government. The individual were also affected by the financial melt down as the wealth and jobs were lost as a result. The companies were also affected by the financial melt down as the demand of good and services were reduced and thus resulted to other collapsing while other reduced their operations (Nanto, 2010).
In conclusion, the financial crisis in the United States markets resulted to various effects that include people loosing their wealth, rampant unemployment due to collapse of the companies, companies shutting down while other reducing their operations and people paying more taxes so as the government to bail out crucial companies in the economy from collapsing. The policy makers should come with the policy that are geared toward prevention of the financial melt down in future and in case it happens, it effects to the economy is reduced.