The worst economic depression in United States happened in after the First World War and later ushered the Second World War. It is commonly known as the great depression and effected many other nations in the world. Many economies have tried to make policies based on the lessons they learnt during the depression. Accordingly, it is asserted that by understanding the causes of great depression, economies around the world can make proper policies.
Causes of the Great Depression
The first cause of the great depression was the crash of the stock market in 1929. Stockholders in United States lost more than 40 billion dollars and named the event as black Tuesday. Soon, as the investors tried to take precautionary measures, the effects of the losses were felt in other nations as well.
Secondly, more than 9,000 banks failed. Citizens lost their savings because the banks were not insured. The insured banks were not sure whether the citizens would be able to pay loans, thus stopped issuing them. People did not also have money to purchase items and those who had saved some stopped purchasing items. More so, as people lost their jobs, goods that had been acquired through credit were repossessed. In the end, the rate of consumption, savings, and investments went down.
Thirdly, in the bid to try and protect the Americans, the federal government decided to take protectionism measures in trade. They taxed the imports from other nations and continents such as Europe. As a result, there were fewer foreign direct investments.
Lessons Nations Can Learn From the Great Depression
Clearly, the great depression was caused a combination of factors and was not a one day event. Accordingly, economies should learn that a combination of wrong policies can cause a world wide economic crisis. If the stock market of powerful nations such as America and Europe is manipulated, it is possible for the rest of the world to go into an economic crisis.
Still, the activities of the banks and the macro-economic policies regarding savings can determine the well- being of a nation. In other words, citizens can either be encouraged or discouraged to save based on the banking policies of a nation. Further, during an economic crisis, the government must calculate its moves well. Imposing import tariffs and other protectionism measures is not always a good move- particularly during the on going globalization era. Ultimately, macro-economic policies should be made carefully in order to avoid a crisis such as the great depression.