Government Intervention and the Causes of the Great Depression

2012 Words9 Pages
The economic business cycle of the world is its own living and breathing entity expanding and contracting with imprecise balances involving supply and demand. The expansions and contractions also known as booms and recessions support a delicate equilibrium of checks and balances, employment and unemployment. The year 1929 marked the beginning of the downward spiral of this delicate economic balance known as The Great Depression of the United States of America. The Great Depression is by far the most significant economic event that occurred during the twentieth century making other depressions pale in comparison. As a result, it placed the world’s political and economic systems into a complete loss of credibility. What transforms an…show more content…
The economists who believed in the predominate state blamed the free market and the free marketers blamed the government for involving policy in an economic issue. Whatever theory one chooses to follow it is imperative to comprehend the various factors that caused the Great Depression in order to avoid the past from repeating itself through poor economic judgment.
Bank Failures
The first cause of the Great Depression under scrutiny is the analysis of the bank failures that occurred leading up to the depression. During its early stages, any bank that had a loan out to a stock market investor placed itself at a large risk. This coupled with bank runs, which are the liquidation of funds by bank members en masse, continued to make matters worse even for the stronger financial institutions. The government led by President Hoover decided to allow contraction to fall on profits instead of dividends as part of his monetary policy. The nation’s firms followed this advice resulting in an initial drop in corporate profits. This drop created a “domino effect” resulting in plummeting firm securities, which manifested the decay of bank portfolios. Blinded by his own ambition, Hoover felt that he should pass a fiscal policy to show his faith in the American economy. Since there was a continuation of budget surpluses, his administration reduced the income tax rates, which ultimately led to a budget deficit. To remedy the
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