Great Depression Economics

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The Great Depression is often considered to be the “defining moment” in the twentieth-century history of the United States. Its most lasting effect was a transformation of the role of the federal government in the economy. The long contraction and painfully slow recovery led many in the American population to accept and even call for a vastly expanded role for government, though most businesses resented the growing federal control of their activities. The federal government took over responsibility for the elderly population with the creation of Social Security and gave the involuntarily unemployed unemployment compensation. The Wagner Act dramatically changed labor negotiations between employers and employees by promoting unions and acting …show more content…
These figures provide an indication of the vast expansion of the federal government’s role during the depressed 1930s. The Great Depression also changed economic thinking. Because many economists and others blamed the depression on inadequate demand, the Keynesian view that government could and should stabilize demand to prevent future depressions became the dominant view in the economics profession for at least the next forty years. Although an increasing number of economists have come to doubt this view, the general public still accepts it. Interestingly, given the importance of the Great Depression in the development of economic thinking and economic policy, economists do not completely agree on what caused it. A worldwide depression struck countries with market economies at the end of the 1920s. Although the Great Depression was relatively mild in some countries, it was severe in others, particularly in the United States. Some people starved; many others lost their farms and homes. Homeless vagabonds sneaked aboard the freight trains that crossed the …show more content…
But there is no doubt that the crash was one of the things that got the ball rolling. Several authors have offered explanations for the linkage between the crash and the recession of 1929–30. Mishkin (1978) argues that the crash and an increase in liabilities led to a deterioration in households’ balance sheets. The reduced liquidity2 led consumers to defer consumption of durable goods and housing and thus contributed to a fall in consumption. Temin (1976) suggests that the fall in stock prices had a negative wealth effect on consumption, but attributes only a minor role to this given that stocks were not a large fraction of total wealth; the stock market in 1929, although falling dramatically, remained above the value it had achieved in early 1928, and the propensity to consume from wealth was small during this period. Romer (1990) provides evidence suggesting that if the stock market were thought to be a predictor of future economic activity, then the crash can rightly be viewed as a source of increased consumer uncertainty that depressed spending on consumer durables and accelerated the decline that had begun in August 1929. Flacco and Parker (1992) confirm Romer’s findings using different data and alternative estimation techniques. Looking back on the behavior of the economy during the year of 1930, industrial production declined 21 percent, the

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