The great depression refers to the time of economic meltdown that leads to a collapse of major areas of the economy. This paper is going to look at the great depression of the 1930s. The paper will focus on the banking system that collapsed leading to the great depression. It will also look into the causes of this collapse and the consequences.
The Great Depression: its causes
The banking crisis happened when over 16,000 commercial banks that had not ascribed to the Federal Reserve System followed operations environment that was not appropriate for the finance industry (Richardson, 2007). One of these practices included the counting of checks. There was a rise in the number of fictitious reserves owing to the way of counting checks in the 1920s (Richardson, 2007). That led to a financial crisis of the 1930’s. The cash flow from banks declined to result in an emergency.
The inability to mobilize bank reserves was also another cause of this crisis (Richardson, 2007). This crisis was caused by panicking customers who wanted to withdraw their money from their banks. One such bank that collapsed because of this crisis is Caldwell and Company. The leaders of this financial conglomerate had invested heavily in securities and lost large sums of money due to the decline in stock prices. These leaders were forced to compensate for their losses by taking cash from the companies they led. That caused a crisis in the banking industry. The Bank of United States also downed its tools around this period. That happened after negotiations for a merger failed leading depositors to withdraw their funds. The reports from newspapers created a panic that led investors to panic (Romer, 2016). There was a shortage of currency, which resulted in a state of panic among investors. Many of them rushed to withdraw funds from other banks.
The ramifications of the collapse
The result of the great depression was a change in institutions, specifically economic ones. Economic policies were formulated to counter the effects of the depression (Encyclopedia Britannica, 2016). Some of the effects of the collapse of the banking industry were a decline on economic output leading to high rates of unemployment in many countries. The prices of commodities decreased notably the wholesale prices (Encyclopedia Britannica, 2016).
Industries suffered a great deal in many countries of the world. The effects of the depression were, however, different in each country. That could probably be explained by the difference in economic policies of the countries.
The depression had serious ramifications to the lives of the people and the country at large. Many lost their investments and money. Many jobs were lost raising the rates of unemployment. The gross domestic product of many countries was dealt a severe blow. The decreasing prices of commodities, especially the wholesale prices had the implication that the growth of many industries stunted. The economic policies of the banks that had refused to join the Federal Reserve could have mainly caused the depression. Proper economic policies, therefore, need to be put in place to counter the effects of cash flow failure for banks and avoid a repeat of the great depression. There should be a central control center for all banks so that the situation can be remedied. It was a difficult moment to recovery for many countries since the depression affected almost every country in the world (Encyclopedia Britannica. 2016). It was an extraordinarily difficult time for the nations of the world. The financial system, therefore, required radical changes.