All of us think that the recession of 2007-2009 was bad & it was indeed but do you know the world faced a similar financial crisis in the late 1920s till the early 1940’s? Yes, if you’ve guessed that it was The Great Depression of 1929, you’re correct. This economic downturn caused a loss of 15% of GDP to the world economy, the US stock market fell by almost and if we look at the corporate gains they almost declined by 90% all in all the economic situation was grim and its timing couldn’t be perfect it just immediately hit at a time when the world was recovering from the first world war.
But what are its causes, and what triggered such an economic downturn? Well.. the exact reason for such a downturn is not clear but there are multiple factors. The first and foremost cause of the depression was The First World War or The Great War, this war completely changed the power dynamics of the world and altered the balance of power, which gave a huge shock to the global financial system. The Gold standard which had long served as an exchange rate for national currencies throughout the world had been suspended temporarily to recover from the losses incurred because of the Great War even though the US, European Nations and Japan tried to establish but it was late till as there was a lot off economic inflexibility in the global and the domestic markets.
Hence they weren’t well prepared to deal with additional shocks that would hit the economy in the late 1920s and early 1930s, when these shocks came in the year 1929, The US Stock Market crashed, it unleashed a period of economic downturn in countries like Germany, which was heavily sanctioned under the Treaty of Versailles, this also gave rise to extreme right-wing ideologies like fascism and nazism. Countries like Great Britain and France were also facing economic strains. Their and Japan’s dedication to reviving the gold standard in the 1930s only worsened the situation and created a disaster recipe for the Great Depression
If we look at its economic impact it led to unemployment, bank failures, deflation, less productivity etc if we look at its social impact it caused homelessness, poverty, Hoovervilles etc. Its political impact is seen as a rise in extremism, extreme right-wing ideologies nazism and also caused political instability.
This gave us a lesson on how the long-term effects of war are harmful and it also taught various central banks how to deal with various economic crises.
