This essay aims to explore the historical factors, how the depression was initiated, central bank policies and political decision making. In doing so, however, the European experience cannot conveniently be separated from that of the United States.

Prosperity was especially evident in America and because of her loans to Europe and her position as an importer (mostly of primary products) this prosperity was communicated to the rest of the world. But in October 1929 the boom came to an end with the stock exchange crash. Thereafter a mood of depression settled over businessmen in America. Orders for goods were cancelled and investment fell off sharply. Also American funds in Europe were withdrawn. This caused problems for Germany, the country with the largest amount of American investment. Withdrawals of capital continued after the Wall Street crash.

The contraction of American lending caused embarrassment to the borrowing countries, many of them primary producers, because they had fi

2. Pollard, S., Development of the British Economy 1914-50, London 1962

Two basic hypotheses are widely supported on how the depression was initiated; the spending (Keynesian) hypotheses and the money (Monetarist) hypotheses. The spending hypothesis suggests that the depression was generated by a fall in autonomous spending. The money hypothesis posits a strinkingly different series of relationships. For it is held that the Great Depression was merely a limited depression converted into a major down swing in income and prices by the collapse of the banking system and decline in the supply of money. It is thought that the banking crises increased the desire of both banks and individuals to hold cash. Consequently, the cash ratios of the commercial banks rose and the money supply decreased. Keynesian theory also suggests that government should increase their spending and cut taxes in order to counteract a slump. Similarly, the Monetarists accuse the major governments of worsening the economic situation by actually allowing the money supply to contract, instead of increasing the supply. [P.Temin, ‘‘Did Monetary Forces cause the Great Depression’’?]. Many agree that a lack of international cooperation prolonged the depression (the United States is traditionally criticized for a lack of leadership in this respect). The financial authorities in the advanced countries, for example, did little to solve the liquidity crisis facing the primary producers, which obliged them to restrict their imports of manufactured goods. Similarly, the apparent ease with which Britain was forced off the gold standard confirms the lack of international support for countries experiencing currency difficulties.

6. Gilbert, F., The End of the European Era to the Present., Norton and company Ltd., 1984. Third Edition

Some topics in this essay:
Germany American, Gwartney Stroup, History United, Cambridge Mass, Reserve Bank, Wall Street, Britain United, Monetary Forces, United Prosperity, Initially France, german banks, german economy, economic activity, stock market, bank failures, economic situation, 1929 1933, financial situation started, financial situation, lack international, national income, real gdp fell, stock market crash,