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What are the causes of deflation

what are the causes of deflation

The Great Depression of the 1930s and Its Origins

The terrible, terrible conditions which occurred in the United States and the rest of the world in the 1930's are known as the Great Depression. This depression was not only an economic catastrophe, it was social and political catastrophes as well. Its origins then were a mystery and even now among the general public are not clear. This document is an attempt to tell the story of the Depression and its origins in terms of statistics in the form of graphs and tables.

In identifying the cause of almost any event one finds not just one cause but a chain of causes, working backwards from the immediate cause and terminating with an ultimate cause. There may also be multiple causes for events in this chain.

The first statistic for demonstrating the decline of the economy into depression is the unemployment rate.

As the above graph indicates the economy descended from essentially full employment in 1929 when the unemployment rate was 3.2 percent into massive unemployment in 1933 when the unemployment rate reached 25 percent. The first question is why was there such high unemployment in 1933. The answer is that the economy was not producing as much output as it was capable of producing with full employment of the

labor force. It was not producing as much as it could because it could not sell that amount.

The output of an economy is measured by its Gross Domestic Product (GDP) and the graph below shows the decline in production from its high point in 1929 to its low point in 1933.

The decline in GDP, while dramatic, is not so spectacular as the explosion in the unemployment rate. This is because the umemployment rate represents what was not produced that could have been produced. A graph showing the percentage of the labor force employed would look much the same as the GDP graph. While the Depression was a catastrophe it is well to keep in mind that at worst there was still 75 percent of the labor force who were employed. But, the important question is why production had fallen off so much in 1933 compared with 1929. Here it is instructive to look at the components of the demand for the nation's output. The output of any nation is purchased by four categories of buyers; consumers, business investors, governments and foreign buyers as exports. The purchases of U.S. output by foreign buyers is offset by American purchases of foreign production as imports. A glance at the table below tells what was happening to the components of demand.

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