Arguments For The Cause Of The Great Depression

The first argument I will discuss for the cause of the decline of the Great Depression is the spending hypothesis, which SHOWS? a contractionary shift in the LS curve. This view is BACKED UP BY? the evident decline in income in the early 1930’s occurring simultaneously with falling interest rates (table 12.2). This theory holds an exogenous fall in spending on goods and services primarily responsible for the Depression, hence being named the ‘spending’ hypothesis. There are several explanations for this initial decline in spending, I will discuss the two most relevant of these. The first argument for the decline of spending within the spending hypothesis is that the contractionary shift in the IS curve was caused by the falling shift in the consumption function, which was, to some extent, bought about by the stock market crash of 1929 (talk about wall st). The Wall Street crash destroyed animal spirits by decreasing wealth and expanding uncertainty about the destiny of the United State’s economy, this resulted in a collapse of consumer expenditure as it inspired consumers to save more of their income rather than spend it and put it back into the country’s economy.

The great residential investment expansion of the 1920s was believed to be exorbitant by many economists, who suggest that the demand for residential investment dramatically decreased once this issue of ‘overbuilding’ (source) became clear to the masses, causing a decline in expenditure. This reasoning of a decline in residential investment is also substantiated by the decrease of immigration in the 1930s, as a more slowly increasing population demanded a smaller amount of