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Q1. Explain the economic conditions which caused the great depression.

In the next decade after World War I, US became the new engine of growth, democracies were established in Eastern Europe, Germany stabilized and prosperity seemed to return. This was signaled by deluge of new technological breakthroughs and mass production of consumer goods. Beneath the illusion of political stability and economic prosperity there were serious problems having roots in World War I.

Unbalanced cash flow: It basically stemmed from the nature of American dominance of the world economy in the 1920’s compared to previous British dominance in the 1800’s.  The British had to maintain a fairly balanced cash flow in world trade as they had to buy raw materials with much of the trade surplus. This prevented too severe a drain of cash from other countries, thus assuring Britain more stable markets. In contrast, the United States was not only an industrial power selling manufactured goods in markets; it also had its own vast natural resources.  This created an unbalanced cash flow from the rest of the world to the United States. European nations, still recovering from the war, needed loans, which they got from American banks. This sent even more money to the United States in the form of repayments and interest, just making an even more unbalanced cash flow.

The second problem had to do with Europe’s recovery from World War I.  Wartime expenditure had reduced the countries of Europe to a state of heavy debt. European industries did revive to their old pre-war levels of production by 1925, but they failed to reclaim their old markets from the United States or create new markets to compensate for the losses.  As a result, the intense economic competition between nations that had largely caused World War I continued after it.  Therefore, nations still maintained high tariffs, which raised prices, cut world trade, and further weakened the world economy.

Finally there was an agricultural crisis in the United States. This was the result of dramatic expansion of farmland in order to meet the food demands of the European countries during the war.  However, European agricultural production revived after the war, causing overproductionAgricultural prices plummeted, and American farmers went into debt, many of them losing their farms when they were unable to maintain interest payments on their newly expanded farms.  Although America’s industries seemed to be thriving, its agricultural sector, still a large part of its population and economy, was in trouble.

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