The Great Depression

I am taking a Macroeconomics class primarily to understand how the economy works. Here is my understanding of the economic calamity during the Great Depression.

There was a lot of uncertainity during the Great Depression primarily due to:

1. contraction in personal wealth: value of stocks fell more than 90%, causing the personal wealth to fall. Reduction in the personal wealth causes people to cut back or postpone purchases.

2. failure of banking system: Households withdrew their money from the banks, causing banks to increase the their banking reserves. Thus the money available for investment decreased drastically -- because each dollar saved in the banks has multiplier effect on the investment in the economy. Money supply fell by 28%. The lack of investments caused a lot of firms to close down -- fuelling the unemployment further.

Economists attribute the biggest reason for the calamity to decreased aggregate demand for the good and services.  As the demand falls, firms tend to decrease production costs by reducing workforce. Unemployment rose from 3% to 25%, thus resulting in a severe recession also called depression. Many other countries experienced similar declines during this period.

Many economists blame the Fed's failure to act during the Great Depression. The Fed can craft nifty policies which can mitigate the severity and the duration of such recessions. 

There are striking similarities between the current economic conditions and the Great Depression.  The economy is uncertain, personal wealth is decreasing and the unemployment is rising. I am happy that the current policymakers are utilizing multiple economic tools to tackle the current recession. I am still  hopeful that these policies will result in a better economy in the near future.