THE GREAT ECONOMIC DEPRESSION AND THE FISCAL POLICY

Abstract

The Great Depression is known as one of the biggest crises in economic history which caused serious economic consequences expressed through increased unemployment, high rates of deflation, bank panic, banking crisis and bankruptcies of many companies and households. The fascination of many economists from this crisis was the main cause of the preparation of this work that aims to capture the overall crisis and to see different views of numerous economists about the reasons that led to the appearance of the same, but also the solutions to overcome it. The paper reviews the different posts of economists, beginning with those who felt that the crisis was caused by monetary factors (tight monetary policy, the gold standard, vulnerable banking system), other authors who considered that the reasons lie in the real sector, and third in the insufficient aggregate demand. Furthermore, the paper examines the Keynesian theory and her attempt to explain and overcome the crises and their views on the increased activity of the state in periods of low economic growth and high unemployment. Keynes succeeded by his revolutionary work to refute all previous views that the market alone manages to declare balance in the economy and that the role of the state should be minimized. Keynes's focus was on capital investments, i.e. the execution of public works which will generate new jobs that can influence to boost consumption. That kind of capital investment in terms of depression should be the main substitute for private investment. The last section elaborates the fiscal measures incorporated in the so-called New Deal of President Roosevelt which were represented through substantial increase in public spending, but such an inevitable march was preceded by the abolition of numerous tax exemptions.