ABSTRACT

The great depression occurred in 1930s. Though it occurred in USA but it had impact throughout
the world. Here we are going to discuss about why the depression occurred, consequences and
also rise of macroeconomics. There are many causes due to why great depression occurred and
all the causes are interrelated.

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 The Great Depression of 1930s

Introduction

Worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest
and most severe depression ever experienced by the industrialized Western world. Over the next
several years, consumer spending and investment dropped, causing steep declines in industrial
output and rising levels of unemployment as failing companies laid off workers. The depression
means “a prolonged and deep recession becomes a depression”. Here recession means “a period
during which aggregate output declines. Two consecutive quarters of decrease in output signal a
recession. There are many reasons why great depression occurred. The great depression not only
affect the USA but it also affect Britain, France and German which impact the world gradually.

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The Stock Market Crash:
America's "Great Depression" began with the dramatic crash of the stock market on "Black
Thursday", October 24, 1929 when 16 million shares of stock were quickly sold by panicking
investors who had lost faith in the American economy. In fact, it was one of the major causes
that led to the Great Depression. Two months after the original crash in October, stockholders
had lost more than $40 billion dollars. The 1927 a prosperous decade but not an exceptional
boom period wholesale goods prices had remained nearly consistent throughout the decade and
they had been mild recession in both 1924 and 1927.

Even though the stock market began to regain some of its losses, by the end of 1930, it just was
not enough and America truly entered what is called the Great Depression. Between 1929 and
1932, worldwide gross domestic product (GDP) fell by an estimated 15%. Before that stock
market condition was in high because in USA from businessman to shoe shiner everyone was
buying stock because of the bank started to offer credit to people buy stock.

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By then production had declined which lead to unemployment. The stock market crash reduced
American aggregate demand substantially. Consumer purchases of durable goods and business
investment fell sharply after the crash. A likely explanation is that the financial crisis generated
considerable uncertainty about future income, which in turn led consumers and firms to put off
purchases of durable goods.

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Bankers Failure:
The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a
recession that started in August 1929. Throughout the 1930s over 9,000 banks failed. Bank
deposits were uninsured and thus as banks failed people simply lost their savings. Surviving
banks, unsure of the economic situation and concerned for their own survival, stopped being as
willing to create new loans.
This exacerbated the situation leading to less and less expenditures. A banking panic started in
1930s when depositor withdraw their money as they lose trust over bank. A large number of
bank had not enough liquid cash to provide depositor as they give too much credit to the people
to buy stock. As result around 25000 bank got closed.

“Bank holiday” declared by President Franklin Roosevelt on March 6, 1933. The bank holiday
closed all banks, permitting them to reopen only after being deemed solvent by government
inspectors. The Fed raised interest rates again to preserve the dollar's value. That further
restricted the availability of money for businesses. More bankruptcies followed. The Fed did not
increase the supply of money to combat deflation.
The financial crisis was not limited to the United States. Countries in Europe and around the
world experienced the depression. Hitler’s rise to power in Germany was fueled in part by the
economic slowdown, and throughout the 1930s international tensions increased as the global
economy declined.

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Declines in the money supply caused by Federal Reserve decisions had a severe contractionary
effect on output. A simple picture provides perhaps the clearest evidence of the key role
monetary collapse played in the Great Depression in the United State. In ordinary times, such as
the 1920s, both the money supply and output tend to grow steadily. But, in the early 1930s, both
plummeted.

The decline in the money supply depressed spending in a number of ways. Perhaps most
importantly, because of actual price declines and the rapid decline in the money supply,
consumers and business people came to expect deflation – that is, they expected wages and
prices to be lower in the future. As a result, even though nominal interest rates were very low,
people did not want to borrow because they feared that future wages and profits would be
inadequate to cover the loan payments.
This hesitancy, in turn, led to severe reductions in both consumer spending and business
investment spending. The panics surely exacerbated the decline in spending by generating
pessimism and a loss of confidence. Furthermore, the failure of so many banks disrupted lending,
thereby reducing the funds available to finance investment.

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Hoover's Response to the Crisis:
At that time president Hoover took some action to decrease the depression. President Hoover
initially met the economic downturn from the perspective of his long-held voluntarism principles
that is, his belief in minimal government interference in the economy, as well as a conviction that
direct public relief to individuals would weaken individual character, turn people away from the
work-ethic, and lead them to develop a dependency on government handouts.

By 1931 Hoover reversed his earlier approach and embraced government intervention in the
economy. The 1932 Reconstruction Finance Corporation (RFC) authorized the lending of $2
billion to banks, railroads, and other privately held companies, and in July 1932 the federal
government appropriated $300 million for the nation’s first relief and public works projects.
He also increase the tax rate thinking that it would help government to recover this situation but
as people did not have work they could not pay the high tax. Many industries ran out of business
and close down.

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The Gold Standard:
Some economists believe that the Federal Reserve allowed or caused the huge declines in the
American money supply partly to preserve the gold standard. Under the gold standard, each
country set a value of its currency in terms of gold and took monetary actions to defend the fixed
price. It is possible that had the Federal Reserve expanded greatly in response to the banking
panics, foreigners could have lost confidence in the United States’ commitment to the gold
standard.
There is no question that it was a key factor in the transmission of the American decline to the
rest of the world. Under the gold standard, imbalances in trade or asset flows gave rise to
international gold flows. For example, in the mid-1920s intense international demand for

American assets such as stocks and bonds brought large inflows of gold to the United States.
While there is debate about the role the gold standard played in limiting U.S. monetary policy,
there is no question that it was a key factor in the transmission of the American decline to the
rest of the world. Under the gold standard, imbalances in trade or asset flows gave rise to
international gold flows.
For example, in the mid-1920s intense international demand for American assets such as stocks
and bonds brought large inflows of gold to the United States. Likewise, a decision by France
after World War I to return to the gold standard with an undervalued franc led to trade surpluses
and substantial gold inflows.

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American Economic Policy with Europe:
As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help
protect American companies. This charged a high tax for imports thereby leading to less trade
between America and foreign countries along with some economic retaliation. At this time of
depression as other countries of world stop buying USA product, there was surplus units in the
industries which lead to overproduction.

American Economic Policy with Europe. Newton D. Baker Rails against the Hawley-Smoot
Tariff

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Unemployment and Family Affect:

As the effects of the depression across the US economy, millions of people lost their jobs. By
1930 there were 4.3 million unemployed; by 1931, 8 million; and in 1932 the number had risen
to 12 million. By early 1933, almost 13 million were out of work and the unemployment rate
stood at an astonishing 25 percent. As a result many families could not pay their rents, debts and
Hoover’s increased amount of tax.

Those who managed to retain their jobs often took pay cuts of a third or more. After the World
War 1 America's industries increased their production of goods and services. But people didn't
buy the goods and services as Industries owners thought they would buy. As a result there was
surplus of goods. Then the industries owner lay-off some employees to decrease their operational
expenses. Which also later create huge unemployment problem. The country’s industrial
production had dropped by half. Bread lines, soup kitchens and rising numbers of homeless
people became more and more common in America’s towns and cities. Farmers couldn’t afford
to harvest their crops, and were forced to leave them rotting in the fields while people elsewhere
starved.

In 1933, the average family income had dropped to $1,500, 40 percent less than the 1929 average
family income of $2,300.Faced with this disaster, families split up or migrated from their homes
in search of work. 'Hoovervilles' (named after President Hoover, as an insult), shanty towns

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constructed of packing crates, abandoned cars and other cast off scraps sprung up across the
Nation. Gangs of youths, whose families could no longer support them, rode the rails in box cars
like so many hoboes, hoping to find a job.

Features that could be considered symptoms of family disorganization, especially the

employment of women and children outside the home, can perhaps best be regarded as ways in
which families actively adapted to and coped with economic deprivation. In order to help
provide economic support for their families, married women increasingly came to work outside
the home during the 1930s, generally in low-status, low-paying jobs, often in the service and
light manufacturing sectors.

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New Deal and Recovery of Great Depression:

Unable to help themselves the American public looked to the Federal Government. Dissatisfied
with President Herbert Hoover's economic programs, the people elected Franklin D. Roosevelt as
their president in 1932. Within one hundred days the President, his advisors and the U.S.
Congress passed into law a package of legislation designed to help lift the troubled Nation out of
the Depression. Roosevelt took immediate action to address the country’s economic woes, first
announcing a four-day “bank holiday” during which all banks would close so that Congress
could pass reform legislation and reopen those banks determined to be sound.

Fiscal policy played a relatively small role in stimulating recovery in the United States.
Roosevelt's program was called the 'New Deal.' The words 'New Deal' signified a new
relationship between the American people and their government. This new relationship included
the creation of several new federal agencies, called 'alphabet agencies' because of their use of
acronyms. A few of the more significant of these New Deal programs was the CCC (Civilian
Conservation Corps) which gave jobs to unemployed youths and to improve the environment, the
WPA (Works Progress Administration) gave jobs to thousands of unemployed in everything
from construction to the arts, and the NRA (National Recovery Administration) drew up
regulations and codes to help revitalize industry.

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Later on came the creation of the Social Security System, unemployment insurance and more
agencies and programs designed to help Americans during times of economic hardship. The role
of fiscal policy in generating recovery varied substantially across other countries. Great Britain,
like the United States, did not use fiscal expansion to a noticeable extent early in its recovery. It
did, however, increase military spending substantially after 1937. France raised taxes in the mid-
1930s in an effort to defend the gold standard, but then ran large budget deficits starting in 1936.
The expansionary effect of these deficits, however, was counteracted somewhat by a legislated
reduction in the French workweek from 46 to 40 hours a change that raised costs and depressed
production. Fiscal policy was used more successfully in Germany and Japan.

The German budget deficit as a percent of domestic product increased little early in the recovery,
but grew substantially after 1934 as a result of spending on public works and rearmament. In
Japan, government expenditures, particularly military spending, rose from 31 to 38 percent of
domestic product between 1932 and 1934. Currency devaluations and monetary expansion
became the leading sources of recovery throughout the world. There is a notable correlation
between the time countries abandoned the gold standard (or devalued their currencies
substantially) and a renewed growth in their output. For example, Britain, which was forced off
the gold standard in September 1931, recovered relatively early, while the United States, which
did not effectively devalue its currency until 1933, recovered substantially later.

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Devaluation, however, did not increase output directly. Rather, it allowed countries to expand
their money supplies without concern about gold movements and exchange rates. Countries that
took greater advantage of this freedom saw greater recovery. The monetary expansion that began
in the United States in early 1933 was particularly dramatic. The American money supply
increased nearly 42 percent between 1933 and 1937.

Actually the attack on Pearl Harbor end Great Depression when America entered into World War
2 when they got. Many unemployed man and young joined the military force which decrease the
unemployment rate. This expanding industrial production, as well as widespread conscription
beginning in 1942, reduced the unemployment rate to below its pre-Depression level.

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The Rise of Macroeconomic:

As we know Economics is a social science concerned with the production, distribution, and
consumption of goods and services. Macroeconomics deals with the economy as a whole it
examines the behavior of economic aggregates such as aggregate income, consumption,
investment and the overall level of prices. The most obvious economic impact of the Great
Depression was human suffering. In a short period of time world output and standards of living
dropped. Many people got unemployed.

The Great Depression was not only done by America but also it also done by France and Britain,
gradually it impacted to the whole world. As we can see when the banks of USA ran out of
business not only one bank but a great number of banks ran out of business. Aggregate number
of people lost their houses and deposits and also a great number of industries got closed down.

The central role of reduced spending and monetary contraction in the Depression led British
economist John Maynard Keynes to develop the ideas in his General Theory of Employment,
Interest, and Money (1936). Keynes’s theory suggested that increases in government spending,
tax cuts, and monetary expansion could be used to counteract depressions.

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Conclusion:

In the end we found out that the causes of great depression are interrelated. When the stock
market crashed at 1929s, after some time most of the banks failed at USA then the gold standard
decreases and unemployment problem broke out. The president Herbert Hoover initial action to
minimize the depression also made the situation worsen.

The causes of depression not only affected the USA but also affected the other countries of
world. When they recover the great depression they recover step by step and by taking time, at
the beginning of World War 2 USA got back their early economic condition.

The great depression played huge role on the rising of macroeconomics. After the great
depression and at the time of great depression the world economy changed aggregately. The
great depression cannot happen again if the central bank around the world maintain the monetary
and fiscal policy properly.

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References:
1. Recchiuti, (published date unknown), The Great Depression, Retrieved from
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s%3A%2F%2Fwww.khanacademy.org%2Fhumanities%2Fap-us-history%2Fperiod-
7%2Fapush-great-depression%2Fa%2Fthe-great-depression&usg=AOvVaw0-
oEZGLjeinSzwRJGSrlFL
2. History.com Staff,(2009), A+E Networks, The Great Depression, Retrieved from
http://www.history.com/topics/great-depression
3. Christina D. Romer, (December 20, 2003), Great Depression, Encyclopedia
Britannica
4. History.com Staff, (2010), A+E Networks, Stock Market Crash of 1929, Retrieved
from http://www.history.com/topics/1929-stock-market-crash

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