Great Depression What

The Great Depression

Debt Deflation Hypothesis

Contractionary Issues

The Gold Standard Monetary Policy

The Great Depression was an economic downturn which started in 1929 and its effects continued to last through the 1930s. Although the main effects were felt in North America and Europe, it affected countries around the world. Cities around the world that were based on heavy industry were hit the hardest and unemployment and homelessness shot up. Outside of the cities farmers, miners, and loggers were also hit because demand and prices fell dramatically. The causes of the Great Depression are numerous and have been examined many times by many different people. Although economists have come up with and supported numerous theories- such as the Debt Deflation Hypothesis, The Gold Standard and Monetary Policy, and Contractionary Issues- there will continue to be debate on what the underlying cause of the Great Depression that began in 1929 was.

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The 1920's

In the United States the decade of the 1920's was a decade of brisk economic growth in the United States that was marked by an expansion of consumer credit. Major innovations in the consumption behavior of households led to the purchase of durable goods such as automobiles, refrigerators, and radios, which utilized the availability of more credit. Between 1920 and 1929 the United States saw an annual growth rate of real GNP to equal 4.6%. Throughout the 1920s the Federal Reserve began to use Monetary Policy as an implement to stabilize business cycle fluctuations along with other actions to stabilize the economy.

The Great Depression Hits

Members of the Federal Reserve System, President Herbert Hoover, and other public officials perceived there to be speculative excesses that were driving the stock market boom and a speculative bubble in equity values. These public officials were intent on ending these speculations. By 1928 buying rates on bankers' acceptances were raised from 3 percent in January 1928 to 4.5 percent in July. This rate increase reduced the Federal Reserve holdings of such bills, leaving only $185 million of these bills on balance. After the death of the Federal Reserve Bank President Benjamin Strong, the Federal Reserve was put into the hands of Adolph Miller, which insured that the fall in the stock market would become a reality.

• Federal Resrve's seasonally adjusted index of industrial production stood at 114 in August 1929
• Stood at 110 (decline of 3.5 percent) by October 1929
• Fell to 100 (decline of 9 percent) after the crash by December 1929
• Fell to 79 (decline of 21 percent) by January 1930
• In this period unemployment rose from 3 percent to 25 percent

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A Brief Timeline

1920 January, economic expansion peaks; a severe recession begins

May, Treasury begins to buy silver at one dollar an ounce, as required by the Pittman Act of 1918

1923 May, economic expansion peaks, recession begins

mid-year, silver purchase policy effectively ends

1924 July, economic contraction ends, recovery begins

1925 April 28th, Britain announces return to a gold standard for its currency, setting the value of the pound back to its pre-World War I value of $4.86/pound

1926 October, economic expansion peaks, recession begins

Revenue Act of 1926 passed, cutting taxes of those earning $1M or more by two-thirds

1927 Federal Reserve reduces the discount rate by half a point and purchases $230 million of government securities

1928 June, France returns to a gold standard, establishing exchange rates of 124 francs per pound and 25.51 francs per dollar

October, Benjamin Strong, Governor of the Federal Reserve Bank of New York, dies.

November, Herbert Hoover elected president

1929 February 2nd, Federal Reserve announces a ban on bank loans for margin trades

August, economic expansion peaks

September 3rd, stock market prices peak, with New York Times index of industrial stocks at 452

October 24th, "Black Thursday," recorded sales of shares hits 12,895,000

October 25th, market rallies, briefly

October 29th, "Black Tuesday," recorded sales of shares hits 16,410,000. New York Times index of industrial stocks drops nearly forty points, the worst drop in Wall Street history to that point. November 13th, stock market prices reach low for the year, with New York Times index of industrial stocks at 224

1930 June 17th, Smoot-Hawley Tariff Act is signed into law October, Committee for Unemployment Relief formed By year's end, 1350 banks have suspended operations during 1930