Contractionary Issues

The Contractionary Theory: The Great Depression itself was similar to being in a deflationary gap except for an extended period of time. In this case the gap lasted approximately 5 years (1929-1934). During this period the money supply decreased, real GDP declined, stocks plumetted, savings fell, and unemployment rates soared.

http://www.shambhala.org/business/goldocean/depsupply.gif

The above graph illistrates the directly corrolation between the money supply and real gross domestic product. Everywhere money supply decreased gross domestic product followed suit. Unfortunately during the great depression the government failed to increase the money supply for upwards of 5 years, leaving the economy in a contractionary state. Should the government had taken steps to increase the money supply Gross Domestic Product most certainly would have rebounded in a much more timely fashion.

http://libertycorner.typepad.com/photos/uncategorized/private_saving_1929_2005.jpg

The graph above illistrates the severity of economic issues during the depression. Over the period from 1929-1934 americans gross national income fell from 15%-5%, in otherwords, americans were now saving 1/3rd of what they were previously. As a result people were less willing to invest money, which ultimately disrupted the cash flow within the U.S. economy.

http://www.amatecon.com/gd/djia.jpg

The graph above traces the Dow Jones Industrial Average over a 35 year duration 1915-1950. The Dow Jones itself is a very good indicator on how well the economy is doing. Following the stock market crash of 1929 the market fell astronomically. It fell approximately 75% over the following 5 years, mostly as a result of the entire nations populous being unable or unwilling to invest. With investors losing faith in the market and the lack of money to invest the market only had one place to go… down.

http://e1.newcastle.edu.au/coffee/pubs/briefs/graphics/proflecture7.jpg

With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve, especially the New York branch, which was owned and controlled by Wall Street bankers. The Fed was not controlled by President Herbert Hoover or the U.S. Treasury; it was primarily controlled by member banks and businessmen and it was to these groups that the Fed listened most attentively regarding policies to follow.

In Conclusion: What happens to the quantity of money directly effects what happens to national income and to stock prices. The simple facts are this: during the contractionary stages of the great depression, the U.S. failed to engage in expansionary fiscal policy, that is increasing government expeditures, increasing transfer payments, or decreasing taxes. Thus, following the stock market crash of 1929 a chain reaction began that wouldnt be stopped until pre war production began for WWII.