FOREIGN TRADE UNIVERSITY

DEPARTMENT OF INTERNATIONAL ECONOMICS

----------***---------

MACROECONOMICS I

ASSIGNMENT

THE GREAT DEPRESSION IN THE UNITED STATES

GROUP 10 – CLASS: KTEE264.2

1. Nguyễn Hà Quỳnh Anh 2012450005
2. Vũ Linh Chi 2013450009
3. Nguyễn Hoàng Sơn 2013450052
4. Lê Sơn Duy 2011450701
5. Nguyễn Lê Mai Linh 2012450021
6. Nguyễn Ngọc Trà My 2012450027
7. Lê Văn Mạnh 2013450038
8. Đỗ Thùy Linh 2014450210
9. Nguyễn Ngọc Hà 2013450014
10.Nguyễn Hồng Hạnh 2013450017

Instructor: Assoc. Prof. Hoang Xuan Binh

May 2021, Hanoi

Table of Contents
Abstract.......................................................................................................................................3

I. Definition:................................................................................................................................4

1. What is economic crisis?....................................................................................................4

2. How significant was the Crisis that it was called “The Great Depression”?......................4

II. Background and cause:...........................................................................................................6

1. Historical background:........................................................................................................6

2. Main cause of the great depression.....................................................................................7

III. Consequence:......................................................................................................................14

1. Economic consequence:....................................................................................................14

2. The Great Depression’s socio-economic consequences:..................................................15

IV. Government response:........................................................................................................19

1. Fiscal policy:.....................................................................................................................19

2. Monetary policy:...............................................................................................................24

V. Modern Economist Statement:.............................................................................................29

Conclusion................................................................................................................................31

Reference..................................................................................................................................32

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Abstract

The Great Depression was a severe worldwide economic depression, occurring most
of the 1930s, that began in the United States. The timing of the Great Recession varied around
the world; In most countries, it began in 1929 and lasted until the late 1930s. It was the
longest, deepest, and most widespread recession of the 20th century. The Great Depression is
often used as an example of how strong the global economy can be.

The Great Recession had devastating effects in both rich and poor countries. In many
countries, its negative influence lasted until the beginning of the Second World War.
Recognizing the importance of this period, we decided to conduct a study on the topic: "The
Great Depression in the US"

This report is intended to research, explore and delve into the issue.

Due to limited time as well as difficulty in understanding and collecting data, this
report is hard to avoid errors. Therefore, we are open to all feedbacks and questions from
everyone.

Sincerely thanks for your time and consideration.

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I. Definition:

1. What is economic crisis?

The noun crisis is originated from the Latinized form of the Greek

word krisis, meaning "a difficult or dangerous time in which a solution is needed — and
quickly”. Economic crisis could be defined as a situation in which the economic state of a
country experiences a sharp deterioration. There are several signs of an economic collapse,
including significant declines in production, the rise of unemployment rate, violation of
existing production relations, bankruptcy of enterprises,…In other words, an economic crisis
is an unforeseen set of developments creating results which might affect states on the
macroscale and corporations on the microscale.

Economic crises experienced in national economies are usually a product of negative

fallout in the economical and political cycles and structures. But it could be stated that
economic crises are a general outcome of macro economical instability. (Munir, 2015, p18)

A recession is defined as two or more quarters of negative GDP growth. A depression

is an especially prolonged or severe recession, while economic stagnation is a long period of
slow but not necessarily negative growth. Unfortunately, economic crises have occurred
frequently throughout history, and they frequently result in economic tsunamis in the affected
economies. Throughout the history, there were five major economic crisis:
 The Credit Crisis of 1772
 The Great Depression of 1929 – 1939
 The OPEC Oil Price Shock of 1973
 The Asian Crisis of 1997
 The Financial Crisis of 2007 – 2008
 

2. How significant was the Crisis that it was called “The Great
Depression”?

The Great Depression is considered the worst economic downturn in the history of the
industrialized world. The crisis began in 1929 and lasted until about 1939. Originated in the

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United States, the Depression resulted in sharp decline in output, high unemployment, and
severe deflation in nearly every country on the planet. 
Between 1929 and 1932, worldwide gross domestic product fell by an estimated 15%.
By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great
Recession. (Lowenstein, 2021). Some economies started to recover by the mid-1930s.
However, in many countries, the negative effects of the Great Depression lasted until the
beginning of World War II.

Chart comparing GDP and stock market of the two crises (Marohn, 2018)
The most devastating impact of the Great Depression was human suffering. In a short
period of time, world output and standard of living dropped precipitously. As much as one-
fourth of the labour force in industrialized countries was unable to find work in the early
1930s.  (Romer, Christina D. and Pells, Richard H., 2020)
Nowadays, The Great Depression is commonly used as an example of how intensely the
global economy can decline (Eichengreen, 2016, p.28 ). Not only did it prove the significance
of money, banks and the stock market in our economy but it also dramatically changed the
role of government, especially the federal government.

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II. Background and cause:
1. Historical background:

Between 1921 and 1929, the image conveyed by the United States was of a population
living in the best possible society. The industrial growth of economic power had never been
so strong before, in contrast with the previous decade marked by the great war. The 1920s
was often referred to as the "Roaring Twenties".  This related to the booming period of rapid
economic expansion, but also changing social attitudes. Society was becoming less
regimented and discovering new found freedoms; suddenly people's expectations were
changing, and this was fuelled by new technologies and a booming economy. However,
hidden behind the optimistic views and a booming economy, there were significant structural
problems, which led to the notorious stock market crash of 1929 and the Great Depression of
the 1930s. (Tejvan Pettinger, 2007)

In the 1920s, U.S. prosperity soared as the manufacturing of consumer goods

increased. Washing machines, vacuum cleaners, and refrigerators became everyday household
items. By 1934, 60% percent of households owned radios. By 1922, 60 radio stations
broadcast everything from news to music to weather reports. Most of them used expanded
credit offered by a booming banking industry. (Kimberly Amadeo, 2021)
The airline industry literally took off. In 1925, the Kelly Act authorized the Post
Office to contract out airmail delivery. In 1926, the Air Commerce Act authorized
commercial airlines. From 1926 to 1929, the number of people flying in planes increased
from 6,000 to 173,000. World War I hastened the development of the airplane. Many
returning veterans were pilots eager to show off their flying skills with nationwide
"barnstorming." (Kimberly Amadeo, 2021)

The auto industry also greatly expanded due to Henry Ford's mastery of the assembly
line. A Model T only cost $300. Also, more families could buy on credit. By the end of the
decade, 26 million cars were registered. For the first time, women got behind the wheel.
(Kimberly Amadeo, 2021)

The automotive industry's influence on other segments of the economy were

widespread, jump starting industries such as steel production, highway building, motels,

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service stations, car dealerships, and new housing outside the urban core. Governments spent
$1 billion to build new roads, bridges, and traffic lights. Gas stations, motels, and restaurants
sprang up to service drivers who now covered longer distances. The insurance industry added
expensive protection for the vehicles and their owners. Banks also profited by lending to new
car owners.
(Kimberly Amadeo, 2021.

It’s also the period of enormous excitement about the stock market where all ordinary
people began to see Wall Street as a place to grow rich quickly.American discovered a
passion for stock exchange. During the mid- to late 1920s, the stock market in the United
States underwent rapid expansion. It continued for the first six months following President
Herbert Hoover’s inauguration in January 1929. The prices of stocks soared to fantastic
heights in the great “Hoover bull market,” and the public, from banking and industrial
magnates to chauffeurs and cooks, rushed to brokers to invest their liquid assets or their
savings in securities, which they could sell at a profit. Billions of dollars were drawn from the
banks into Wall Street for brokers’ loans to carry margin accounts.People sold their Liberty
Bonds and mortgaged their homes to pour their cash into the stock market. In the midsummer
of 1929 some 300 million shares of stock were being carried on margin, pushing the Dow
Jones Industrial Average to a peak of 381 points in September (Paul H. Oehser, 2021)

(Fragmented nature of Banking system) A structural weakness in the US economy was

the limited reserves of small and medium sized regional banking companies. This meant that
when the Great Depression came, the banking sector was not prepared to meet the
extraordinary circumstances. Even before the Great Depression of the 1930s many regional
banks faced problems. They often failed to secure sufficient funds in the case of bad debts.
Therefore, when farmers when bankrupt, they didn't have sufficient reserves to meet credit
demand.There was also no system of lender of last resort. This meant that if the banks were
short of money, they couldn't borrow from a Central Bank. When the Great Depression
struck, people wanted to withdraw their money, but the banks didn't have enough reserves to
meet this demand. This caused a fall in confidence in the banking system and many banks
went under. (Tejvan Pettinger, 2007)

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 2. Main cause of the great depression

2.1. The seed of destruction – The Roaring Twenties:

Throughout the 1920s, after stepping out the First World War as the victor, the United
State held a tremendous amount of wealth from war reputation and armaments selling.
Dubbed as the “Roaring Twenties”, In this decade, America became the richest nation on
Earth and a culture of consumerism was born. It was the time of the $5 workday, good worker
pay for those days. People spent money for better roads, tourism, and holiday resorts. Real
estate booms, most notably in Florida, sent land prices soaring. Invention Technology played
a vital part in delivering the economic and cultural good times that most of America enjoyed
during the 1920s. Henry Ford blazed the way with his Model T; he sold more 15 million of
them by 1927. Ford's assembly line means of production was the key. The automobile`s
popularity, and construction of roads and highways — pouring fresh public funds into the
economy — brought tremendous economic prosperity during the roaring twenties. The radio
found its way into virtually every home in America. Following the first public station,
KDKA, in Pittsburgh, thousands more went on the air across the country. The year 1922
introduced the first movie made with sound, The Jazz Singer, starring Al Jolson. And in 1926,
the advent of Technicolor made movies more entertaining and memorable. Consequently, the
movie industry became a major part of American industry in general. Charles A. Lindbergh `s
pioneering flight across the Atlantic Ocean in the Spirit of St. Louis in 1927 did much to
stimulate the young aviation industry. Canned foods, ready-made clothing and household
appliances liberated women from much household drudgery. The influence of Ford`s methods
of mass production and efficiency enabled other industries to produce a huge variety of
consumer appliances. American life seemed fundamentally sound but there was a storm that
was approaching which would driven the world into chaos once again. (Jack Newlon, Rob
Spooner, Alicia Spooner, 2021)

2.2. The crisis unfold – Stock market crash:

The initial decline in U.S. output in the summer of 1929 is widely believed to have
stemmed from tight U.S. monetary policy aimed at limiting stock market speculation. The
1920s had been a prosperous decade, but not an exceptional boom period; prices had

8
remained nearly constant throughout the decade, and there had been mild recessions in both
1924 and 1927. The one obvious area of excess was the stock market. Stock prices had risen
more than fourfold from the low in 1921 to the peak in 1929. In 1928 and 1929, the Federal
Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices. These
higher interest rates depressed interest-sensitive spending in areas such as construction
and automobile purchases, which in turn reduced production. Some scholars believe that a
boom in housing construction in the mid-1920s led to an excess supply of housing and a
particularly large drop in construction in 1928 and 1929.
By the fall of 1929, U.S. stock prices
had reached levels that could not be
justified by reasonable anticipations
of future earnings. As a result, when
a variety of minor events led to
gradual price declines in October
1929, investors lost confidence and
the stock market bubble burst. Panic
selling began on “Black Thursday”, October 24, 1929. Many stocks had been purchased on
margin—that is, using loans secured by only a small fraction of the stocks’ value. As a result,
the price declines forced some investors to liquidate their holdings, thus exacerbating the fall
in prices. Between their peak in September and their low in November, U.S. stock prices
(measured by the Cowles Index) declined 33 percent. Because the decline was so dramatic,
this event is often referred to as the Great Crash of 1929.
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. Although the
loss of wealth caused by the decline in stock prices was relatively small, the crash may also
have depressed spending by making people feel poorer. As a result of the drastic decline in
consumer and business spending, real output in the United States, which had been declining
slowly up to this point, fell rapidly in late 1929 and throughout 1930. Thus, while the Great
Crash of the stock market and the Great Depression are two quite separate events, the decline
in stock prices was one factor contributing to declines in production and employment in the
United States. (Christina D.Romer, Richar H. Pells, 2020)

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 2.3. The main cause – Banking crisis:
The next blow to aggregate demand occurred in the fall of 1930, when the first of four
waves of banking panics gripped the United States. A banking panic arises when many
depositors simultaneously lose confidence in the solvency of banks and demand that their
bank deposits be paid to them in cash. Banks, which typically hold only a fraction of deposits
as cash reserves, must liquidate loans in order to raise the required cash. This process of hasty
liquidation can cause even a previously solvent bank to fail. The United States experienced
widespread banking panics in the fall of 1930, the spring of 1931, the fall of 1931, and the fall
of 1932. The final wave of panics continued through the winter of 1933 and culminated with
the national “Bank Holiday” declared by President Franklin D. Roosevelt on March 6, 1933.
The bank holiday closed all banks, and they were permitted to reopen only after being deemed
solvent by government inspectors. The panics took a severe toll on the American banking
system. By 1933, one-fifth of the banks in existence at the start of 1930 had failed.
By their nature, banking panics are largely irrational, inexplicable events, but some of
the factors contributing to the problem can be explained. Economic historians believe that
substantial increases in farm debt in the 1920s, together with U.S. policies that had
encouraged small, undiversified banks, created an environment in which such panics could
ignite and spread. The heavy farm debt stemmed in part from the high prices of agricultural
goods during World War I, which had spurred extensive borrowing by American farmers
wishing to increase production by investing in land and machinery. The decline in farm
commodity prices following the war made it difficult for farmers to keep up with their loan
payments.
The Federal Reserve did little to try to stem the banking panics. Economists Milton
Friedman and Anna J. Schwartz, in the classic study A Monetary History of the United States,
1867 - 1960 (1963), argued that the death in 1928 of Benjamin Strong, who had been the
governor of the Federal Reserve Bank of New York since 1914, was a significant cause of this
inaction. Strong had been a forceful leader who understood the ability of the central bank to
limit panics. His death left a power vacuum at the Federal Reserve and allowed leaders with
less sensible views to block effective intervention. The panics caused a dramatic rise in the
amount of currency people wished to hold relative to their bank deposits. This rise in the
currency-to-deposit ratio was a key reason why the money supply in the United States
declined 31 percent between 1929 and 1933. In addition to allowing the panics to reduce the

10
U.S. money supply, the Federal Reserve also deliberately contracted the money supply and
raised interest rates in September 1931, when Britain was forced off the gold standard and
investors feared that the United States would devalue as well.
Scholars believe that such declines in the money supply caused by Federal Reserve
decisions had a severely 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 States. The figure shows the
money supply and real output over
the period 1900 to 1945. 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 important, because of actual price declines and the rapid
decline in the money supply, consumers and businesspeople 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 their loan payments. This hesitancy in turn
led to severe reductions in both consumer spending and business investment. The panics
surely exacerbated the decline in spending by generating pessimism and loss of confidence.
Furthermore, the failure of so many banks disrupted lending, thereby reducing the funds
available to finance investment. . (Christina D.Romer, Richar H. Pells, 2020)

2.4. A monetary problem – 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 the 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 the money supply
greatly in response to the banking panics, foreigners would have lost confidence in the United
States’ commitment to the gold standard. This could have led to large gold outflows, and the
United States could have been forced to devalue. Likewise, had the Federal Reserve not
tightened the money supply in the fall of 1931, it is possible that there would have been a

11
speculative attack on the dollar and the United States would have been forced to abandon the
gold standard along with Great Britain.
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 America’s economic 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.
Britain chose to return to the gold standard after World War I at the prewar parity.
Wartime inflation, however, implied that the pound was overvalued, and this overvaluation
led to trade deficits and substantial gold outflows after 1925. To stem the gold outflow,
the Bank of England raised interest rates substantially. High interest rates depressed British
spending and led to high unemployment in Great Britain throughout the second half of the
1920s.
Once the U.S. economy began to contract severely, the tendency for gold to flow out of other
countries and toward the United States intensified. This took place because deflation in the
United States made American goods particularly desirable to foreigners, while low income
among Americans reduced their demand for foreign products. To counteract the resulting
tendency toward an American trade surplus and foreign gold outflows, central banks
throughout the world raised interest rates. Maintaining the international gold standard, in
essence, required a massive monetary contraction throughout the world to match the one
occurring in the United States. The result was a decline in output and prices in countries
throughout the world that nearly matched the downturn in the United States.
Financial crises and banking panics occurred in a number of countries besides the
United States. In May 1931 payment difficulties at the Creditanstalt, Austria’s largest bank,
set off a string of financial crises that enveloped much of Europe and were a key factor in
forcing Britain to abandon the gold standard. Among the countries hardest hit by bank failures
and volatile financial markets were Austria, Germany, and Hungary. These widespread
banking crises could have been the result of poor regulation and other local factors or of
simple contagion from one country to another. In addition, the gold standard, by forcing
countries to deflate along with the United States, reduced the value of banks’ collateral and
made them more vulnerable to runs. As in the United States, banking panics and

12
other financial market disruptions further depressed output and prices in a number of
countries. (Christina D.Romer, Richar H. Pells, 2020)

2.5. The Smoot-Hawley Tariff: 

Another reason for the Wall Street Crash, and in the long run, affected international
trade of the United States is The Smoot-Hawley Tariff. Named after its sponsors, the tariff
originally introduced to protect inland goods and business. The bill proposed to impose tariffs
on 20000 imported goods. Economists, business leaders, and newspaper editors completely
opposed the bill. They knew it would become a barrier to international trade as the other
countries would retaliate. Here are the timeline of the bill’s passage through Congress
 May 28, 1929: Smoot-Hawley passed the House. Stock prices dropped to 191
points.
 June 19: Senate Republicans revised the bill. Market rallied, hitting its peak of 216
on September 3.
 October 21: Senate added tariffs to non-farm imports. Black Thursday stock market
crashed.
 October 31: Presidential candidate Hoover supported the bill. Foreigners started
withdrawing capital.
 March 24, 1930: Senate passed the bill. Stocks fell.
 June 17, 1930: Hoover signed the bill into law. Stocks dropped to 140 in July
As the stock market crashed, other countries took action in response to the tariffs. 
Canada, Europe, and other nations swiftly retaliated by raising tariffs on U.S. exports. As a
result, exports fell from $7 billion in 1929 to $2.5 billion in 1932. Farm exports fell to a third
of their 1929 level by 1933.
Global trade plummeted 65%. That made it difficult for American manufacturers to
remain in business. For example, tariffs on cheap imported wool rags rose by 140%. Five
hundred U.S. plants employed 60,000 workers to use the rags to make cheap clothing. U.S.
auto manufacturers suffered from tariffs on 800 products they used. (Kimberly Amadeo,
2020)

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III. Consequence:
1. Economic consequence:

1.1. Economy:
During the first five years of the depression, the economy shrank 50%. In 1929,
economic output was $105 billion, as measured by gross domestic product (GDP). That's
equivalent to more than $1 trillion today. (“National Income and Product Accounts Tables”,
2020.)
The economy began shrinking in August 1929. By 1933, 20 percent of banks failed because
of the banking panics. By the end of the year, 650 banks had failed. In 1930, the economy
shrank another 8.5%, according to the Bureau of Economic Analysis. GDP fell 16.1% in 1931
and 23.2% in 1932. By 1933, the country had suffered at least four years of economic
contraction. It only produced $56.4 billion, half what it produced in 1929. ("GDP and Other
Major NIPA Series, 1929 - 2012: II.", 2020)
New Deal spending boosted GDP growth by 17% in 1934. It grew another 11.1% in 1935,
14.3% in 1936, and 9.7% in 1937. Unfortunately, the government cut back on New Deal
spending in 1938. The depression returned, and the economy shrank 6.3%. The New Deal and
spending for World War II shifted the economy from a pure free market to a mixed economy.
It depended much more on government spending for its success. The timeline of the Great
Depression shows this was a gradual—though necessary—process.
 ("The Great Depression and the New Deal.", 2020)

1.2. Unemployment rate:

By 1932, unemployment had reached 23.6%, peaking in early 1933 at 25%. Wages for
those who still had jobs fell. (Estimates of national product and income for the United States
economy, 1919–1941)
Drought persisted in the agricultural heartland, businesses and families defaulted on
record numbers of loans (Great Depression in the United States)
Panicked government leaders passed the Smoot – Hawley tariff (the Tariff Act of 1930) to
protect domestic industries and jobs, but it actually worsened the issue. (Federal Reserve
Bank of St. Louis. "Tariff of 1930 (Smoot – Hawley Tariff)," 2020)
Hoover's first measures to combat the depression were based on voluntarism by
businesses not to reduce their workforce or cut wages. But businesses had little choice and

14
wages were reduced, workers were laid off, and investments postponed. (Prosperity,
Depression and the New Deal: The USA 1890–1954,2008 – p.114)
In 1931, Hoover urged bankers to set up the National Credit Corporation so that big
banks could help failing banks survive. But bankers were reluctant to invest in failing banks,
and the National Credit Corporation did almost nothing to address the problem. (Prosperity,
Depression and the New Deal, 2008, p. 113)

1.3. Consumption:
The Consumer Price Index fell 27% between November 1929 to March 1933,
according to the Bureau of Labor Statistics. (“Consumer Price Index Database, All Urban
Consumers”, 2020)

In June 1930, Congress approved the Smoot–Hawley Tariff Act which raised tariffs
on thousands of imported items. The intent of the Act was to encourage the purchase of
American-made products by increasing the cost of imported goods, while raising revenue for
the federal government and protecting farmers. Most countries that traded with the US
increased tariffs on American-made goods in retaliation, reducing international trade, and
worsening the Depression. (Smoot-Hawley Tariff – 2009)

2. The Great Depression’s socio-economic consequences:

The Great Depression hit America hard economically, and thus it also severely
affected its social aspect.
Due to the Depression, the mutual trust among the public, the business owners and the
government was heavily deteriorated. Before the New Deal of President Roosevelt, the
economy showed no signs of improvement. The nation’s real GDP was cut down by nearly
one-third (Milan Brahmbhatt & Luiz Pereira da Silva, 2009), followed by a significant
plummet in GDP per capita (Analysis, 2018). Furthermore, the unemployment rate reached its
peak in the 1930 decade (Statistics, 2021). This was caused by: (1) the financial bubble burst
of 1929 (also known as the Wall Street Crash), followed by a “banking panic”; (2) high
inflation rate due to the government’s price control policy; (3) “tariff war” among nations. To
fully understand the causation relationship between America’s “trust issue” and the
forementioned causes, an analysis will follow this paragraph.

15
 First of all, the Wall Street Crash, followed by the “banking panic”. Before the Crash,
the U.S economy expanded like a wild fire, hence the name “the roaring 20s”. This means
Americans in general could enjoy a prosperous life and had a significant saving; businesses
(and by extension, their stocks) were highly profitable as well. We can see that the demand
and the supply were both there: the public had savings, hungry for even more money;
businesses needed investments, also desired to expand themselves. Naturally, people invest
their entire savings into the stock market. Many withdrew their bank deposits, or borrowed
more, some sold their houses, etc. This inflated the price of the stocks even further, to the
point when it becomes “absurd”. As a rule of thumb, the actual demand could not keep up
with the price, investors were not paid enough by businesses, the bubble burst, and the price
fell. People panicked at such sight, and they started selling off. This pushed the stock price
further down the rabbit hole, and everyone lost: businesses lost their capital, investors lost
their money, and in turn, banks lost their money as well. However, the crisis did not stop
there. As the banks lost their money, they could not pay their depositors. Thus, people lost
their faith in banks then started withdrawing their money. The banks, which originally
depended on those deposits to re-invest for profit, started going bankrupt. That led to other
new problems, because the banks also lent people money for other purposes, such as building
houses. Companies relying on these purposes lost their customer, and went bankrupt. As
businesses closed down, people lost their jobs, leading to a reduction in aggregate demand.
Moreover, the reduction is also worsened due to the fact that people has just lost their savings
from the stock market, some even carried a huge loan. This chain disaster caused people to
lose faith in businesses and the stock market.   (Romer, Christina D. and Pells, Richard H.,
2020)
Secondly, the high inflation rate caused by the government. In fact, the U.S
government’s policies caused both inflation and deflation. It tried increasing government
spending, but at the same time raised taxes. President Hoover’s argued that solving the issue
require raising the payment of workers, which implied raising the price of goods and services.
However, by doing so, consumers (who were also workers) had to spend more, leading to an
even further reduction in demand. Meanwhile, the Fed increased money supply and keep the
interest rate low, causing the Crash itself. After the Crash, instead of injecting money to banks
to save them and/or buying blue-chip stocks to raise investors’ confidence, it cut down on
money supply, causing “great liquidity issues and choked them off” (Segal, 2021). The
actions from the government had exacerbated the already grim economic status. People could

16
not afford goods and services, yet the price was kept high while it was supposed to fall. This
has caused some serious social issues: famine, increased death rate, immigration, etc (Lyskov,
2008). Many strikes happened with the number of participants reaching seven-digits. The
public did not trust the government. As a proof, they called shanty towns “Hoovervilles”,
calling Hoover a “do-nothing president” (Segal, 2021).
Finally, the tariff policies among nations. It started with the Smoot-Harley tariff with
the goal of reducing foreign competition and supporting the agriculture sector as part of U.S
protectionism. However, the plan backfired as other nations did the same thing in retaliation
with the same goal in mind for their nations’ products (Romer, Christina D. and Pells,
Richard H., 2020). U.S businesses were in a difficult situation for two main reasons. Firstly,
their domestic sales plummeted, due to the price control policy. Secondly, their exports were
also blocked by heavy tariffs. These were all caused by the government’s failed policies. This
had undoubtedly worsened their mutual trust.

17
 

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IV. Government response:
1. Fiscal policy:

1.1. What is fiscal policy?

Fiscal policy is the means by which a government adjusts its spending levels and tax
rates to monitor and influence a nation's economy ( LESLIE KRAMER, 2021). It is the sister
strategy to monetary policy through which a central bank influences a nation's money supply.
 Fiscal policy is an important tool for managing the economy because of its ability to
affect the total amount of output produced—that is, gross domestic product. The first
impact of a fiscal expansion is to raise the demand for goods and services. This greater
demand leads to increases in both output and prices. The degree to which higher
demand increases output and prices depends, in turn, on the state of the business cycle.
If the economy is in recession, with unused productive capacity and unemployed
workers, then increases in demand will lead mostly to more output without changing
the price level.
 But Hoover’s idea of how activist government policy should fight the Great
Depression was for the government to make sure that its budget remained in
surplus. Hoover sought tax increases because “our major sources of revenues,
income taxes and corporation profits, were going out from under us with appalling
speed... National stability required that we balance the budget. To do this, we had
to increase taxes on the one hand and, on the other, to reduce drastically
government expenditures” (Michael D. Bordo, Claudia Goldin, Eugene N. White,
1952)

1.2. Under Hoover’s administration:

Hoover tried many tactics to fight the depression.

 In 1929, he cut taxes. He lowered the top rate from 25%-24%. (Tax Policy Center,
2015).
 In December 1930, he raised it back to 25%.

19
  In 1930, Hoover vetoed several bills that would have provided direct relief to
struggling Americans. “Prosperity cannot be restored by raids upon the public
Treasury,” he explained in his 1930 address to Congress (UVA Miller Center, 2020).
Instead, he protected businesses by signing the Smoot – Hawley Tariff Act. It was
supposed to protect farmers but ended up imposing 40% tariffs on 900 products. That
year, the nation's gross domestic product fell 8.5% (Bureau of Economic Analysis,
2020). The unemployment rate was 8.7% (Bureau of Labor Statistics, 1947).
 In 1931, other countries retaliated with their own tariffs. The resultant trade war
reduced international trade by 67% (World Trade Organization, 2013). GDP growth
fell 6.4% while the unemployment rate rose to 15.9% (Bureau of Economic Analysis,
2020 & Bureau of Labor Statistics, 1947).
 In 1932, the economy shrank 12.9%. But Hoover raised the top rate to 63% to
reduce the deficit. His commitment to a balanced budget worsened the depression.
 In 1932, Hoover approved the Reconstruction Finance Corporation to prevent more
bankruptcies. (Encyclopedia Britannica, 2015)
 By 1933, it disbursed $2 billion to failing banks, railroads, and a few other
businesses (CQ Press, 1935). It was effective in keeping them from going under
(Charles W. Calomiris, Joseph R. Mason, Marc Weidenmier & Katherine Bobroff,
2012). In July, the Emergency Relief Act empowered the RFC to lend money to states
to feed the unemployed and expand public works. 
 Hoover signed the Revenue Act of 1932 (Open Journal Systems, 2013). It increased
the top income tax rate to 63%. He wanted to reduce the federal deficit. Hoover
believed it would also restore confidence. Instead, higher taxes worsened the
Depression. GDP growth fell 12.9% and unemployment was 23.6%.
Hoover believed a free market economy would self-correct. As the Depression wore
on, government revenue fell, so Hoover cut spending. He signed the Smoot-Hawley tariff to
protect U.S. industries (FDIC, 2014). He believed business prosperity would trickle down to
the average person. Instead, the Depression worsened.

1.3. Under Roosevelt’s Administration:

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 Fiscal policy is the use of taxes and government spending to stabilize the
economy. During the first part of the 1930s, contractionary fiscal policy may have
deepened the Great Depression. After 1932, fiscal policy became more expansionary and
may have helped to end the Great Depression.

The election of Franklin Roosevelt in 1932 was a turning point. After his election,
President Roosevelt and his advisors created a series of measures—called the New Deal—that
were intended to stabilize the economy. In terms of fiscal policy, the US government moved
away from budget balance and adopted a much more aggressive spending policy. Government
spending increased from 3.2 percent of real GDP in 1932 to 9.3 percent of GDP by 1936.
These spending increases were financed by budget deficits.

Roosevelt’s New Deal sought to reinvigorate the economy by stimulating consumer

demand. The New Deal embraced federal deficit spending to promote economic growth, a
fiscal approach that came to be associated with the British economist John Maynard Keynes.
Keynes argued that government spending that put money in consumers' hands would allow
them to buy products made in the private sector. Then, as employers sold more and more
products, they would have the money to hire more and more workers, who could afford to buy
more and more products, and so on (Robert Skidelsky, 2003).

In this way, Roosevelt and his supporters theorized, the Great Depression’s
downward economic spiral could be reversed.

*First New Deal:

 Government Economy Act - March 20: The Act cut the pay of government and
military employees by 15%. It cut government spending by 25% (C. N. Trueman,
2015). The $1 billion saved went to finance New Deal programs.
 Beer-Wine Revenue Act - March 22: It legalized the sale of beer and wine and taxed
alcohol sales, raising federal revenue. The Beer-Wine Revenue Act was followed by
the passage of the 21st Amendment, which effectively ended Prohibition.
 Federal Emergency Relief Act - May 12: This program funded a wide variety of jobs
in agriculture, the arts, construction, and education (W University Libraries, 2003).

21
  Agricultural Adjustment Act - May 12: This legislation subsidized farmers to reduce
crops. It doubled crop prices by 1937. It was overturned by Supreme Court in 1936
because it taxed processors but gave funds to farmers. That was remedied in 1938.
 Emergency Farm Mortgage Act - May 12: The act provided loans to save farms
from foreclosure (Farm Credit Administration, 2018).
 Tennessee Valley Authority Act - May 18: The program established a federal
corporation that built power stations in the Tennessee Valley, the poorest area in the
nation.
 Home Owners Refinancing Act - June 13: The act established the Home Owners
Loan Corporation that refinanced mortgages to prevent foreclosures. It also provided
additional capital to mortgage lenders. When it closed in 1935, it had refinanced 1
million homes, which was the equivalent of 20% of all urban mortgages (Fraser,
1933).
 National Industrial Recovery Act - June 16: This labor and consumer law set up the
Public Works Administration to create public works jobs. This law also created the
National Recovery Administration. It outlawed child labor, established a minimum
wage of $1.25, and limited the workday to eight hours. It gave trade unions the legal
right to bargain with employers. It was declared unconstitutional in 1935.
 Civil Works Administration - Nov. 9: Created thousands of construction jobs to put
people to work. Congress ended it on March 31, 1934 (John P. Deeben, 2012). 

*Second New Deal Programs:

These focused on providing more services for the poor, the unemployed, and farmers. 

 Soil Conservation & Domestic Allotment Act - February 29:  This program paid
farmers to plant soil-building crops, like beans and grasses, to counteract the Dust
Bowl (Webref, 2019).
 Emergency Relief Appropriation - April 8: The program replaced FERA and funded
the new Works Progress Administration with $5 million (PBS, 1941). It employed 8.5
million people to build bridges, roads, public buildings, public parks, and airports. It
paid artists to create 2,566 murals and 17,744 pieces of sculpture to decorate the
public works.
 Rural Electrification Act - May 20: The law provided loans to farming cooperatives
to generate electricity for their rural areas (National Park Service, 2020).

22
  Resettlement Act - May:  It created the Resettlement Administration that trained
farmers and administered farm debt adjustment activities. It bought 10 million acres of
submarginal farmland and paid farmers to convert it to pasture, preserves, or parks. It
resettled farmers onto better land and taught them modern conservation and farming
techniques.
 Social Security Act - August: This law created the Social Security Trust Fund and
Administration to provide income to the elderly, the blind, the disabled, and children
in low-income households.

*Third New Deal Programs:

In 1937, FDR rolled out the Third New Deal. Concerned about budget deficits, he did
not fund it as much as the previous two. 

 United States Housing Act: it funded state-run public housing projects (The Fair
Housing Center, 1937).
 Bonneville Power Administration: Congress created a federal agency that delivered
and sold power from the Bonneville Dam, which had been built by the PWA.
 Farm Tenancy Act: Called the Bankhead-Jones Farm Tenant Act, it created Farmers’
Home Corporation to provide loans for tenant farmers to buy their farms (Internet
Archive Wayback Machine,2009).
 Farm Security Administration: This replaced the Resettlement Administration to
provide loans and training for farmers.

The cutback in New Deal spending pushed the economy back into the Depression
Roosevelt lost further prestige in the summer of 1937, when the nation plunged into a
sharp recession. Economists had feared an inflationary boom as industrial production moved
up to within 7.5 percent of 1929. Roosevelt, fearing a boom and eager to balance the budget,
cut government spending. The new Social Security taxes removed an additional
$2,000,000,000 from circulation. Between August 1937 and May 1938 the index of
production fell from 117 to 76 (on a 1929 base of 100), and unemployment increased by
perhaps 4,000,000 persons. Congress voted an emergency appropriation of $5,000,000,000
for work relief and public works, and by June 1938 recovery once more was under way,
although unemployment remained higher than before the recession. 

23
 To look back, fiscal policy played a relatively small role in stimulating recovery in the
United States.Franklin D. Roosevelt’s New Deal, initiated in early 1933, did include a number
of new federal programs aimed at generating recovery. However, the actual increases in
government spending and the government budget deficit were small relative to the size of the
economy. This is especially apparent when state government budget deficits are included,
because those deficits actually declined at the same time that the federal deficit rose. As a
result, the new spending programs initiated by the New Deal had little direct expansionary
effect on the economy. 

2. Monetary policy:
The United States government was using monetary policy to save the economy that
had been severely constrained during the Great Depression. The American economist Charles
P. Kindleberger pointed out that in the 1929, before and after the collapse of the stock market,
the Fed lowered interest rates, tried to expand the money supply and eased the financial
market tensions for several times; however, they were not successful. (P., 1973).

2.1. Under Hoover Administration:

Between the 1920s and 1930s, The United States began to try the tight money policy
to promote economic growth. President Hoover began to expand federal spending, he set up a
governmental financial revitalization company to provide emergency assistance to banks and
financial institutions that were on the verge of bankruptcy. 
In December 1929, as means of showing government confidence in the economy,
Hoover reduced all income tax rates by 1% of 1929 due to the continuing budget
surplus. (Gene Smiley, n.d.)
By 1930, the surplus turned into a fast-growing deficit of economic contraction. 
In 1931, the US federal fiscal revenue and expenditure changed from the financial
surplus to a deficit for the first time (the deficit was less than 2.8% of GDP). (Kimberly
Amadeo, reviewed by Janet Berry-Johnson)

By the end of 1931, Hoover had decided to recommend a large increase in taxes to
balance the budget; in addition, Congress approved the tax increase in 1932, a substantial
reduction in personal immunity to increase the number of taxpayers, and the interest rates had
risen sharply, the lowest marginal rate rose from 25% on taxable income in excess of

24
$100,000 to 63% on taxable income in excess of $1 million as the rates were made much
more progressive. Hoover changed his approach to fighting the Depression. He justified his
call for more Federal assistance by noting that "We used such emergency powers to win the
war; we can use them to fight the Depression, the misery, and suffering from which are
equally great." This new approach embraced a number of initiatives. Unfortunately for the
President, none proved especially effective. (Hamilton, D. E., n.d. Herbert Hoover: Domestic
Affairs. [Online] Available at: millercenter.org, [Accessed May 2021].)

In terms of the financial reform, Hoover had been trying to repair the economy. He
founded government agencies to encourage labor harmony and support local public works aid
which promoted cooperation of government and business, stabilized prices, and strived to
balance the budget. (Anon., 2013). The commitment to maintain the gold standard system
prevented the Federal Reserve from expanding its money supply operations in 1930 and 1931,
and it promoted Hoover's destructive balancing budgetary action to avoid the gold standard
system overwhelming the dollar. As the Great Depression became worse, the call raised for
increasing federal intervention and spending. But Hoover refused to allow the Federal
government to force fixed prices, control the value of the business or manipulate the currency,
in contrast, he started to control the dollar price. For official dollar prices, he expanded the
credit base through free market operations in federal reserve system to ensure the domestic
value of the dollar. He also tended to provide indirect aid to banks or local public works
projects, and refused to use federal funds to give aid to citizens directly, which will reduce
public morale. Instead, he focused on volunteering to raise money for relief of the needy
(Anon., 2013. Herbert Hoover on the Great Depression and New Deal, 1931–1933. [Online].
Available at: gilderlehrman.org. [Accessed May 2021].)
* Consequences of the Hoover policy
In 1929, the Great Depression began, the asset bubble burst, and the unemployment
rate rose. The following year, though most people thought that there was nothing worth
worrying about, Hoover took decisive action on issues such as employment, construction,
public construction, and agriculture, which helped restore public confidence. The unemployed
population rose, although it remained less than 9%.
In 1931, politicians and economists were convinced that the economy would recover,
but a serious economic crisis and depression happened this year. Because of Hoover's policy
having led to financial spending increases and financial difficulties, he decided to increase
taxes.

25
 2.2. Under Roosevelt Administration:
At the start of 1933, during the previous couple of weeks of Hoover's term, the
American economic system was paralyzed. The bank crisis caused serious deflationary
pressures. In fact, the worst period of 1932 – the Great Depression had passed, but the
recovery was slow and weak. Roosevelt understood that traditional political and financial
policy was not strong enough to respond to the crisis, and his administration decided to adopt
more radical measures.

During the financial crisis of 1933 culminating in the banking holiday of March 1933,
gold had flowed out from the Fed in large quantities, to individuals and companies in the
United States worried about bank failures, and to foreign entities worried about the
depreciation of the dollar. (Richardson, 2013)
In the spring and summer of 1933, the Roosevelt administration and the Congress took
several actions that effectively suspended the gold standard and rebuilt confidence in the
nation’s banking system.
On March 9, Congress passed the Emergency Banking Act which was intended to
restore Americans’ confidence in banks when they reopened and gave the President the power
to control international and domestic gold exports. (Anon., 2013)
The Act, which also broadened the powers of the president during a banking crisis,
was divided into five sections: 

 Title I expanded presidential authority during a banking crisis, including retroactive

approval of the banking holiday and regulation of all banking functions, including
“any transactions in foreign exchange, transfers of credit between or payments by
banking institutions as defined by the President, and export, hoarding, melting, or
earmarking of gold or silver coin.”
 Title II gave the comptroller of the currency the power to restrict the operations of a
bank with impaired assets and to appoint a conservator, who “shall take possession of
the books, records, and assets of every description of such bank, and take such action
as may be necessary to conserve the assets of such bank pending further disposition of
its business.”

26
  Title III allowed the secretary of the treasury to determine whether a bank needed
additional funds to operate and “with the approval of the President request the
Reconstruction Finance Corporation to subscribe to the preferred stock in such
association, State bank or trust company, or to make loans secured by such stock as
collateral.”
 Title IV gave the Federal Reserve the flexibility to issue emergency currency—
Federal Reserve Bank Notes—backed by any assets of a commercial bank.
 Title V made the act effective.
Roosevelt announced that the next day, March 13, banks in the twelve Federal Reserve
Bank cities would reopen. On March 14, banks in cities would reopen. On March 15, banks
throughout the country that government examiners ensured would reopen and resume
business. (Anon., 2013)
When banks reopened on March 13, it was common to see long lines of customers
returning their stashed cash to their bank accounts. Currency held by the public had increased
by $1.78 billion in the four weeks ending March 8. By the end of March, though, the public
had redeposited about two-thirds of this cash. (Anon., 2013)

On March 15, the first day of stock trading after the extended closure of Wall Street,
the New York Stock Exchange recorded the largest one-day percentage price increase ever,
with the Dow Jones Industrial Average gaining 8.26 points to close at 62.10; a gain of 15.34
percent. (Anon., 2013).
*Besides, on April 5, Roosevelt ordered all gold coins and gold certificates in denominations
of more than $100 turned in for other money. (History.com Editors., 2009)
On April 20, President Roosevelt issued a formal proclamation prohibiting gold
exports and prohibiting the conversion of money and deposits into gold coins and ingots.
(History.com Editors., 2009)
By May 10, the government had taken in $300 million of gold coins and $470 million of gold
certificates. (History.com Editors., 2009)

On May 12, the United States weakened the monetary connection with gold further
when FDR signed the Agricultural Adjustment Act. Title III of this act, also known as the
Thomas amendment, gave the President power to reduce the dollar's gold content by as much
as 50%. President Roosevelt also used the silver standard instead of gold to exchange dollars,
it was determined by the price of the bank. (Richardson, G., 2013).

27
 The Emergency Banking Act also had a historic impact on the Federal Reserve. Title I
greatly increased the president’s power to conduct monetary policy independent of the
Federal Reserve System. Combined, Titles I and IV took the United States and Federal
Reserve Notes off the gold standard, which created a new framework for monetary policy.
Title III authorized the Reconstruction Finance Corporation (RFC) to provide capital to
financial institutions. (Anon., 2013)
Moreover, under the Roosevelt administration, there were the Gold Reserve Act of 1934 and
the Banking Act of 1935. This legislation shifted some of the Federal Reserve’s
responsibilities to the Treasury Department and to new federal agencies. These agencies
dominated monetary and banking policy until the 1950s.

28
V. Modern Economist Statement:

The Great Depression also changed economic thinking. Because many economists and
others blamed the depression on inadequate demand, the Keynesian view that government
could and should stabilize demand to prevent future depressions became the dominant view in
the economics profession for at least the next forty years. Although an increasing number of
economists have come to doubt this view, the general public still accepts it.

Interestingly, given the importance of the Great Depression in the development of

economic thinking and economic policy, economists do not completely agree on what caused
it. Recent research by Peter Temin, Barry Eichengreen, David Glasner, Ben Bernanke, and
others has led to an emerging consensus on why the contraction began in 1928 and 1929.
There is less agreement on why the contraction phase was longer and more severe in some
countries and why the depression lasted so long in some countries, particularly the United
States. (Encyclopedia Britannica. (1994))

Economists such as John Maynard Keynes and Milton Friedman suggested that the
do-nothing policy prescription which resulted from the liquidationist theory contributed to
deepening the Great Depression. With the rhetoric of ridicule Keynes tried to discredit the
liquidationist view in presenting Hayek, Robbins and Schumpeter as “...austere and
puritanical souls who regard the Great Depression ... as an inevitable and a desirable nemesis
on so much "overexpansion" as they call it ... It would, they feel, be a victory for the mammon
of unrighteousness if so much prosperity was not subsequently balanced by universal
bankruptcy. We need, they say, what they politely call a “prolonged liquidation” to put us
right. The liquidation, they tell us, is not yet complete. But in time it will be. And when
sufficient time has elapsed for the completion of the liquidation, all will be well with us
again...”(White, Lawrence (2008)).

Milton Friedman stated that at the University of Chicago such "dangerous nonsense"
was never taught and that he understood why at Harvard - where such nonsense was taught-
bright young economists rejected their teachers' macroeconomics, and become Keynesians.
He wrote: “I think the Austrian business-cycle theory has done the world a great deal of harm.
If you go back to the 1930s, which is a key point, here you had the Austrians sitting in
London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the

29
world. You've just got to let it cure itself. You can't do anything about it. You will only make
it worse [...] I think by encouraging that kind of do-nothing policy both in Britain and in the
United States, they did harm.”(De Long, J. Bradford. (December,1990)).

Economist Lawrence White, while acknowledging that Hayek and Robbins did not
actively oppose the deflationary policy of the early 1930s, nevertheless challenges the
argument of Milton Friedman, J. Bradford DeLong et al. that Hayek was a proponent of
liquidationism. White argues that the business cycle theory of Hayek and Robbins (which
later developed into Austrian business cycle theory in its present-day form) was actually not
consistent with a monetary policy which permitted a severe contraction of the money supply.
Nevertheless, White says that at the time of the Great Depression Hayek "expressed
ambivalence about the shrinking nomimal income and sharp deflation in 1929–32". In a talk
in 1975, Hayek admitted the mistake he made over forty years earlier in not opposing the
Central Bank's deflationary policy and stated the reason why he had been "ambivalent": "At
that time I believed that a process of deflation of some short duration might break the rigidity
of wages which I thought was incompatible with a functioning economy." 1979 Hayek
strongly criticized the Fed's contractionary monetary policy early in the Depression and its
failure to offer banks liquidity:

“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve
System pursued a silly deflationary policy. I am not only against inflation but I am also
against deflation. So, once again, a badly programmed monetary policy prolonged the
depression.” (Lawrence White. (April 9,2012)).

30
Conclusion

The Great Depression was a significant economic change in the 1930s. It had created
great impacts on many countries around the world. And left negative effects even until the
very beginning of WWII.

However, the government have established appropriate policies to solve the problem.
Such as the Fiscal policy and Monetary policy like we mention in our report above.

This report is intended to research, explore and delve into the issue.

Due to limited time as well as difficulty in understanding and collecting data, this
report is hard to avoid errors. Therefore, we are open to all feedbacks and questions from
everyone.

Sincerely thanks for your time and consideration.

31
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