1

TABLE OF CONTENTS

CHAIR FOREWORDS 3
INTRODUCTION TO THE COMMITTEE 4

AGENDA: The 1929-1933 Great Depression Financial Crisis 8

AGENDA INTRODUCTION 8
KEY TERMS AND DEFINITIONS 11
BACKGROUND OF AGENDA 17
SCOPE OF DEBATE 22
POSSIBLE SOLUTIONS 29
QUESTIONS A BILL MUST ANSWER (QABMA) 33
BIBLIOGRAPHY AND FURTHER READING 34

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CHAIR FOREWORDS

Head Chair: Vianca Gupta

She is a thinker, a friend and, most importantly, a creator of problems
(for herself). Want to know her superpowers? She has the ability and
consistency to pull an all nighter, and the capability of being the most
adaptable and dependable person there is. If you try to reach her,
she’s most probably sleeping, eating or netflixing, but nonetheless she
will be here to help you. Feel free to reach out to her with any queries!

Vianca is beyond excited to chair this edition of GIIS MUN’s USS

committee and hopes to see the senators well-researched and ready
to take part in some heated debate!

Deputy Chair: Nivedita Menon

Nivedita’s love for debate has grown exponentially since she attended
her first MUN conference in 2018. When she isn’t taking part in
debate events, she spends most of her free time organising her
Pinterest page, watching an endless number of food videos, or
listening religiously to 2010s pop music. One thing you will never find
her doing, however, is playing sports.

On a more serious note, she is a reliable and approachable person, so

don’t hesitate to bombard her with questions about MUN. She hopes
all of you have fun MUN-ing and is excited to see how different
perspectives will flow through debate.

3
INTRODUCTION TO THE COMMITTEE

The United States of America consists of a bicameral legislative branch

known as the Congress; it is divided into two houses; the House of
Representatives (Lower House) and The Senate (Upper House).
According to Article I, Section I, of the U.S. Constitution:1 ‘All legislative
powers herein granted shall be vested in a Congress of the United
States’.

This means the constitution specifically grants Congress its most

important power — the authority to make laws. A Bill is a proposal for a
new law. It only becomes a law after both the House of Representatives
and the Senate have approved it in the same form.2

The Senate, initially created to protect the rights of minorities, is

composed of 100 members, two from each state, who are elected to
serve for a term of six years. To become a Senator a person must be at
least 30 years old, have been a US citizen for at least 9 years, and must
live in the state that they represent.3

Being an independent body of responsible citizens that share power

with the House of Representatives and the President, they protect the
rights of their states by showcasing the interests of their people in
national matters. Hence, while the Senate aims to represent the states
equally, the house of representatives aims to represent the population
democratically and proportionally.4

1
“Floor Proceedings.” U.S. Senate, http://www.senate.gov/.
2
Senate of Belgium, www.senate.be/.

3
“US History.” Ushistory.org, Independence Hall Association, http://www.ushistory.org/.
4
U.S. Capitol Visitor Centre, http://www.visitthecapitol.gov/.

4
Similarly, the Senate approves treaties and certain presidential
appointments, such as ambassadors and Supreme Court Justices,
conducts impeachment trials, and implements cloture on debates.
However, it is the House of Representatives that deals with spending
and tax bills.

Seeing as this legislative body is responsible for formulating laws, once

new legislations are drafted in the Senate it is referred to a
sub-committee specific to that bill in the Senate. For example, if a bill
regarding subsidizing the production of crops for farmers has been
drafted then it gets referred to the Senates’ Committee on Agriculture,
Nutrition, and Forestry, where the bill gets written up in legal jargon
and is voted upon. Winning over a majority in the committee the ‘bill’
then moves to the floor of the full Senate to be debated and amended
where it can only be passed if the revised version wins over the majority
votes of senate members. Finally, the Senate version of the bill moves
to the house of representatives where it once again passes upon
majority voting.5

Usually, many revisions and criticisms are taken into consideration

before differences between both houses can be ironed out (hence, bills
can take months to become finalised). Only upon being passed by both
chambers of Congress can the bill move to the President for signing,
where it is then passed and waits to be enacted into law or vetoed.

During the event, the Dias will be the President of the Senate (Vice
President of the United States), overseeing the debate. In the case there

5
“Official Guide to Government Information and Services: Usagov.” Official Guide to
Government Information and Services | USAGov, http://www.usa.gov/.

5
is a tie during the voting, the President of the Senate can cast the
deciding vote; acting as a tiebreaker.6

6
Legislative activity. Homepage. (n.d.). Retrieved November 16, 2021, from
http://www.house.gov/.

6
COMMITTEE TIMELINE

This committee is set in and starting on January 1st, 1933. All events
leading up to the Great Depression (ranging specifically from 1929 to
1932) are relevant to the discussions of this Senate. For more clarity
regarding the timeline, you may refer to the ‘BACKGROUND OF
AGENDA’ section of this study guide. You may also refer to the
‘BIBLIOGRAPHY AND FURTHER READING’ section of this guide for
in-depth research.

7
AGENDA: The 1929-1933 Great Depression
Financial Crisis

AGENDA INTRODUCTION

The Great Depression was the worst economic downturn during the
Industrial Era, which lasted from 1929 to 1939. The causes of the
Great Depression till this day, are still heavily debated upon. While
some attribute the stock market crash to be the event that catalyzed
the Great Depression, there are others that argue that there were
other underlying factors, such as the boom in the economy that
occurred during the 1920s.

The 1920s were known as the ‘Roaring Twenties’ and was a period in
which the US economy expanded rapidly. This surging economy
created an era of mass consumerism and people partaking in
unhealthy spending habits that resulted in the overconsumption of
goods and services. As a result, consumer debt more than doubled
between 1920 and 19307.

Banks and people however continued to take part in risky

investments and banking activities. Most of the potential
consequences of these unstable economies went largely unnoticed as
the U.S economy continued to thrive with a few hurdles here and
there. The potential consequences were not completely ignored and
as a result during the mid-1920s, car manufacturing began to slow
down. Despite the economic boost, one sector that continuously
suffered throughout this period was the agricultural sector.

7
"46f. A Consumer Economy - USHistory.org." https://www.ushistory.org/us/46f.asp.
Accessed 18 Jun. 2022.

8
Farmers suffered from economic hardship due to an overproduction of
goods that were being sold at low prices. Furthermore, they were left
unable to pay off the debts they had used to buy machinery to
increase their yields.

Throughout the Great Depression, the U.S experienced a plethora of

economic setbacks and social struggles. There were numerous
crashes of powerful banks across the country in places such as New
York and Chicago which greatly impacted the U.S economy.
Unemployment rates were also rapidly rising during this period, with
the peak unemployment rate during the Great Depression being
25.6%8.

Moreover, international trade was another aspect that underwent a

steep decline after the passage of the Smoot-Hawley Tariff Act
passed in 1930 by President Hoover. This act not only impacted the
United States but also resulted in the economic decline of many other
nations. As a result of a culmination of these factors, the U.S economy
underwent a period of deflation and hence resulted in a crashing
economy.

The welfare of the people was also severely affected during the Great
Depression. Soup kitchens were flocked by thousands of people and
homelessness became a rising problem. As the depression worsened
many people looked to the government to provide aid. Many believe
that the government did not do enough and was the primary reason
to blame for the nation's intolerable economic and social conditions.

The housing crisis was met with several homeless encampments

which soon became known as ‘Hoovervilles’, a politicised term used to
blame the President for the suffering of the nation. With severe
unemployment rates, rising homelessness, and the inability to afford
8
"Unemployment today vs. the Great Depression: How do the eras ...." 19 May. 2020,
https://www.cnbc.com/2020/05/19/unemployment-today-vs-the-great-depression-how-
do-the-eras-compare.html. Accessed 18 Jun. 2022.

9
necessities, the economy of the country and the suffering of its
citizens became increasingly worrying.

When the committee session begins for this event, the U.S economy
and the welfare of its citizens are in dire straits. Throughout the event,
senators will debate the existing economic and welfare policies, as
well as introduce their own to help solve the problems the country is
currently facing effectively.

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KEY TERMS AND DEFINITIONS

1. Dow Jones index: It is an index that helps investors determine

the overall direction of stock prices. It includes the prices of 30 of
the most actively traded stocks.9

2. Stock market: The stock market is a collection of exchanges

through which equity shares of public companies are issued,
bought and sold.10

3. Margin trading: margin trading involves borrowing money from

a broker and using that money to purchase securities or equity
shares. By taking out a loan, the investor can buy more shares
than they would have otherwise been able to afford using only
the cash in their account.11

4. Margin calls: Demand from a broker or brokerage firm for an

investor to deposit additional money or securities into their
account to increase the amount of equity.12

5. Tariffs: Tax levied upon goods as they cross national

boundaries, usually by the government of the importing
country.13

9
"What Is the Dow Jones? (Stock Market Indexes) - Investopedia."
https://www.investopedia.com/ask/answers/who-or-what-is-dow-jones/. Accessed 4 Jun.
2022.
10
"Stock Market Definition - US News Money." 16 Mar. 2022,
https://money.usnews.com/investing/term/stock-market. Accessed 7 Jun. 2022.
11
"Why Is Buying Stocks on Margin Considered Risky? - Investopedia."
https://www.investopedia.com/ask/answers/041315/why-purchasing-stocks-margin-con
sidered-more-risky-traditional-investing.asp. Accessed 7 Jun. 2022.
12
"Margin Call Definition - Investopedia."
https://www.investopedia.com/terms/m/margincall.asp. Accessed 4 Jun. 2022.
13
"tariff | Definition, Types, Examples, & Facts - Encyclopedia Britannica."
https://www.britannica.com/topic/tariff. Accessed 4 Jun. 2022.

11
 6. Fictitious reserves: The practice of counting checks in the
process of collection as a part of the bank’s cash reserves.
These checks were counted in the reserves of 2 banks: the one
in which the check was deposited and the one in which the
check was drawn, even though the cash resided in only one
bank. During the Great Depression bankers referred to these
reserves as fictitious reserves.14

7. Gold standard: A monetary system in which the standard unit

of currency is a fixed quantity of gold or is kept at the value of a
fixed quantity of gold. The currency is freely convertible
nationally or internationally into a fixed amount of gold per unit
of currency.15

8. Liquidation: The process of bringing a business to an end and

distributing its assets to claimants. It usually occurs when a
company cannot pay its obligations when they are due. As
company operations end, the remaining assets are used to pay
creditors and shareholders, based on priority of their claims.16

9. Collateral: An asset that a lender accepts as security for a loan.

The collateral acts as a form of protection for the lender. If the
borrower defaults on their loan payments, the lender can seize
the collateral and sell it to make up for some of the losses.17

10. Bank run: A bank run is when many customers withdraw all
their money simultaneously from their deposit accounts with a

14
"Banking Panics of 1930-31 - Federal Reserve History."
https://www.federalreservehistory.org/essays/banking-panics-1930-31. Accessed 4 Jun.
2022.
15
"gold standard | Definition & History - Encyclopedia Britannica."
https://www.britannica.com/topic/gold-standard. Accessed 4 Jun. 2022.
16
"Liquidation Definition - Investopedia."
https://www.investopedia.com/terms/l/liquidation.asp. Accessed 7 Jun. 2022.
17
"Collateral Definition, Types, & Examples - Investopedia."
https://www.investopedia.com/terms/c/collateral.asp. Accessed 17 Jun. 2022.

12
 banking institution for fear that the institution is or might
become insolvent.18

11. Economic deflation: A general decline in the prices of goods

and services. Economic deflation is typically associated with a
contraction in the supply of money and credit in the economy.
During deflation, the purchasing power of currency rises over
time.19

12. Recession: A recession is a significant decline in economic

activity that lasts for months or even years. Experts declare a
recession when a nation’s economy experiences negative GDP,
rising levels of unemployment, falling retail sales, and
contraction measures of income and manufacturing for an
extended period of time.20

13. Federal reserve act: The federal reserve act of 1913

established the federal reserve system as the central bank of the
United states to provide the nation with a safer, more flexible,
and more stable monetary and financial system. The law sets
out the purposes, structure and functions of the system as well
as outlines the aspects of its operations and accountability.21

14. Fiscal policy: use of government spending and tax policies to

influence economic conditions, especially macroeconomic

18
"Learn About Liquidity & Causes of Bank Runs - Corporate Finance ...." 18 Sep. 2021,
https://corporatefinanceinstitute.com/resources/knowledge/other/bank-run/. Accessed 7
Jun. 2022.
19
"Deflation Definition - Investopedia."
https://www.investopedia.com/terms/d/deflation.asp. Accessed 4 Jun. 2022.
20
"What Is A Recession? – Forbes Advisor." 12 May. 2022,
https://www.forbes.com/advisor/investing/what-is-a-recession/. Accessed 7 Jun. 2022.
21
"Federal Reserve Act." 10 Mar. 2017,
https://www.federalreserve.gov/aboutthefed/fract.htm. Accessed 17 Jun. 2022.

13
 conditions, including aggregate demand for goods and services,
employment, inflation, and economic growth.22

15. Monetary policy: refers to central bank activities that are

directed towards influencing the quantity of money and credit in
an economy23

16. Free trade: A policy by which a government does not

discriminate against imports or interfere with exports by
applying tariffs (to imports) or subsidies (to exports)24

17. Protectionism: Government policies that restrict international

trade to help domestic industries.25

18. The Glass-Steagall act of 1932: The Glass–Steagall

legislation describes four provisions of the United States
Banking Act of 1933 separating commercial and investment
banking26.

22
"Fiscal Policy Definition - Investopedia."
https://www.investopedia.com/terms/f/fiscalpolicy.asp. Accessed 17 Jun. 2022.
23
"Monetary and Fiscal Policy - CFA Institute."
https://www.cfainstitute.org/en/membership/professional-development/refresher-reading
s/monetary-fiscal-policy. Accessed 17 Jun. 2022.
24
"free trade | Definition & Facts - Encyclopedia Britannica."
https://www.britannica.com/topic/free-trade. Accessed 18 Jun. 2022.
25
"Protectionism Definition - Investopedia."
https://www.investopedia.com/terms/p/protectionism.asp. Accessed 18 Jun. 2022.
26
Heakal, Reem. “What Is the Glass-Steagall Act?” Investopedia,
https://www.investopedia.com/articles/03/071603.asp. Accessed 19 June 2022.

14
 19. The Smoot-Hawley Tariff : The act passed in 1930 that
raised import duties to protect American businesses and
farmers as a result of a boom in the U.S economy27.

20. Macroeconomic policies: The set of government rules and

regulations to control or stimulate the aggregate indicators of an
economy

21. Fordney-McCumber act: The tariff act of 1922 that raised

American tariffs on many imported goods to protect factories
and farms as a result of protectionism post WW128

22. Aggregate demand: A measurement of the total amount of

demand for all finished goods and services produced in an
economy.29

23. GDP (Gross domestic product): Total monetary or market

value of all the finished goods and services produced within a
country’s borders in a specific time period30.

24. Consumer price index: Measure of the overall change in

consumer prices over time based on a representative basket of
goods and services. It is the most widely used measure of

27
“Smoot-Hawley Tariff Act | History, Effects, & Facts.” Encyclopaedia Britannica, 10 June
2022, https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act. Accessed 19 June
2022.
28
“Fordney-McCumber Tariff | United States [1922] | Britannica.” Encyclopaedia
Britannica, https://www.britannica.com/topic/Fordney-McCumber-Tariff. Accessed 19
June 2022.
29
Boyle, Michael. “Aggregate Demand Definition - Macroeconomics.” Investopedia,
https://www.investopedia.com/terms/a/aggregatedemand.asp. Accessed 19 June 2022.
30
“Gross Domestic Product (GDP) Definition - Economics.” Investopedia,
https://www.investopedia.com/terms/g/gdp.asp. Accessed 19 June 2022.

15
 inflation, closely followed by policymakers, financial markets,
businesses, and consumers.31

31
"Consumer Price Index (CPI) Definition - Investopedia."
https://www.investopedia.com/terms/c/consumerpriceindex.asp. Accessed 19 Jun. 2022.

16
BACKGROUND OF AGENDA

The 1920s

The roaring 20s were considered to be a time of economic prosperity.

As the United States of America emerged as a victor from WW1 its
economy began to recover. With more people entering the workforce,
innovations, and banks handing out loans the American economy
experienced immense growth. However, despite the economic growth
in the 1920s, American farmers continued to suffer from economic
hardship. The spending habits of citizens and the banks during this
period were also unsustainable. A combination of these factors is
believed to have resulted in the consequences that were to be faced
in the coming years.

1928

Republicans win by a 56-39 seat majority, beating democratic

representative- Al Smith32.

1929

On March 4th, 1929, Herbert Hoover was made President of the

United States, gaining major political support from the Midwest and
Northeast. His support stemmed from the alignment of beliefs that
higher tariffs on imports would help curb the economic crisis faced by
the farmers.

On the 24th of October 1929 now known as ‘Black Thursday’, the

stock market experienced one of many catastrophic losses that were
about to appear over the next few years. Due to growing economic

32
“1928 United States presidential election.” Wikipedia,
https://en.wikipedia.org/wiki/1928_United_States_presidential_election. Accessed 19
June 2022.

17
and investor uncertainty, people began selling their shares which
resulted in the value of the Dow Jones dropping by 11% in value.33 In
an attempt to stabilise the market from crashing further, powerful
banks invested large sums of money into the stock market and banks,
which did ultimately have the desired effect and by the end of the day,
the market had lost a total of 2%.34

On the 28th of October 1929, ‘Black Monday’, the Dow Jones crashed
once again. This time the stock market prices dropped by nearly
13%.35 Many people sold their stocks primarily because clients of
brokers could not pay for their margin calls and also because they
had lost trust in the stock market.

On the 29th of October 1929, ‘Black Tuesday, the stock market

plummeted by another 12%.36 Once again powerful banks invested
large sums of money into the stock market and banks to try to
stabilize the stock market.

1930

The Dow Jones began to regain value and the recovery of the stock
market and the American economy seemed likely by the fall of 1930.

However, on the 7th of November, 1930, Caldwell and Company, one

of the largest financial holding companies, closed one of its principal
subsidiaries, the Bank of Tennessee. This resulted in a domino effect,

33
"Timeline of the Great Depression, 1930s - Historic Newspapers." 14 Dec. 2021,
https://www.historic-newspapers.co.uk/blog/great-depression-timeline/. Accessed 18 Jun.
2022.
34
"Timeline of the Great Depression, 1930s - Historic Newspapers." 14 Dec. 2021,
https://www.historic-newspapers.co.uk/blog/great-depression-timeline/. Accessed 18 Jun.
2022.
35
"Timeline of the Great Depression, 1930s - Historic Newspapers." 24 Dec. 2020,
https://www.historic-newspapers.com/blog/great-depression-timeline/. Accessed 18 Jun.
2022.
36
"1929 Timeline | Historic Newspapers US." 15 Feb. 2021,
https://www.historic-newspapers.com/blog/1929-timeline/. Accessed 18 Jun. 2022.

18
with many other commercial banks liquidating. The closure of some of
the Cladwell and Company’s subsidiaries marked the beginning of the
first regional banking panics. The closure of these commercial banks
was a result of fictitious bank reserves and the inability of the banks
to mobilise bank reserves during times of crisis.

Following the crash of the stock market, protectionism gained

strength. The Smoot Hawley tariff bill passed the Senate by a narrow
margin (44-42)37. Despite urges from over 1000 economists to veto
the legislation, President Hoover signed the bill into law on June 17th,
1930. The act raised tariffs on imported goods in the hopes of
supporting American businesses. However, this resulted in other
countries also imposing tariffs on the US, which led to a steep decline
in global trade.

Early 1930s

The Great Depression welcomed an increase in crime rates and

homelessness, reduced incomes followed by mass migrations with
people seeking opportunities elsewhere. Investments in healthcare
were left to last resorts leading to increased death rates. Birth rates
sharply fell. Alcoholism increased as a means of escape for people
which resulted an increase in suicide rates.

1931

On the 21st of September, 1931, Britain was forced to leave the gold
standard. This departure from the gold standard occurred because
people became weary of British investments during times of
uncertainty in Europe and began exchanging pounds in return for
gold. This led to a depletion in gold reserves and a loss of faith in the
British pound. After Britain left the gold standard it allowed the value
37
“Smoot–Hawley Tariff Act.” Wikipedia,
https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act. Accessed 19 June
2022.

19
of the pound to be determined by market forces. The devaluation of
the pound led many people to believe that the dollar was going to be
next and hence people once again began exchanging their dollars in
return for gold which magnified the bad economic state of the nation.

On December 11th, 1931, New York’s Bank of the United States

closed down. The collapse of one of the largest New York banks at the
time created national news and resulted in people withdrawing
money from other banks, generating bank panic once again.

1932

On the 22nd of January, 1932, the Reconstruction Finance

Corporation (RFC), which is a US government agency, was
established by Congress. It was a financial institution that mostly
garnered bipartisan support from the members of opposing parties. It
provided direct funding to banks and financial institutions, including
those which were not under the federal bank reserves.

The emergency Relief and Construction act passed on the 27th of July
1932 aimed to broaden the lending powers of the RFC. As a result,
the RFC was able to expand its funding towards financing state and
local public works such as infrastructure projects, agricultural aid, and
unemployment relief. These loans were provided by the RFC,
guaranteeing that they would receive a repayment via tax receipts.

The Glass-Stegall act of 1932 reformed the role of the federal reserve
in providing credit. Gold supplies had fallen since the summer of 1931
and governors became increasingly concerned about their free-gold
positions. The Glass-Steagall act allowed the federal reserve to
provide money to member banks on assets that were not otherwise
eligible for discount at an interest rate of one-half of 1% higher than

20
the regular discount rate at that bank as long as 5 members from the
federal reserve board allowed it.38

The federal reserve bank also received power to use government

securities as collateral for federal reserve notes in addition to gold and
commercial paper, which were previously authorised by the federal
reserve act of 1913. In the summer of 1932, however, the federal
reserve discontinued the expansionary policies of the act.

However, the banking panics did not end as Chicago experienced a

regional banking crisis in June, 1932. These banking panics were
triggered by falling real estate prices, falling local utility stocks, a
decline in corporate assets, and cases of bank fraud and
mismanagement. A significant impact of these factors was seen on
the 22nd of June, when people began withdrawing their money from
banks.

These withdrawals continued until they reached their peak on June

24th. In an attempt to help banks recover, informed third parties (the
Federal Reserve and Reconstruction Finance Corporation) intervened
and banks cooperated to resolve this issue (bankers from New York
and Chicago worked together to solve the Chicago banking
problems).

38
"Banking Act of 1932 | Federal Reserve History."
https://www.federalreservehistory.org/essays/banking-act-of-1932. Accessed 18 Jun.
2022.

21
SCOPE OF DEBATE

1. Resolving the imminent hyper deflation:

Deflation is defined as a decrease in the general price levels of goods
and services.39 In the years following up to the Great Depression, the
US was probably in the most comfortable position it had been
economically, in a long time. Free trade was on the rise as
industrialised countries were able to produce goods for cheaper
prices, therefore creating a global interconnected network. More
workers in the country started to work in these factories. Moreover,
the country was bustling with relatively wealthy, working people,
resulting in an unemployment rate of below 3%.40

A lot of this wealth however, was invested in shares. This is mainly

because shares can buy you more profit and wealth. This concept got
so important that people started taking out loans to invest in shares,
thinking that they could, with whatever profit they gain, repay back
the loan and keep additional wealth to themselves. However,
following the stock market crash in 1929, the value of company
shares dropped by 40%,41 meaning that the people had even less
money compared to before. People were unable to pay back the loans
they took out to invest in those shares. Although this didn’t have as
much of an effect, considering the stock market is just a part of the
economy, it is the effect this had on consumer confidence and
spending that was concerning.
Following the loss of money, people started saving more and
spending less in order to repay back loans. This meant businesses
started losing revenue. As a result, workers were laid off as costs of

39
Sonnenshein, Michael. “Deflation Definition - Economy.” Investopedia,
https://www.investopedia.com/terms/d/deflation.asp. Accessed 19 June 2022
40
“Employment and Unemployment in the 1930s.” FRASER - St. Louis Fed,
https://fraser.stlouisfed.org/files/docs/meltzer/maremp93.pdf. Accessed 20 June 2022.
41
Richardson, Gary, et al. “Stock Market Crash of 1929.” Federal Reserve History,
https://www.federalreservehistory.org/essays/stock-market-crash-of-1929. Accessed 20
June 2022.

22
production were not met, businesses went bankrupt or started
producing less. This unemployment in turn led to more unemployment,
as fewer people could afford goods and services which led to more
businesses going bankrupt and laying off workers.

Although this may only affect those with relatively lower incomes, the
problem does not stop there. Earning enough or not, people tend to
speculate, meaning those who still had jobs starting saving more in
case they got fired. Other businesses too, in fear of going bankrupt,
stopped investing. There became a massive decrease in consumer
confidence and spending in the economy. Regardless of saving,
however, some people could not pay back their loans and mortgages
which led to banks closing down. This meant all the remaining money
in the banks too had gone. In fear of more banks going bankrupt,
people started pulling out their money out of banks. This ripple effect
led to many more banks going bankrupt.

With banks going bankrupt and savings vanishing, workers continued

to get laid off. Banks refused to lend out mortgages leading
businesses like construction ones to suffer and certain people to
remain homeless. The issue that remained was the continuous
production of goods, regardless of the loss of money in the economy,
in order for businesses to pay off their fixed costs. Overproduction
meant forcefully reducing prices in order to allow people to demand it.
By reducing the prices over time, people started to speculate; they
believed prices would lower further and hence would delay spending.
This led to more businesses closing down and loss of incomes.

Following the enactment of the Smoot-Hawley tariff act, it was

believed that by making foreign goods more expensive, people would
start purchasing more goods in the domestic markets once more.
However, this seemed to have its own adverse effects.

23
 2. Smoot-Hawley Tariff Act:
The Smoot-Hawley Tariff of June 17th, 1930, grew out of the
promises of President Herbert Hoover’s election campaign. The bill,
sponsored by Republicans Reed Smoot and Willis Hawley, was
targeted at farmers (20% of Americans) as an attempt to help them
during their economic hardships. Hoover, during his campaign, had
pledged to help them by increasing the tariffs on their produce to yield
them all higher sales revenue.

Although the Roaring 20’s marked economic prosperity for the United
States, the agricultural sector suffered from falling incomes during the
’20s. As European farmers recovered from World War I, American
farmers faced stiff competition and falling prices due to
overproduction in the agricultural sector globally. Additionally, the
Roaring 20s called for increased consumption and so increased
production. To keep up with the market demand, farmers were forced
into borrowing, eventually leading them to face pressures on repaying
debts on factors of production like borrowed land during the late 20s.
This led to lobbying with the federal government to produce
protection of agriculture from imports.

Republican candidate Hoover focused his plans on raising protective

tariffs on farm products, strongly believing that revision of the
legislation was needed to help industries gain command of their
domestic markets once again.

As the bill was introduced into Congress, post-stock market crash

fears still lingered with people, losing money, confidence, and jobs.
Legislators were compelled to add tariffs on all kinds of products in all
sectors of the economy. It raised tariffs by 20%; higher levels above
the already established levels in the 1922 Fordney-McCumber act.
About 20,000 more goods were taxed including those from the
manufacturing and agricultural industries.

24
After the enactment of the bill, many countries swiftly retaliated with
their own tariffs. As a result, American exports fell from $7 billion in
1929 to $2.5 billion in 1932. American imports and exports to Europe
fell by two-thirds between 1929 and 1932. In May 1930, Canada
imposed their own countervailing duties on US imports. These Tariffs
- which accounted for about 30% of the value of all US merchandise
exports to Canada42 - were raised to the levels charged by the United
States.

As documented by the League of Nations, "The Hawley-Smoot tariff

in the United States was a signal for a surge in tariff activity in other
countries, in part at least through retaliation. The significant increases
in rights were almost direct from Canada, Cuba, Mexico, France, Italy
and Spain" (League of Nations, 1932, p.193). The law had its adverse
effects by not only causing a trade war but also raising prices for the
US, leading the nation to lose out on its essential imports. Even so, the
macroeconomic impact explains that a purchase of these imports
would drive prices in US markets even higher. This is an unfavorable
outcome, especially during a time of lowered wages and high
unemployment, as people's real incomes falling makes goods even
more unaffordable, fuelling the recession. Moreover, a combination of
the two following the recession led to an overall decrease in net
exports, negatively impacting the aggregate demand of the economy.
The bill, therefore, worsened the effects of the depression by further
decreasing the net GDP considering that GDP levels were already far
below the equilibrium level.

From a political perspective, the Smoot-Hawley Tariff fueled suspicion

between nations, which led to less cooperation. In the end, world
trade fell by around 66%.⁴³

42
O'Brien, Anthony. “Smoot-Hawley Tariff.” EH.Net,
https://eh.net/encyclopedia/smoot-hawley-tariff/. Accessed 19 June 2022.

25
 3. Restructuring the banking systems:
There are a few reasons why banks failed during the Great
Depression; banks extending too much credit, failing to maintain
adequate reserves, and the federal reserve.

Bank reserves extended too much credit:

The over consumerism of products in the 1920s was facilitated by

banks as they kept loaning people money, which in turn encouraged
spending. This resulted in businesses thriving (business inventories
soared 300% between 1928 and 1929).43 During the years leading up
to the Great Depression, American wages began to stagnate but the
overconsumption of goods continued as banks continued to lend
money. Banks also promoted the participation of the average citizens
in the stock market by providing individual investors with funds to
partake in margin trading. When the stock market rose, banks
continued to make money however this prosperity did not last. Their
reliance on the stock markets for their wealth was unsustainable and
hence when the stock market crashed so did the banks.

Role of the federal reserve during the Great Depression:

When the financial crisis began, more than 8000 banks were
members of the federal reserve, but almost 16000 non-member
banks operated in an environment of banking practices that existed
before the establishment of the federal reserve.44 There were
disagreements among federal reserve leaders about the extent to
which aid should be provided to financial institutions that were not
under the federal reserve. The federal reserve had also increased
43
"How Bank Failures Contributed to the Great Depression - HISTORY." 13 May. 2021,
https://www.history.com/news/bank-failures-great-depression-1929-crash. Accessed 18
Jun. 2022.
44
"Banking Panics of 1930-31 - Federal Reserve History."
https://www.federalreservehistory.org/essays/banking-panics-1930-31. Accessed 18 Jun.
2022.

26
interest rates in 1928 and 1929 as an attempt to limit speculations in
security markets which resulted in the slowing down of economic
activity in the United States.

Furthermore, during the bank panics, many believe that the federal
reserve failed to fulfill its duty by acting as a lender to banks. This was
primarily due to differences in opinions between governors working
for the federal reserve. Some of the governors believed in Bagehot’s
dictum, while others believed in real bills. The Bagehot’s dictum
approach stated that by lending freely, the central bank may be able
to quell powerful panic-driven demands for liquidity and their
potentially untoward effects on the economy.45 Whereas the real bills
doctrine limits banks to primarily issuing money that is adequately
backed by equally valued assets that will not contribute to inflation.46

Despite complaints about the inaction of the federal reserve during

the Great Depression, they did, however, attempt to alert the banks
about their concern regarding their activities by issuing them warning
letters. They also stopped raising interest rates in 1929, which some
believe was an action that was carried out too late to have any
positive effect. In 1931 and 1932, they also began to expand their
monetary base rapidly to try to curb deflation.

Banks failing to maintain adequate reserves:

Usually how a bank operates is when a person comes to the bank

with a certain amount of money they want to deposit, the bank only
keeps a certain percentage of that deposit on reserve while they lend
the rest of the money to other people in the form of loans. When
people repay loans, they do so at an interest rate that allows the

45
"Bagehot's Dictum in Practice: Formulating and Implementing ...." 21 Aug. 2009,
https://www.federalreserve.gov/newsevents/speech/madigan20090821a.htm. Accessed
18 Jun. 2022.
46
"Real Bills Doctrine Definition - Investopedia."
https://www.investopedia.com/terms/r/real-bill-doctrine.asp. Accessed 18 Jun. 2022.

27
banks to make money. This system works when people repay their
loans on time and bank runs don't occur.

During the Great Depression, numerous loans went unpaid and many
bank runs occurred, which resulted in the collapse of many banks.
Ordinarily, banks can borrow extra reserves from other banks or the
federal reserve. However, borrowing from other banks becomes
extremely expensive when depositors want to withdraw their money
from all banks. Moreover, during this period, a lot of banks had not
joined the federal reserve system and hence were not able to tap into
its resources to avoid collapse. Each year, from 1930 to 1933, more
than 1000 U.S banks closed.47

47
"The Great Depression: An Overview by David C. Wheelock."
https://www.stlouisfed.org/~/media/files/pdfs/great-depression/the-great-depression-wh
eelock-overview.pdf. Accessed 18 Jun. 2022.

28
POSSIBLE SOLUTIONS

1. Repeal of the Smoot-Hawley tariff act

The enactment of the Smoot-Hawley tariff act resulted in world trade
falling by around a massive 66%,48 with American exports falling
from $7 billion in 1929 to $2.5 billion in 1932.49 It is necessary that
senators address the effects the bill had on global trade and
international relations.

The repeal of this act or introduction of new bills may help improve
global trade through improving global relations, as there would be
more transparency between members during international trade.
Senators may look towards possible negotiation methods, trade pacts
that could be implemented, whether the tariffs should be reduced or
removed completely and to consider their impacts on the domestic
economy.

The Democratic party, heavily voting against the bill, supported free
trade and low tariffs to promote trade and boost exports. However,
the Republican party, on the other hand, favors protectionist policies.
It is argued that the Smoot-Hawley tariff act is not a major
contributing factor to the socio-economic crisis at hand and that a
more domestic approach is needed to help boost the economy out of
slumber.

2. Raising income tax

During the Great Depression, the wealth disparity between the rich
and the poor was so large that by 1928 the top 1% of families
received 23.9% of all pretax income. About 60% of families made less

48
"Smoot-Hawley Tariff Act | History, Effects, & Facts - Encyclopedia ...." 10 Jun. 2022,
https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act. Accessed 18 Jun. 2022.
49
"Smoot-Hawley Tariff Act - Overview, Legislative History, Impact."
https://corporatefinanceinstitute.com/resources/knowledge/economics/smoot-hawley-tarif
f-act/. Accessed 18 Jun. 2022.

29
than $2000 a year, the income level the Bureau of Labor Statistics
classified as the minimum livable income for a family of 5.50

In 1929, the top 0.1% of Americans had a combined income equal to

the bottom 42%. That same top 0.1% of Americans in 1929 controlled
34% of all savings, while 80% of Americans had no savings at all51.
Senators must look to reduce the income inequality among the
population. Raising taxes on the rich could be a method used to
maintain equal wealth levels between the wealthy and poor.
Moreover, the tax collected could be invested in welfare projects,
financial aid for the unemployed and/ or poor.

Democratic senators generally believe that by raising taxes on those

with higher incomes, it could be redistributed/reallocated to aid in
alleviating the hardships of the economy and the welfare of its
citizens. On the contrary, Republican senators argue that these taxes
shouldn’t be raised at all, as using money earned by the rich to help
the poor can reduce the incentive for people to work hard.

3. Leaving the gold standard

After Britain left the gold standard on the 21st of September 1931,
it allowed the value of the pound to be determined by market forces. If
senators decide that America should also follow in their footsteps by
leaving the gold standard, the federal reserve could play a bigger role
in alleviating the economic crisis as the gold standard currently limits
the abilities of the federal reserve by restricting the government’s
ability to print money and increase national debt.

It could also be argued that the gold standard plays a role in causing
the periodic economic contractions since the availability and value of
50
"Why the Roaring Twenties Left Many Americans Poorer - HISTORY." 26 Mar. 2021,
https://www.history.com/news/roaring-twenties-labor-great-depression. Accessed 18
Jun. 2022.
51
"1 Main Causes of the Great Depression Paul Alexander Gusmorino ...."
https://www.rcboe.org/cms/lib/GA01903614/Centricity/Domain/2820/Main%20Causes%
20of%20the%20Great%20Depression%20article%202019.pdf. Accessed 18 Jun. 2022.

30
gold fluctuates, and so by leaving the gold standard, it could help
stabilise the economy. Democratic senators would generally favour
this outcome as they support federal reserve intervention.

On the contrary, it could be argued that the gold standard is a means

of encouraging international cooperation on monetary issues as it is a
monetary system in which the standard unit of currency is a fixed
quantity of gold or is kept at the value of a fixed quantity of gold. The
currency is freely convertible nationally or internationally into a fixed
amount of gold per unit of currency.

Furthermore, leaving the gold standard would result in more authority

being handed over to the federal reserve which Republicans dislike,
as they believe assigning too much power to an unelected agency
that is unaccountable to the citizens of the nation would be
unconstitutional to dictate monetary policy.

4. Federal reserve
Some of the duties of the federal reserve system are to conduct the
nation’s monetary policy, promote stability of the financial system,
and foster payment systems safely through services such as the
banking industry. Senators should collaborate to discuss how they
can achieve the above. They must also discuss to how and what
extent all banks can receive aid.

Ways that this could possibly be achieved is by the federal reserve

system extending aid to all banks regardless of whether they are
under the feds, through implementation of new regulations or
proposal of new systems. This could prevent the collapse of many
banks that are currently struggling due to bank runs.

Due to the liquidation of many banks, unemployment has risen as

workers can no longer be given their salaries. If banks are provided
with relief from the federal reserve, workers will regain jobs. However,

31
during this time, there are still 8000 banks that are not members of
the federal reserve and almost 16000 non-member banks operate in
an environment of banking practices that existed before the
establishment of the federal reserve52. This raises the question as to
whether the banks not under the federal system should be able to
reap benefits and have equal benefits as banks under feds.

Democratic senators generally favour expanding upon the duties of

the federal reserve and granting them more authority, while
Republican senators generally oppose federal reserve intervention as
they believe the federal reserve promotes poor fiscal policy.

The federal reserve operates mostly independent from the federal

government but is still considered to be a quasi-governmental agency
as it still consists of members selected by the president and approved
by the congress. In case there is a misalignment in views between the
government and the federal reserve (ex: government implements a
loose fiscal policy while the federal reserve implements a tight
monetary policy) it will diminish the efforts of both organisations.

52
"Banking Panics of 1930-31 - Federal Reserve History."
https://www.federalreservehistory.org/essays/banking-panics-1930-31. Accessed 18 Jun.
2022.

32
QUESTIONS A BILL MUST ANSWER
(QABMA)

1. What approach should the country take to improve global

trade? Would moving into a more open economy stimulate the
economy of the country at this given time?

2. How would the systemic risks of the financial sector be

minimised?

3. What macroeconomic policies should be imposed in order to

promote maximum employment and stable prices of goods and
services?

4. Is there scope to redefine the way monetary policies are

regulated?

5. How may the Federal Reserve Systems be altered to encompass

the needs of all failing banks who are considered non-members?

33
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