Event Analysis:

1929 Great Depression

Numero UNO Group:
1. Haryoga Aditya Wardhana (162210085)
2. Herlina (162210044)
3. Hetty Kusuma Waty (162210086)
4. Kokoh Parlindungan (162210051)
5. Yosa Arfika Naim (162210087)
6. Zia Ulhaq (162210069)

THE GREAT DEPRESSION

Economists may dream of a perfect market where no bubbles, crashes, or recessions occur, but
these phenomena are inevitable when the players are human. The Great Depression, one of the
worst blows to the world economy, serves as a prime example of how vulnerable markets can
be.
The Great Depression was an economic slump in North America, Europe, and other
industrialized areas of the world that began in 1929 and lasted until about 1939. It was the
longest and most severe depression ever experienced by the industrialized Western world.
Though the U.S. economy had gone into depression six months earlier, the Great Depression
may be said to have begun with a catastrophic collapse of stock-market prices on the New York
Stock Exchange in October 1929. During the next three years stock prices in the United States
continued to fall, until by late 1932 they had dropped to only about 20 percent of their value in
1929. Besides ruining many thousands of individual investors, this precipitous decline in the
value of assets greatly strained banks and other financial institutions, particularly those holding
stocks in their portfolios. Many banks were consequently forced into insolvency; by 1933,
11,000 of the United States' 25,000 banks had failed. The failure of so many banks, combined
with a general and nationwide loss of confidence in the economy, led to much-reduced levels of
spending and demand and hence of production, thus aggravating the downward spiral. The
result was drastically falling output and drastically rising unemployment; by 1932, U.S.
manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen
to between 12 and 15 million workers, or 25-30 percent of the work force.
The Great Depression began in the United States but quickly turned into a worldwide economic
slump owing to the special and intimate relationships that had been forged between the United
States and European economies after World War I. The United States had emerged from the
war as the major creditor and financier of postwar Europe, whose national economies had been
greatly weakened by the war itself, by war debts, and, in the case of Germany and other
defeated nations, by the need to pay war reparations. So once the American economy slumped
and the flow of American investment credits to Europe dried up, prosperity tended to collapse
there as well. The Depression hit hardest those nations that were most deeply indebted to the
United States, i.e., Germany and Great Britain. In Germany, unemployment rose sharply
beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the
work force. Britain was less severely affected, but its industrial and export sectors remained
seriously depressed until World War II. Many other countries had been affected by the slump
by 1931.
Almost all nations sought to protect their domestic production by imposing tariffs, raising
existing ones, and setting quotas on foreign imports. The effect of these restrictive measures
was to greatly reduce the volume of international trade: by 1932 the total value of world trade
had fallen by more than half as country after country took measures against the importation of
foreign goods.
The Great Depression had important consequences in the political sphere. In the United States,
economic distress led to the election of the Democrat Franklin D. Roosevelt to the presidency in
late 1932. Roosevelt introduced a number of major changes in the structure of the American
economy, using increased government regulation and massive public-works projects to
promote a recovery. But despite this active intervention, mass unemployment and economic
stagnation continued, though on a somewhat reduced scale, with about 15 percent of the work
force still unemployed in 1939 at the outbreak of World War II. After that, unemployment
dropped rapidly as American factories were flooded with orders from overseas for armaments
and munitions. The depression ended completely soon after the United States' entry into World
War II in 1941. In Europe, the Great Depression strengthened extremist forces and lowered the
prestige of liberal democracy. In Germany, economic distress directly contributed to Adolf
Hitler's rise to power in 1933. The Nazis' public-works projects and their rapid expansion of
munitions production ended the Depression there by 1936.
At least in part, the Great Depression was caused by underlying weaknesses and imbalances
within the U.S. economy that had been obscured by the boom psychology and speculative
euphoria of the 1920s. The Depression exposed those weaknesses, as it did the inability of the
nation's political and financial institutions to cope with the vicious downward economic cycle
that had set in by 1930. Prior to the Great Depression, governments traditionally took little or
no action in times of business downturn, relying instead on impersonal market forces to
achieve the necessary economic correction. But market forces alone proved unable to achieve
the desired recovery in the early years of the Great Depression, and this painful discovery
eventually inspired some fundamental changes in the United States' economic structure. After
the Great Depression, government action, whether in the form of taxation, industrial
regulation, public works, social insurance, social-welfare services, or deficit spending, came to
assume a principal role in ensuring economic stability in most industrial nations with market
economies.

What Caused The Great Depression in United States of America?

There were specific events and policies during the 1930s, in both the United States and Europe,
that most economists agree helped prolong the Great Depression. For example, many of
President Hoover's interventions damaged the economy's ability to adjust and reallocate
resources. The Smoot-Hawley Tariff Act of 1930 triggered a 66% decline in global trade
between by 1934. Hoover encouraged businesses to raise wages and keep prices high at a time
when they should have fallen, and effectively banned further immigration to the United States
in 1930.
Possible Caused
World War I
The United States entered World War I late (1917) and emerged as a major creditor and
financier of post-War restoration. Germany was burdened with massive war reparations (a
political decision on the part of the victors, see the Treaty of Versailles). Britain and France
needed to rebuild. US banks were more than willing to loan money. However, once US banks
began failing ... the banks not only stopped making loans, they wanted their money back. This
put pressure on European economies, which had not fully recovered from WWI, contributing to
the global economic downturn.
The Federal Reserve
The Federal Reserve System, which Congress established in 1913, is the nation's central bank,
authorized to issue the Federal Reserve notes that create our paper money supply. The "Fed"
indirectly sets interest rates because it loans money, at a base rate, to commercial banks.
In 1928 and 1929, the Fed raised interest rates to try to curb Wall Street speculation (otherwise
known as a "bubble"). Brad DeLong believes the Fed "overdid it" and brought on a recession.
Moreover, the Fed then sat on its hands: "The Federal Reserve did not use open market
operations to keep the money supply from falling.... [a move] approved by the most eminent
economists." There was not yet a "too big to fail" mentality at the public policy level.
Black Thursday (or Monday or Tuesday)
A five-year bull market peaked on 3 September 1929. On Thursday 24 October, a record 12.9
million shares were traded, reflecting panic selling. On Monday 28 October, panicked investors
continued to try to sell stocks; the Dow saw a record loss of 13%. On Tuesday 29 October 1929,
16.4 million shares were traded, shattering Thursday's record; the Dow lost another 12%.
Total losses for the four days: $30 billion, 10 times federal budget and more than the U.S. had
spent in World War I ($32B estimated). The crash wiped out 40 percent of the paper value of
common stock. Although this was a cataclysmic blow, most scholars do not believe that the
stock market crash, alone, was sufficient to have caused the Great Depression.
Bank Failures
In 1929, there were 25,568 banks in the United States; by 1933, there were only 14,771.
Personal and corporate savings dropped from $15.3 billion in 1929 to $2.3 billion in 1933.
Fewer banks, tighter credit, less money to pay employees, less money for employees to buy
goods. This is the "too little consumption" theory sometimes used to explain the Great
Depression but it, too, is discounted as being the sole cause.

Protectionism
The 1913 Underwood-Simmons Tariff was an experiment with lowered tariffs. In 1921,
Congress ended that experiment with the Emergency Tariff Act. In 1922, the Fordney-
McCumber Tariff Act raised tariffs above 1913 levels. It also authorized the president to adjust
tariffs by 50% to balance foreign and domestic production costs, a move to help America's
farmers.
In 1928, Hoover ran on a platform of higher tariffs designed to protect farmers from European
competition. Congress passed the Smoot-Hawley Tariff Act in 1930; Hoover signed the bill
although economists protested. It is unlikely that tariffs alone caused the Great Depression, but
they fostered global protectionism; world trade declined by 66% from 1929 to 1934

The Fickle Fed

Twenty-two years earlier, the panic of 1907 offered a similar scenario, as panic selling sent the
New York Stock Exchange (NYSE) spiraling downward and led to a bank run to boot. With no
Federal Reserve to inject cash into the market, it fell upon investment banker J.P. Morgan to
organize Wall Street. Morgan rallied people who had cash to spare and moved that capital to
banks lacking funds. The panic led the government to create the Federal Reserve, in part to cut
its reliance on financial figures like Morgan in the future.
In the crash of 1929, however, the Fed took the opposite course by cutting the money supply by
nearly a third, thus choking off hopes of a recovery. Consequently, many banks suffering
liquidity problems simply went under. The Fed's harsh reaction, while difficult to understand,
may have occurred because it wished to give Wall Street some tough love by refusing to bail
out careless banks, a response that it felt would only encourage more fiscal irresponsibility in
the future.
Ironically, by increasing the money supply and keeping interest rates low during the roaring
twenties, the Fed instigated the rapid expansion that preceded the collapse. In some ways, it
set up the market bubble leading to the crash and then kicked the economy when it was down.
Although some people, such as Milton Friedman have rightly suggested that the Fed's
mismanagement of the economic situation greatly contributed to the Great Depression, there
still would probably have been a minor recession regardless of government involvement.
Presidential Blunders
President Roosevelt rode into office by characterizing a "do nothing" attitude. In truth,
however, his predecessor, Herbert Hoover, had done far too much to try to halt the recession
following the crash. One of Hoover's main concerns was that workers' wages would be cut
following the economic downturn. In order to ensure artificially high wages among all
businesses, he reasoned, prices needed to stay high so companies would continue producing.
To keep prices high, consumers with the money would need to pay more. Yet the public had
been burned badly in the crash, and most did not have the resources to overpay for products.
This bleak reality forced Hoover to use legislation, the government's trump card, to try to prop
up wages. Following in the unfortunate tradition of the protectionists, Congress tried to restrict
the flow of foreign goods by passing the Smoot-Hawley Tariff Act. Because foreign nations
weren't willing to buy over-priced American goods any more than Americans were, Hoover
decided to choke out cheap imports. The Smoot-Hawley Act started out as a way to protect
agriculture, but swelled into a multi-industry tariff. Other nations retaliated with their own
tariffs, essentially cutting off international trade. Not surprisingly, the economic conditions
worsened worldwide and the U.S. economy sunk from a recession into a depression.
Although Roosevelt promised change when he came into office, he continued Hoover's
economic intervention, only on a bigger scale. He created the New Deal with the best
intentions, but like Hoover's wage controls, it backfired. With previous recession/depression
cycles, the U.S. suffered one to three years of low wages and unemployment before the
dropping prices led to a recovery. Responding to this historical trend of a few hard years
followed by a recovery, American industrialist and philanthropist J.D. Rockefeller remarked,
"These are days when many are discouraged. In the 93 years of my life, depressions have come
and gone. Prosperity has always returned and will again." By attempting to immediately recover
without swallowing the bitter pill of two hard years, Hoover and Roosevelt may have actually
prolonged the pain.
New Deal
The New Deal set lofty goals to maintain public works, full employment, and healthy wages
through price, wage, and even production controls. The New Deal was loosely based on
Keynesian economics, specifically on the idea that government works can stimulate the
economy. Occasionally these projects were ideal, but there were just as many cases of
mismanagement, political back-scratching and general waste that dogs government-run
initiatives. (For related reading, see Can Keynesian Economics Reduce Boom-Bust Cycles?)
One of the most heartbreaking results of the New Deal was the destruction of excess crops to
justify the artificially high prices, despite the need for cheap food. In fact, many of the agencies
created by the New Deal broke up black markets selling cheap goods. This forced factory
workers to stop working and generally halted the production that was needed for recovery.
Even unemployment remained high because companies couldn't afford to keep large payrolls at
the rates set by the government.
Eventually, recovery came in the unappealing form of World War II. Although the notion that
the war ended the Great Depression is a broken window fallacy, it did open up international
trading channels and reverse price and wage controls. Suddenly, the government wanted lots
of things made inexpensively, and pushed wages and prices below market levels. When the war
finished, the trade routes remained open and the post-war era went from recovery to a bull run
in a few short years.

The International Depression

The Great Depression of 1929-33 was the most severe economic crisis of modern times.
Millions of people lost their jobs, and many farmers and businesses were bankrupted.
Industrialized nations and those supplying primary products (food and raw materials) were all
affected in one way or another. In Germany the United States industrial output fell by about 50
per cent, and between 25 and 33 per cent of the industrial labor force was unemployed.
The Depression was eventually to cause a complete turn-around in economic theory and
government policy. In the 1920s governments and business people largely believed, as they had
since the 19th century, that prosperity resulted from the least possible government
intervention in the domestic economy, from open international relations with little trade
discrimination, and from currencies that were fixed in value and readily convertible. Few people
would continue to believe this in the 1930s.
The Main Areas of Depression
 Map 1

The US economy had experienced rapid economic growth and financial excess in the late 1920s,
and initially the economic downturn was seen as simply part of the boom-bust-boom cycle.
Unexpectedly, however, output continued to fall for three and a half years, by which time half
of the population was in
Map 2
desperate circumstances
(Map 1). It also became
clear that there had been
serious over-production in
agriculture, leading to
falling prices and a rising
debt among farmers. At the
same time there was a
major banking crisis,
including the "Wall Street
Crash" in October 1929.
The situation was
aggravated by serious
policy mistakes of the
Federal Reserve Board,
which led to a fall in money
supply and further
contraction of the
economy.
The economic situation in
Germany (Map 2) was made worse by the enormous debt with which the country had been
burdened following the First World War. It had been forced to borrow heavily in order to pay
"reparations" to the victorious European powers, as demanded by the Treaty of Versailles
(1919), and also to pay for industrial reconstruction. When the American economy fell into
depression, US banks recalled their loans, causing the German banking system to collapse.
Countries that were dependent on the export of primary products, such as those in Latin
America, were already suffering a depression in the late l920s. More efficient farming methods
and technological changes meant that the supply of agricultural products was rising faster than
demand, and prices were falling as a consequence. Initially, the governments of the producer
countries stockpiled their products. However this depended on loans from the USA and Europe.

Map 3

When these were recalled, the stockpiles were released onto the market, causing prices to
collapse and the income of the primary-producing countries to fall drastically (Map 3).
New Interventionist Policies
The Depression spread rapidly around the world because Map 4
the responses made by governments were flawed. When
faced with falling export earnings they overreacted and
severely increased tariffs on imports, thus further reducing
trade. Moreover, since deflation was the only policy
supported by economic theory at the time, the initial
response of every government was to cut their spending.
As a result consumer demand fell even further. Deflationary
policies were critically linked to exchange rates. Under the
Gold Standard, which linked currencies to the value of gold,
governments were committed to maintaining fixed
exchange rates. However, during the Depression they were
forced to keep interest rates high to persuade banks to buy and hold their currency. Since
prices were falling, interest-rate repayments rose in real terms, making it too expensive for
both businesses and individuals to borrow.
The First World War had led to such political mistrust that international action to halt the
Depression was impossible to achieve in 1931 banks in the United States started to withdraw
funds from Europe, leading to the selling of European currencies and the collapse of many
European banks. At this point governments either introduced exchange control (as in Germany)
or devalued the currency (as in Britain) to stop further runs. As a consequence of this action the
gold standard collapsed (Map 4).
Political Implications
The Depression had profound political implications. In countries such as Germany and Japan,
reaction to the Depression brought about the rise to power of militarist governments who
adopted the regressive foreign policies that led to the Second World War. In countries such as
the United States and Britain, government intervention ultimately resulted in the creation of
welfare systems and the managed economies of the period following the Second World War.
In the United States Roosevelt became President in 1933 and promised a "New Deal" under
which the government would intervene to reduce unemployment by work-creation schemes
such as street cleaning and the painting of post offices. Both agriculture and industry were
supported by policies (which turned out to be mistaken) to restrict output and increase prices.
The most durable legacy of the New Deal was the great public works projects such as the
Hoover Dam and the introduction by the Tennessee Valley Authority of flood control, electric
power, fertilizer, and even education to a depressed agricultural region in the south.
The New Deal was not, in the main, an early example of economic management, and it did not
lead to rapid recovery. Income per capita was no higher in 1939 than in 1929, although the
government’s welfare and public works policies did benefit many of the neediest people. The
big growth in the US economy was, in fact, due to rearmament.
In Germany Hitler adopted policies that were more interventionist, developing a massive work-
creation scheme that had largely eradicated unemployment by 1936. In the same year
rearmament, paid for by government borrowing, started in earnest. In order to keep down
inflation, consumption was restricted by rationing and trade controls. By 1939 the Germans’
Gross National Product was 51 per cent higher than in 1929 — an increase due mainly to the
manufacture of armaments and machinery.
The Collapse of World Trade
The German case is an extreme example of what happened virtually everywhere in the 1930s.
The international economy broke up into trading blocs determined by political allegiances and
the currency in which they traded. Trade between the blocs was limited, with world trade in
1939 still below its 1929 level. Although the global economy did eventually recover from the
Depression, it was at considerable cost to international economic relations and to political
stability.

Turning point and recovery

In most countries of the world, recovery from the Great Depression began in 1933. In the U.S.,
recovery began in early 1933, but the U.S. did not return to 1929 GNP for over a decade and
still had an unemployment rate of about 15% in 1940, albeit down from the high of 25% in
1933. The measurement of the unemployment rate in this time period was unsophisticated and
complicated by the presence of massive underemployment, in which employers and workers
engaged in rationing of jobs.
There is no consensus among
economists regarding the
motive force for the U.S.
economic expansion that
continued through most of the
Roosevelt years (and the 1937
recession that interrupted it).
The common view among most
economists is that Roosevelt's
New Deal policies either caused
or accelerated the recovery,
although his policies were
never aggressive enough to
bring the economy completely
The overall course of the Depression in the United States, as reflected in per-capita GDP
out of recession. Some
(average income per person) shown in constant year 2000 dollars, plus some of the key
events of the period. Dotted red line = long term trend 1920-1970 economists have also called
attention to the positive effects
from expectations of reflation and rising nominal interest rates that Roosevelt's words and
actions portended. It was the rollback of those same reflationary policies that led to the
interrupting recession of 1937. One contributing policy that reversed reflation was the Banking
Act of 1935, which effectively raised reserve requirements, causing a monetary contraction that
helped to thwart the recovery. GDP returned to its upward trend in 1938.
Role of Women and Household Economics
Women's primary role were as housewives; without a steady flow of family income, their work
became much harder in dealing with food and clothing and medical care. The birthrates fell
everywhere, as children were postponed until families could financially support them. The
average birthrate for 14 major countries fell 12% from 19.3 births per thousand population in
1930, to 17.0 in 1935. In Canada, half of Roman Catholic women defied Church teachings and
used contraception to postpone births.
Among the few women in the labor force, layoffs were less common in the white-collar jobs
and they were typically found in light manufacturing work. However, there was a widespread
demand to limit families to one paid job, so that wives might lose employment if their husband
was employed. Across Britain, there was a tendency for married women to join the labor force,
competing for part-time jobs especially.
In rural and small-town areas, women expanded their operation of vegetable gardens to
include as much food production as possible. In the United States, agricultural organizations
sponsored programs to teach housewives how to optimize their gardens and to raise poultry for
meat and eggs. In American cities, African American women quilt makers enlarged their
activities, promoted collaboration, and trained neophytes. Quilts were created for practical use
from various inexpensive materials and increased social interaction for women and promoted
camaraderie and personal fulfillment.
Oral history provides evidence for how housewives in a modern industrial city handled
shortages of money and resources. Often they updated strategies their mothers used when
they were growing up in poor families. Cheap foods were used, such as soups, beans and
noodles. They purchased the cheapest cuts of meat—sometimes even horse meat—and
recycled the Sunday roast into sandwiches and soups. They sewed and patched clothing, traded
with their neighbors for outgrown items, and made do with colder homes. New furniture and
appliances were postponed until better days. Many women also worked outside the home, or
took boarders, did laundry for trade or cash, and did sewing for neighbors in exchange for
something they could offer. Extended families used mutual aid—extra food, spare rooms,
repair-work, cash loans—to help cousins and in-laws.
In Japan, official government policy was deflationary and the opposite of Keynesian spending.
Consequently, the government launched a nationwide campaign to induce households to
reduce their consumption, focusing attention on spending by housewives.
In Germany, the government tried to reshape private household consumption under the Four-
Year Plan of 1936 to achieve German economic self-sufficiency. The Nazi women's
organizations, other propaganda agencies and the authorities all attempted to shape such
consumption as economic self-sufficiency was needed to prepare for and to sustain the coming
war. Using traditional values of thrift and healthy living, the organizations, propaganda agencies
and authorities employed slogans that called up traditional values of thrift and healthy living.
However, these efforts were only partly successful in changing the behavior of housewives.
World War II and Recovery
The common view among economic historians is that the Great Depression ended with the
advent of World War II. Many economists believe that government spending on the war caused
or at least accelerated recovery from the Great Depression, though some consider that it did
not play a very large role in the recovery. It did help in reducing unemployment. The
rearmament policies leading up to World War II helped stimulate the economies of Europe in
1937–39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of
manpower following the outbreak of war in 1939 ended unemployment.

The U.S.' entry into the war in 1941 finally eliminated the last effects from the Great Depression
and brought the U.S. unemployment rate down below 10%. In the U.S., massive war spending
doubled economic growth rates, either masking the effects of the Depression or essentially
ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes,
redoubling their efforts for greater output to take advantage of generous government
contracts.

Sources:
https://en.wikipedia.org/wiki/Great_Depression#Turning_point_and_recovery
http://uspolitics.about.com/od/economy/tp/what_caused_great_depression.htm
http://www.history.com/topics/great-depression