2009-A

The Great Depression

Macro-Economics
Samiya Illias
th
25 September 2009
Submitted to: Mr Farrukh Hassan
Pakistan Institute of Management

Causes of The Great Depression 1929 explored…. and lessons for today!
Contents
Contents................................................................................................................ 2

Introduction........................................................................................................ 3

Causes of the Great Depression ........................................................................3

List of Causes:.................................................................................................... 4

1. False Prosperity...........................................................................................4

2. Speculation..................................................................................................4

3. Stock Market Crash.....................................................................................4

4. Banking Crisis..............................................................................................4

5. Unemployment............................................................................................4

6. Trade Collapse.............................................................................................5

7. Republican Policy........................................................................................5

The Federal Reserve...........................................................................................5

The protectionist temptation: Lessons from the Great Depression for today.....8

2
The Great Depression

Introduction1

The Great Depression was a severe worldwide economic depression in the decade preceding
World War II. The timing of the Great Depression varied across nations, but in most
countries it started in about 1929 and lasted until the late 1930s or early 1940s. It was the
longest, most widespread, and deepest depression of the 20th century, and is used in the 21st
century as an example of how far the world's economy can decline. The depression originated
in the United States, triggered by the stock market crash of October 29, 1929 (known as
Black Tuesday), but quickly spread to almost every country in the world.

The Great Depression had devastating effects in virtually every country, rich and poor.
Personal income, tax revenue, profits and prices dropped, and international trade plunged by
half to two-thirds. Unemployment in the United States rose to 25%, and in some countries
rose as high as 33%. Cities all around the world were hit hard, especially those dependent on
heavy industry. Construction was virtually halted in many countries. Farming and rural areas
suffered as crop prices fell by approximately 60 percent. Facing plummeting demand with
few alternate sources of jobs, areas dependent on primary sector industries such as cash
cropping, mining and logging suffered the most.

Countries started to recover by the mid-1930s, but in many countries the negative effects of
the Great Depression lasted until the start of World War II.

Causes of the Great Depression2

The causes of the Great Depression are still a matter of active debate among economists.
The specific economic events that took place during the Great Depression have been studied
thoroughly: a deflation in asset and commodity prices, dramatic drops in demand and credit,
and disruption of trade, ultimately resulting in widespread poverty and unemployment.
However, historians lack consensus in describing the causal relationship between various
events and the role of government economic policy in causing or ameliorating the
Depression.

Current theories may be broadly classified into three main points of view. First, there is
orthodox classical economics: monetarist, Austrian Economics and neoclassical economic
theory, which focus on the macroeconomic effects of money supply, how central banking
decisions lead to overinvestment (economic bubble), or the supply of gold which backed
many currencies before the Great Depression, including production and consumption.

Second, there are structural theories, most importantly Keynesian, but also including those of
institutional economics, that point to underconsumption and overinvestment (economic
bubble), malfeasance by bankers and industrialists, or incompetence by government officials.
The only consensus viewpoint is that there was a large-scale lack of confidence.

1
http://en.wikipedia.org/wiki/Great_Depression
2
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
3
Unfortunately, once panic and deflation set in, many people believed they could make more
money by keeping clear of the markets as prices got lower and lower and a given amount of
money bought ever more goods.

List of Causes:3

1. False Prosperity

• overdependence on mass production, consumer spending, advertising,

welfare capitalism, high tariff, "invisible hand"
• automobile was the leading industry
• chemicals, appliances, radio, aviation, chain stores
• overproduction in textiles, farming, autos
• real wages increased only 11%
• 60% population less than $2000 poverty minimum
• top 5% earned 33% income - spending by the rich essential
• Andrew Mellon cut taxes

2. Speculation

• Fed loaned at 3.5%, gold inflow 1927, Great Bull Market 1928
• broker loans on call rose from $3.5b in 1927 to $8.5b in 1929
• Goldman Sachs investment trusts, 50% margin trading at 5% interest
• only 1.5m of 120m population were investors
• pooling tactic of "anglers" - John J. Raskob
• Charles Mitchell of National City Bank: "I know of nothing fundamentally
wrong with the stock market." (Oct. 21, 1929)
• Joe Kennedy: "Only a fool holds out for the top dollar" (sold after RKO
merger in October 1928)

3. Stock Market Crash

• Sep. 3 Dow high of 381

• Sep. 6 Babson break - market became erratic
• Sep. 20 - collapse of Hatry in Britain
• Oct. 23 - J.P. Morgan buys to stop price decline
• Oct. 24 - panic selling began - 12.8m shares
• Oct. 29 - "Black Tuesday" - 16.4m shares
• prices decline to Dow low 41.22 on July 8, 1932

4. Banking Crisis

• deposits withdrawn, deflation

• 9000 banks fail in 1930, 1932 waves
• Austria's bank failed May 1931

5. Unemployment

• ripple effect as leading factories close

3
http://history.sandiego.edu/gen/20th/1930s/depression-causes.html
4
 • rose to 25-35% of total labor force, 80% in Toledo
• farm income declined 60%; 1/3 lost land

6. Trade Collapse

• foreign countries retaliate with high tariffs

• Weimar Republic unable to pay reparations or U.S. banks loans
• U.S. had been creditor with $638m annual surplus

7. Republican Policy

• "The Ordeal of Herbert Hoover"

• laissez faire, balanced budget, trickle down, voluntarism
• no use of monetary or fiscal policies
• Agricultural Marketing Act, Hawley-Smoot tariff, RFC of Jesse Jones

Milton Friedman explains the role of gold in the Great

Depression:
http://www.youtube.com/watch?v=O7pnjzCuSv8

The Federal Reserve4

In 1913 Congressman Lindbergh warned that the Federal Reserve System “establishes
the most gigantic trust on earth. When the President signs this act, the invisible
government by the monetary power will be legitimized. The new law will create
inflation whenever the trusts want inflation. From now on, depressions will be
scientifically created.”

After the bankers finished profiting from the world war, they decided to cause an economic
depression in the U.S. so that they could further buy up the market, further expand
government, and further control the American people. Creating booms, busts, recessions and
depressions is completely scientific when you decide the amount of money printed and
circulated. As Nobel-Prize winning economist, Milton Freidman said, “The Federal Reserve
definitely caused the Great depression by contracting the amount of currency in circulation
by one-third from 1929 to 1933.”

“To think that the Crash of 1929 was an accident or the result of stupidity defies all logic.
The international bankers who promoted the inflationary policies and pushed the
propaganda which pumped up the stock market represented too many generations of
accumulated expertise to have blundered into the Great Depression …It was the game of
boom and bust, using economic crisis to consolidate political power at the top where it can
be most easily controlled. The major cause of the economic collapse was the deliberately
4
http://www.atlanteanconspiracy.com/2008/08/feds-great-depression.html

5
created credit inflation by the Federal Reserve. In six years it had inflated the money supply
by sixty-two %, inducing market speculations and unwise investments by middle Americans
who were being set up for a shearing. When the shearing came, the sheep took a realistic
look at their economy and panicked. Optimism was replaced by economic despair; despair
produced a willingness to accept a major expansion of government controls over the
economy.” -Gary Allen, “The Rockefeller File”

During the depression Congressman Louis T. McFadden was a very outspoken voice against
the Federal Reserve. Regarding the Great depression he said, “It was not accidental. It was a
carefully contrived occurrence … The international bankers sought to bring about a
condition of despair here so that they might emerge as rulers of us all.” In 1932 he said, “We
have in this country one of the most corrupt institutions the world has ever known. I refer to
the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board has
cheated the people of the United States out of enough money to pay the national debt three
times over. This evil institution has impoverished and ruined the people of the United States,
has bankrupted itself, and has practically bankrupted our government. It has done this
through the defects of the law under which it operates, through the maladministration of the
law by the Federal Reserve Board, and through the corrupt practices of the moneyed
vultures who control it.” Proceeding McFadden’s activism he received a series of death
threats, and then died of food poisoning shortly after under suspicious circumstances.

"The real truth of the matter is that a financial element in the large centers has owned the
government since the days of Andrew Jackson" -US President Franklin D. Roosevelt, 1933

“Once Inflation or Deflation has been documented, the government economists point with
pride at the supposed perpetrators: the public. They never direct their attention at the real
culprit in America: the privately owned Federal Reserve System. This private banking
establishment has complete control over the quantity of money in circulation. Therefore, they
have the ability to create Inflation or Deflation whenever they choose to do so.” -Ralph
Epperson, “The New World Order” (243)

Since the Great depression, the Federal Reserve bankers have continued to manipulate the
market for their own gain and done so through periodic planned market plunges after which
they buy up all they can. In 1936-37 Stock prices plummeted 50%, in 1948 dropped 16%, in
1953 down 13%, 1956-57 down 13% and late in 57 down another 19%. It has continued like
this every few years until today

In 1963, President Kennedy passed Executive Order 11110 which stripped the Federal
Reserve from its power to loan money to the U.S. government. It also called for the
printing of $450 Billion dollars in U.S. backed Debt-Free currency and gave the
Treasury Department the authority to issue silver certificates against the treasury’s
silver holdings. Six months after this JFK was killed. As soon as his successor, Lyndon
Johnson took office, the first thing he did was suspend the printing of JFK’s silver
certificates, and took them out of circulation.

6
“It’s money out of thin air. It’s the secrecy of it all that’s so bad. The ownership is by
members of all the banks. It is something Congress created. The first central/national bank
was created by Alexander Hamilton and Jefferson got rid of it, the second one was gotten rid
of by Andrew Jackson, and I’m just looking forward to being the president that gets rid of the
third national bank.” -Congressman Dr. Ron Paul, Presidential campaign speech in New
Hampshire, Jan. 6th, 2008

“Do you remember the television show called Mission Impossible? If you ever see a rerun,
watch the opening of the show very closely. What will come up on the screen will be the
insignia IMF - supposedly standing for the "Impossible Mission Force." The impossible
mission force, the IMF, the International Monetary Fund. What were they always doing on
the show? They were always tricking leaders out of positions of authority, assassinating
somebody, helping people escape, or doing some other dirty deal, all in a war for power.

Whose power? Of course, they were always working for some government, but the agents are
not supposed to know who that is for sure. They just do their jobs, not knowing who's really
hired them. The "IMF" just sends them out on as mission that they must perform, at all costs.
And if anyone should find out who's really pulling the strings, then the agents are told that
"we are going to disavow any connection to you." Well, that is the IMF. The International
Monetary Fund, which is the power behind the Federal Reserve System, which is raping our
country and destroying our economy. And these guys are doing it right in front of you, telling
you what they are doing, but we just don't see it, Even after they spell it out for us on
television. They are even making comedies about it, like Get Smart. On one side you have
Chaos, and the other side you have Control. And when you watch the show closely, and
ignore the foolishness, it is easy to see that the same operation is running both sides.
Creating chaos, then rushing in to 'control' it, in order to accomplish an agenda. That is how
it has always been done. GET SMART! They are telling you something.” -Jordan Maxwell,
Matrix of Power

7
The protectionist temptation: Lessons from the Great
Depression for today5
Barry Eichengreen Douglas Irwin
17 March 2009
What do we know about the spread of protectionism during the Great Depression and what are the
implications for today’s crisis? This column says the lesson is that countries should coordinate their
fiscal and monetary measures. If some do and some don’t, the trade policy consequences could once
again be most unfortunate.

The Great Depression of the 1930s was marked by a severe outbreak of protectionism. Many fear
that, unless policymakers are on guard, protectionist pressures could once again spin out of control.
What do we know about the spread of protectionism then, and what are the implications for today?

While many aspects of the Great Depression continue to be debated, there is all-but-universal
agreement that the adoption of restrictive trade policies was destructive and counterproductive and
that similarly succumbing to protectionism in our current slump should be avoided at all cost. Lacking
other instruments with which to support economic activity, governments erected tariff and nontariff
barriers to trade in a desperate effort to direct spending to merchandise produced at home rather than
abroad. But with other governments responding in kind, the distribution of demand across countries
remained unchanged at the end of this round of global tariff hikes. The main effect was to destroy
trade which, despite the economic recovery in most countries after 1933, failed to reach its 1929
peak, as measured by volume, by the end of the decade (Figure 1). The benefits of comparative
advantage were lost. Recrimination over beggar-thy-neighbour trade policies made it more difficult to
agree on other measures to halt the slump.

Figure 1. World trade and production, 1926-1938

The impression one gleans from both contemporary and modern accounts is that trade policy was

5
http://www.voxeu.org/index.php?q=node/3280
8
thrown into complete chaos, with every country scrambling to impose higher barriers. But, in fact, this
was not exactly the case (Eichengreen and Irwin, forthcoming). Although recourse to trade restrictions
was widespread, there was considerable variation in how far countries moved in this direction. Figure
2 illustrates this for tariffs. Tariff rates rose sharply in some countries but not others. The history of the
1930s would have been very different had other countries responded in the manner of, say, Denmark,
Sweden and Japan. It is important to understand why they did not.

Figure 2. Average tariff on imports, 1928-1938, percentage

The answer, in a nutshell, is the exchange rate regime and the policies associated with it. Countries
that remained on the gold standard, keeping their currencies fixed against gold, were more inclined to
impose trade restrictions. With other countries devaluing and gaining competitiveness at their
expense, they adopted restrictive policies to strengthen the balance of payments and fend off gold
losses. Lacking other instruments with which to address the deepening slump, they used tariffs and
similar measures to shift demand toward domestic production and thereby stem the rise in
unemployment.

In contrast, countries abandoning the gold standard and allowing their currencies to depreciate saw
their balances of payments strengthen. They gained gold rather than losing it. As importantly, they
now had other instruments with which to address the unemployment problem. Cutting the currency
loose from gold freed up monetary policy. Without a gold parity to defend, interest rates could be cut,
and central banks No longer bound by the gold standard rules could act as lenders of last resort. They
now possessed other tools with which to ameliorate the Depression. These worked, as shown in
Figure 3. As a result, governments were not forced to resort to trade protection.

9
Figure 3. Change in industrial production, by country group

This relationship is quite general, as we show in Figure 4. It also carries over to non-tariff barriers to
trade such as exchange controls and import quotas.

Figure 4. Exchange rate depreciation and the change in import tariffs, 1929-1935

This finding has important implications for policy makers responding to the Great Recession of 2009.
The message for today would appear to be “to avoid protectionism, stimulate.” But how? In the 1930s,
stimulus meant monetary stimulus. The case for fiscal stimulus was neither well understood nor
generally accepted. Monetary stimulus benefited the initiating country but had a negative impact on its
trading partners, as shown by Eichengreen and Sachs (1985). The positive impact on its neighbours
of the faster growth induced by the shift to “cheap money” was dominated by the negative impact of
the tendency for its currency to depreciate when it cut interest rates. Thus, stimulus in one country
increased the pressure for its neighbours to respond in protectionist fashion.

10
Today the problem is different because the policy instruments are different. In addition to monetary
stimulus, countries are applying fiscal stimulus to counter the Great Recession. Fiscal stimulus in one
country benefits its neighbours as well. The direct impact through faster growth and more import
demand is positive, while the indirect impact via upward pressure on world interest rates that crowd
out investment at home and abroad is negligible under current conditions. When a country applies
fiscal stimulus, other countries are able to export more to it, so they have no reason to respond in a
protectionist fashion.

The problem, to the contrary, is that the country applying the stimulus worries that benefits will spill
out to its free-riding neighbours. Fiscal stimulus is not costless – it means incurring public debt that
will have to be serviced by the children and grandchildren of the citizens of the country initiating the
policy. Insofar as more spending includes more spending on imports, there is the temptation for that
country to resort to “Buy America” provisions and their foreign equivalents. The protectionist danger is
still there, in other words but, insofar as the policy response to this slump is fiscal rather than just
monetary, it is the active country, not the passive one, that is subject to the temptation.

But if the details of the problem are different, the solution is the same. Now, as in the 1930s, countries
need to coordinate their fiscal and monetary measures. If some do and some don’t, the trade policy
consequences could again be most unfortunate.

11