The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, originating in the United States. The document discusses several key causes and events of the Great Depression including the stock market crash of 1929, a decline in the money supply, policy decisions like the Smoot-Hawley Tariff Act of 1930, and the effects of abandoning the gold standard. John Maynard Keynes advocated for policies like deficit spending to stimulate the economy in response to the Depression. Roosevelt's New Deal programs attempted to address unemployment and stabilize the banking system through acts like the National Industrial Recovery Act.

1. The Great Depression
Group
5

2. Introduction The Great
Depression
What is Depression?
• A very large recession, period during which the real GDP is falling continuously. This also causes
unemployment to shoot up rapidly and productivity goes down significantly.
What is a Recessionary Gap?
• When the Real GDP is below the Potential Real GDP

3. Hence, 1930’s is regarded as an era of Economic Disaster.
Timeline The Great
Depression1929-1933
Depression 1933-1937
Recovery
Period
1938
Recession
1939
Recovery

4. Causes of The
Great Depression
Stock Market
Crash
Caused wealth effect
(People became
poorer)
Decline in
Money Supply
Lesser Consumer
Spending and More
Savings
Less Deflation
If Deflation would have
been enough then
Great Depression would
have been contained
Policy Decisions
Hoover Tax
of 1932
Smoot Hawley
Tariff of 1930
Causes The Great
Depression

5. 1. Stock Market Crash:
Total value of the stock on NYSE declined to 20% of the amount they
had been worth in September 1929.
This was because: due to economic boom in 1920s there was over-
production and hence the supply was greater than the demand.
Effects of Stock Market Crash:
• People became poorer and hence consumption decreased (Wealth
Effect)
• People became more pessimistic and hence they increased saving
activities and reduced consumption.
• Hence the aggregate demand fell as consumption and investment both
decreased.
Stock Market Crash
Causes of
the Great
Depression

6. Year
Money
Supply ($Bn)
1929 26.4
1930 25.4
1931 23.6
1932 20.6
1933 19.4
Causes of Great Depression
2. Decline in Money Supply:
Causes of Decline in Money Supply:
• Margin Trading: People did not pay loans and let Banks keep
their ‘devalued’ stock.
• Panic caused people to withdraw their money from the banks
as they were suspicious of sustainability of banks.
2. Less Deflation:
• Recessionary gap was created because Real GDP was lower
than the potential Real GDP.
• Proper deflation would have filled this gap.
Decline in Money Supply & Less Deflation
Causes of
the Great
Depression

7. Causes of Great Depression
4. Policy Decisions:
• Hoover Tax of 1932
President Hoover increased taxes to meet budget deficits as according
to classical theory it was bad for the economy and should never exist.
This further increased unemployment rate.
• Smoot Hawley Tariff of 1930
Congress imposed very high taxes on imported goods to encourage
consumption of American goods and hence increase employment. But
instead:
• Other countries imposed high taxes on American products &
• American producers incurred higher costs of production due to high
taxes on imported material used in production as parts.
Policy Decisions
Causes of
the Great
Depression

8. Monetary system where a country's currency or paper money
has a value directly linked to gold.
 Political leaders and central bankers continued to adhere to the gold
standard as the Great Depression intensified.
 It was expressed and reinforced by the discourse among these leaders.
 It was opposed and finally defeated by mass politics, but only after the
interaction of national policies had drawn the world into the Great
Depression.
Gold Standard and The Great Depression

9. • June 17, 1930 - Breakdown of the anti-tariff coalition of the senate:
• US Legislation raised import duties on 20,000 products to protect American
businesses and farmers. This Act contributed to the early loss of confidence on Wall
Street and signalled U.S. isolationism.
• By raising the average tariff by 20%, it prompted retaliation from foreign
governments and many overseas banks began to fail (the legislation set both specific
and ad valorem tariff rates.)
• 1929 & 1932 - U.S. Imports from and Exports to Europe fell by two-thirds.
• 1934 - President Franklin D. Roosevelt signed the Reciprocal Trade Agreement Act,
reducing tariff levels & promoting trade liberalization and cooperation with foreign
governments.
Smoot - Hawley Tariff Act (1930)
Smoot
Hawley
Tariff Act

10. • Classical Economists believed that recession should have gone automatically with the
help of market forces i.e., demand and supply.
• No serious policies were undertaken by government because according to classical
economics government didn’t see any need of intervention.
• Federal reserve system was more concerned about inflation that would have ideally
taken place as per quantity theory of money .
• Prices did fall but not as much as required. Large corporations who had limited
competition could establish a control over the prices. However, the production also fell
extensively.
• Wages also fell, but not sufficiently enough to generate full employment. This was due to
the power of big labor unions who wouldn’t let the wage rates fall beyond an extent.
Classical Economics Classical
Economics

11. • The decline in the nominal interest rates
couldn’t correct the fall in production.
As can be seen in table, the Real
Interest Rates were higher, in the
period of deflation, which will lead
to further depression due to lesser
economic activity.
Year CPI
Nominal
Interest
Rate (%)
Real Interest
Rate (%)
Wages
($/hour)
1929 100 5.85 5.85 0.57
1930 97 3.59 6.59 0.55
1931 89 2.64 10.88 0.52
1932 80 2.73 12.84 0.45
1933 76 1.73 6.73 0.44
1934 78 1.02 3.65 0.53
1935 80 0.75 3.31 0.55
1936 81 0.75 2 0.56
1937 84 0.94 4.64 0.62
1938 82 0.81 3.19 0.63
1939 81 0.59 1.80 0.63
1940 82 0.56 1.79 0.66
1941 86 0.53 5.40 0.66
Classical Economics Classical
Economics

12. The Means to Prosperity (1933)
John
Maynard
Keynes
Multiplier = 1 / (Sum of the Propensity to Save + Taxes + Imports)
If Propensity to Save = 0.1, Propensity to Tax = 0.2, Propensity to Import = 0.2
Then the Multiplier = 1/0.5 = 2
JM Keynes advocates deficit spending by the government,
which he calls “loan-expenditures”. The recipients of these
loan-expenditures will themselves spend part of their new
incomes, which will further stimulate further increases in
output and employment. Ideally, the result would be a
virtuous spiral upwards. At each stage the extra money
flowing around the circular flow gets smaller
£200m
Injection
• £20m saved
• £40m taxed
• £40m imports
£100m extra
GDP
• £10m saved
• £20m taxed
• £20 imports
£50m extra
GDP
• £10m saved
• £20m taxed
• £20m imports
The rate of leakage from the circular flow:
Assume that for each Rs.100 of extra income
• 10% is saved
• 20% is taken in taxation
• 20% leaks from the economy in imports

13. Open Letter to President Roosevelt
John
Maynard
Keynes
JM Keynes indicated two technical fallacies in Roosevelt’s administration
policies:
1. Policy to Increase the Prices:
Rising prices are considered to be a symptom of rising output and
employment. But to increase the prices at the expense of output
(restricting the quantity) is not the way. It should be the other way
around, which is stimulating output by increasing aggregate purchasing
power to get prices up.
Recommendation: Deficit Spending by the government. Preferably in the
area which can be made to mature quickly on a large scale, for example
Railroads. Also by maintenance of cheap and abundant credit (by
reducing long term rate of interest).

14. Open Letter to President Roosevelt
John
Maynard
Keynes
JM Keynes indicated two technical fallacies in Roosevelt’s administration
policies:
2. Quantity Theory of Money:
If the quantity of money is rigidly fixed then sooner of later, rising prices
and output will suffer a setback. Also, an early Roosevelt policy was
involved in ongoing (and largely arbitrary) changes in the official gold
price (linked with dollar price), which impeded the freedom of domestic
price-raising policy and BOP with foreign countries.
Recommendation: Roosevelt should control the dollar exchange by
buying and selling gold and foreign currencies at a definite figure so as to
avoid wide and meaningless fluctuations.

15. • Classical Economists believed that recession should have gone
automatically with the help of market forces i.e., demand and supply.
• No serious policies were undertaken by government because according
to classical economics government didn’t see any need of intervention.
• Federal reserve system was more concerned about inflation that would
have ideally taken place as per quantity theory of money .
• Prices did fall but not as much as required. Large corporations who had
limited competition could establish a control over the prices. However,
the production also fell extensively.
• Wages also fell , but not sufficiently enough to generate full
employment. This was due to the power of big labor unions who
wouldn’t let the wage rates fall beyond an extent.
Monetary Causes Of The Great Depression The Great
Depression

16. A number of special monetary institutions were established such as Reconstruction Finance
Corporation and the Federal Home Loan Banks.
Powers of the Federal Reserve System were substantially modified.
Suspension of gold payments.
A drastic modification of the gold standard.
The contraction shattered the long-held belief that monetary policy was a potent
instrument for promoting economic stability.
Opinion shifted to the opposite extreme that “money does not matter” and monetary
policy is of extremely limited value in promoting stability.
The effects of returning confidence on the part of the public and the banks were largely offset by a
reduction in the Federal Reserve credit outstanding.
A second banking crisis started a renewed decline in the stock of money and at an accelerated rate.
A renewed decline in the economic activity ended the hope of revival.
Effects Of Contraction Contraction

17. • The contrast between Federal Reserve policy before 1929 and
after is the shift of power within the System and the lack of
understanding and experience of the individuals to whom the
power shifted.
• The dominant figure, Benjamin Strong , if had been alive,
would have recognized the oncoming liquidity crisis and would
have prepared by experience & conviction to take strenuous
and appropriate measures to head it off and carry the System
with him.
Reason for the Contrast Contrast

18. • The international economic & monetary system needs a country
which can set standards of conduct for other countries, and get
them to follow the same.
• This will help in maintaining a flow of investment capital &
discounting its paper.
• Britain performed this role in 1913, post which the US did it.
Charles Kindleberger
Absence of a
lender of last
resort

19. Non-Monetary Effects of the Financial Crises
Friedman & Schwartz pointed out two ways in
which these worsened the general economic
contraction:
• By reducing the wealth of bank shareholders
• By lending to a rapid fall in the supply of money
The present paper builds on the existing work by
considering a third way in which the financial
crises may have affected the output. This
includes debtor bankruptcies & failures of banks.
Ben Bernanke
Non-Monetary
Effects of the
Financial Crises

20. • Saw decline in price and wages as cause rather than result of
the problem
• Safeguards and Laws:
• National Industrial Recovery Act
• Wagner Act
• Agricultural Adjustment Act
• Created employment
• Made Banks Safer for Depositors
• Social Security
• Cut off Connection with Gold
Roosevelt’s New Deal Eureka

21. Thank You 
Group
5
Prepared By:
1.) Aditya Raval
2.) Akshatha Neeraje
3.) Arjun Parekh
4.) Naren Shetty
5.) Ronak Sharma
6.) Shaini Sachdeva