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Section 2A

The Great Depression

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Overview

• The key aspects of the Great Depression

• Why was the Great Depression so lengthy and severe

• Lessons from the Great Depression

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Key Aspects of the Great Depression

The Great Depression was characterized by:

• Large reductions in output

• Soaring unemployment

• Farm and home foreclosures

• Bank failures

• Extensive human suffering

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The Great Depression

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Declines in Real GDP

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High Rates of Unemployment

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Foreclosures, Bank Failures, and General Human Suffering

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Was the Great Depression caused by the stock market crash of 1929?• Stock prices plunged in September-October 1929

• But they recovered during the five months from mid-November 1929 through mid-April of 1930.

• However, they then continued to decline through the 1930’s. Why?

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Why was the Great Depression so long and severe?

1. Contraction of the money supply

2. The Smoot-Hawley tariff

3. Huge tax increases

4. Price controls, regulations, and constant policy changes

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1. Contraction of the Money Supply

A. The supply of money expanded slowly and steadily through the 1920’s.

B. The Fed increased the discount rate, four times between January 1928 and August 1929.

C. After the October stock market crash, the Fed aggressively sold government bonds, which reduced the money supply

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1. Contraction of the Money Supply

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1. Contraction of the Money Supply

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2. Smoot-Hawley Tariff of 1930

• Increased tariffs by 50% on 3,200 imported goods

• 60 countries responded with retaliatory tariffs, and trade fell by more than 50%

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3. Huge Tax Increases

• The government began to experience a budget deficit and so they instituted a huge tax increase in 1931.

• Real GDP fell be 13.3% and unemployment soared to nearly 25%

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3. Huge Tax Increases

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4. Price Controls, Regulations, and Constant Policy Changes

• Did the New Deal policies end the Great Depression?

• Some were good:1. Federal Deposit Insurance Program2. Re-evaluation of gold and expansion of the money supply

• But others….

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4. Price Controls, Regulations, and Constant Policy Changes

A. The Agricultural Adjustment Act (AAA): adopted in 1933, the Roosevelt Administration tried to push prices up by restricting supply

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4. Price Controls, Regulations, and Constant Policy Changes

B. National Industrial Recovery Act (NIRA): More than 500 industries were organized into cartels.

Government and business leaders set production quotas, prices, wages, working hours, and distribution methods for each industry (non-compliers were imprisoned).

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4. Price Controls, Regulations, and Constant Policy Changes

NIRA was passed

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Fiscal Policy During the Great Depression

• The Keynesian Revolution:

Before: The government should have a balanced budget.

After: The government should run budget deficits during recessions and budget surpluses during expansions.

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Fiscal Policy During the Great Depression

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Keynesian Vs. Classical Economics

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Lessons from the Great Depression

1. Monetary contractions tend to undermine economic activity.

2. Trade restrictions reduce wealth.3. Raising taxes during a recession makes

matters worse.4. Constant policy changes make for an

unstable economic climate5. Good intentions do not guarantee good

outcomes!

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Review

1. Know the key characteristics of the Great Depression

2. Know the four main reasons why the Great Depression was so lengthy and severe.A. Agricultural Adjustment Act (AAA)

B. National Industrial Recovery Act (NIRA)

3. Understand the lessons that should be learned from the Great Depression.