The Great Depression era can be divided into two parts. The initial decline lasted from mid-1929 to mid-1931. Around mid-1931, there was a change in people's expectations about the future of the economy. This fear of reduced future income coupled by the Fed's deflationary monetary policy resulted in a Mundell-Tobin effect. This further depressed the economy until Roosevelt stepped into office in 1933 and ended the gold standard, thereby ending the deflationary policy.
A true understanding of the Great Depression requires not only knowledge of the U.S. monetary system but also the implications of the gold standard on its participatory nations. The gold standard made the involved nations interdependent on each other's monetary policy. Due to a fixed exchange rate, the only way to affect the demand for gold was through interest rates. For example, if interest rates were high in one country, then investors would have no reason to exchange currency for gold and the gold reserves would remain stable. However, if interest rates were low in a different country then its investors would elect to move their funds abroad where interest rates were higher. In order to stop this from happening, each nation within the gold standard union had no choice but to raise its interest rates in correspondence with its fellow nation. This interconnectivity of deflationary policy amongst so many nations resulted in the prolongation of the greatest economic downturn.
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1929
U.S. decline in industrial production August: The recession begins, two months before the crash. Production falls by 20%.
October 24: Wall Street bailout begins.
October 25: Brief surge on the market.
October 29: 'Black Tuesday'. U.S. Stock market collapse.
November 1: The Federal Reserve begins lowering the discount rate from its 6% level.
Decline in the commodity prices.
- The stock market crash had little substantive effect on the recession because only 16% of the population was involved in the market, and only 10% of wealth was lost. However, the crash created uncertainty in people's minds about the future of the economy. This distrust in future income reduced consumption expenditure. As demand for commodities decreased, so did their prices.
Great Depression Timeline Video
1930
June 17: Smoot-Hawley Tariff Act passed.
September - December: First round of U.S. bank failures.
December: The Federal Reserve's federal funds rate reaches 2%, a record low.
1931
May: Creditanstalt, Austria's premier bank, goes insolvent.
May: The Federal Reserve's federal funds rate bottoms out at 1.5%.
May-June: Second U.S. bank failures / Change in people's expectation of the economy
- If people expect the deflation to continue, they anticipate that prices will be even lower in the future than they are now. They hold off on purchases to take advantage of the expected lower prices. They are reluctant to borrow at any nominal interest rate because they will have to pay back the loan in dollars that are worth more when prices are lower than they are now. In short, the real interest rate rises above the nominal rate (Temin 56).
July: Germany banking crisis
September 21: Britain leaves the gold standard.
September - October: Substantial amount of dollar assets are converted to gold in the US
September - December: The Federal Reserve increases the federal funds rate.
- Fed wanted to stabilize the dollar without going off the gold standard. As a result, production continued to plummet and the depression intensified.
November - Summer 1932: Foreign trade restrictions / Imperial Preference
1932
April 2 - June: Government conducted open market transactions to increase money supply.
July: The Government discontinued open market operations.
November 8: Franklin D. Roosevelt elected 32nd President.
1933
April 5 - Executive Order 6102 of President Franklin D. Roosevelt issued, forbidding hoarding of gold coin, bullion and certificates, effective from May 1, 1933
Source of the article : Wikipedia
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