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NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

ECONOMICS II PROJECT

On

Great Depression

United States, 1929

Submitted to

Prof R!e"# $utm

Submitted b%

&un' S#rm

()*+ BALLB ,+

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Acknowledgment

I -ou'd 'i.e to e/0re"" m% 1rtitude to '' t#o"e -#o #e'0ed nd

1uided me in m.in1 t#i" 0ro!e2t3 4ir"t of ''5 I m re''% 1rtefu'

to Profe""or R!e"# $utm -#o 16e me n o00ortunit% to -or.on t#e 2#o"en to0i2 nd 16e me #i" 6'ub'e 1uidn2e nd

in0ut"3 A'"o5 I -ou'd 'i.e to t#n. m% friend" nd "enior" -#o

"u00orted me t#rou1#out t#e 0ro!e2t3

Kunal Sharma

2013 BALLB 63

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Content"

Re6ie- of Literture333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333 7

Introdu2tion3333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333 ,

$ret 8e0re""ion nd t#e Wor'd33333333333333333333333333333333333333333333333333333333333333333333333333333 ,

$ret 8e0re""ion in t#e US9 “Black Tuesday” 333333333333333333333333333333333333333333333333333333333:

Cu"e" of t#e $ret 8e0re""ion333333333333333333333333333333333333333333333333333333333333333333333333333333333;

Emer1en2e of Ne- t#eorie"333333333333333333333333333333333333333333333333333333333333333333333333333333333333 <

&e%ne"33333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333 <

Monetri"t333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333*)

E2onomi2 Sitution in t#e United Stte"933333333333333333333333333333333333333333333333333333333333333333**

Miserable Statistics333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333**

A Loo. t "tti"ti2"9 8t n'%"i"3333333333333333333333333333333333333333333333333333333333333333333333333**

E=e2t" of t#e 8e0re""ion333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333*,

Rod to Re2o6er%933333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333*:

Roo"e6't nd t#e Ne- 8e'3333333333333333333333333333333333333333333333333333333333333333333333333333333333333*:

 T#e Se2ond Ne- 8e'3333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333*;

Con2'u"ion3333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333 *<

Bib'io1r0#%3333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333()

Re6ie- of Literture

 T#e"e "our2e" di"2u"" 2u"e" nd e=e2t" of t#e $ret 8e0re""ion -#i2# #00enedround t#e *<(< unti' mid>*<+)3 Here5 t#e ut#or" n'%"e" nd mention" "ome of

t#e 2u"e" nd e=e2t" of t#i" de0re""ion t#t =e2t not on'% t#e United Stte" but

ot#er 2ountrie" " -e''3 It -i'' '"o be re6ie- "ome "tti"ti2" nd f2t" ori1inted b%

t#e $ret 8e0re""ion3 

a)“The Great Depression” by Gay, E.F., 192

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 T#e ut#or mention" nd de"2ribe" t#t for *<(< t#e rte" of unem0'o%ment -ere

from +3(? to (73<? b% t#e %er of *<++3 T#i" bru0t'% in2re"e -" 2u"ed b% t#e

2r"# on W'' Street mr.et nd t#e 0"t 2ri"e"3 T#e ut#or '"o mention t#t i" -"

too di@2u't for one urter of -omen to nd !ob to #e'0 to "u00ort t#eir fmi'ie"5

"o t#e 0o6ert% nd 2on"um0tion of 2ommoditie" de2re"e " -e''5 'edin1 to n

o6erbundn2e of "u00'ie" in t#e mr.et3

It" "eem" t#t5 t#e 1ret 2r"# on t#e W'' Street mr.et #d #u1e im02t in t#e

rte" of unem0'o%ment durin1 t#e 2ri"i"5 'edin1 to 1ener' 0ni2 not !u"t for

2on"umer but "u00'ier" " -e'' "in2e t#e% -ere #6in1 n o6er"to2. in "u00'ie"

"in2e t#e 0eo0'e did not #6e enou1# mone% to bu% 1ood"3

C#n1e" in t#e be#6iour of t#e 0o0u'tion -ere '"o f2tor in t#i" 2ri"i"3 T#e

ut#or mention" t#t in *<(< t#e rte" of "ui2ide in2re"e r0id'% "in2e mn%

2om0nie" -ere ruined or in bn.ru0t2%3 Anot#er 2#n1e -" t#e rte" of ferti'it%

nd fmi'%5 -#i2# de2re"e in ner'% ()? b% *<+73 Mn% %oun1 2ou0'e" -ere

frid of #6in1 2#i'dren for t#eir nn2e"5 t#e -ide"0red 0o6ert% -" =e2tin1 ''t#e "0e2t" of fmi'% 'ife nd -omen 0refer not to #6e 2#i'dren3

b)“The Great Depression: A Diary” by !en"amin #ot$

 T#e "to2. mr.et "in." to '' time 'o- 'e6e'"3 Bn."5 fter %er" of 00ro6in1

ue"tionb'e 'on"5 2o''0"e under t#e burden of too mn% defu'ted mort11e"3

 T#e ntion i" in fore2'o"ure nd e6entu''% t#e bn." be1in to 2'o"e3 Unem0'o%ment

ri"e" t 'rmin1 rte"3 Entire indu"trie" f'' into re2ei6er"#i0 nd t#e do''r i"

de6'ued3 T#e e2onomie" of ot#er ntion" in t#e -or'd mr.et be1in to mirror t#e

United Stte"3 T#e 6oter" re"0ond b% 6otin1 6er% un0o0u'r Re0ub'i2n out of

o@2e nd 6otin1 in 8emo2rt -#o 0romi"e" 2#n1e3

 T#e %er i" not ());3 It" t#e *<+)" nd Ben!min Rot#5 %oun1 2on"er6ti6e

ttorne% in Youn1"to-n5 O#io5 be1in" to .ee0 dir% 2#roni2'in1 t#e $ret

8e0re""ion3 T#rou1# Rot#" e%e" t#e reder 1et" bird" e%e 6ie- of t#e 8e0re""ion

unfo'din1 nd t#e 2on"euen2e" on t#e ntion' nd 'o2' 'e6e'"3 E6er% entr% i" n

edu2tion3 Rot# "0end" t#e re"t of #i" 'ife redin1 bout e2onomi2" nd e6'utin1

t#e e6ent" of t#e *<+)" -it# t#e 1o' to determine -#t 2u"ed t#i" de6"ttion

nd #o- to 0re6ent it from e6er #00enin1 1in3

 T#e $ret 8e0re""ion9 A 8ir% i" n edu2tion in 1'ob' e2onomi2" nd "2'

re"0on"ibi'it%3 T#rou1# t#i" boo.5 reder" 1in in"i1#t into -#t #00ened <) %er"1o nd -#t i" #00enin1 in our 2ountr% tod%3 Ben!min Rot# 0ro6e" -#t e6er%

#i1# "2#oo' #i"tor% te2#er #" been "%in1 for %er"5 DT#o"e -#o do not 'ern t#eir

#i"tor% re doomed to re0et it3

c) “New Deal Policies and the Persistence of the Great

Depression: A General Equilibriu Analysis” by

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%arold &. 'ole

Hro'd L Co'e in #i" re"er2# 00er “e! "eal #$licies and the #ersistence $% the

&reat "e'ressi$n”  #" re6e'ed t#t t#ere re t-o "tri.in1 "0e2t" of t#e re2o6er%

from t#e $ret 8e0re""ion in t#e United Stte"9 t#e re2o6er% -" 6er% -e.5 nd

re' -1e" in "e6er' "e2tor" ro"e "i1ni2nt'% bo6e trend3 T#e"e dt 2ontr"t"#r0'% -it# neo2'""i2' t#eor%5 -#i2# 0redi2t" "tron1 re2o6er% -it# 'o- re'

-1e"3 We e6'ute t#e 2ontribution to t#e 0er"i"ten2e of t#e 8e0re""ion of Ne-

8e' 2rte'iFtion 0o'i2ie" de"i1ned to 'imit 2om0etition nd in2re"e 'bor

br1inin1 0o-er3 We de6e'o0 mode' of t#e br1inin1 0ro2e"" bet-een 'bor nd

rm" t#t o22urred -it# t#e"e 0o'i2ie" nd embed t#t mode' -it#in mu'ti"e2tor

d%nmi2 1ener' eui'ibrium mode'3 We nd t#t Ne- 8e' 2rte'iFtion 0o'i2ie" re

n im0ortnt f2tor in 22ountin1 for t#e fi'ure of t#e e2onom% to re2o6er b2. to

trend3

d( “Great Depression and its analysis” by Friedman and

Sc$wart( )19*+

4riedmn nd S2#-rtF G*<,+ r1ued t#t t#e $ret 8e0re""ion -" e/0onenti''%

m1nied b% t#e 4eder' Re"er6e" fi'ure to 2ondu2t e=e2ti6e monetr% 0o'i2% in

t#e %er" 'edin1 u0 to5 durin1 nd "#ort'% fter t#e e2onomi2 re2e""ion3 Temin

G*<:, "u11e"t" t#t t#e $ret 8e0re""ion 2n be e/0'ined " 'r1e ne1ti6e

"#o2. to 11re1te demnd3 Temin G*<:, 2ontrdi2t" 4riedmn nd S2#-rtF

G*<,+ b% "%in1 t#t "tud%in1 on'% monetr% 0o'i2% f2tor"5 -i'' %ie'd n

in2om0'ete e/0'ntion of t#e $ret 8e0re""ion3 In"ted5 t#e de2'ine in mone%

1ro-t# m% e/0o"e t#e under'%in1 for2e" of t#e $ret 8e0re""ion3 Temin G*<:,

'oo." 0rimri'% t intere"t rte" to e/0'in t#e monetr% 0o'i2% 2#n1e" of t#e time0eriod3

 T#e $ret 8e0re""ion9 United Stte"5

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*<(<

Introdu2tion

$ret 8e0re""ion nd t#e Wor'd

 T#e $ret 8e0re""ion -" "e6ere -or'd-ide e2onomi2 de0re""ion in t#e de2de

0re2edin1 Wor'd Wr II3 T#e timin1 of t#e $ret 8e0re""ion 6ried 2ro"" ntion"5

but in mo"t 2ountrie" it "trted in *<+) nd '"ted unti' t#e 'te *<+)" or midd'e

*<7)"3It -" t#e 'on1e"t5 mo"t -ide"0red5 nd dee0e"t de0re""ion of t#e ()t#

2entur%3

In t#e (*"t 2entur%5 t#e $ret 8e0re""ion i" 2ommon'% u"ed " n e/m0'e of #o-

fr t#e -or'd" e2onom% 2n de2'ine3 T#e de0re""ion ori1inted in t#e U3S35 fter t#e

f'' in "to2. 0ri2e" t#t be1n round Se0tember 75 *<(<5 nd be2me -or'd-ide

ne-" -it# t#e "to2. mr.et 2r"# of O2tober (<5 *<(< G.no-n " B'2. Tue"d%3

 T#e $ret 8e0re""ion #d de6"ttin1 e=e2t" in 2ountrie" ri2# nd 0oor3 Per"on'

in2ome5 t/ re6enue5 0rot" nd 0ri2e" dro00ed5 -#i'e interntion' trde 0'un1ed

b% more t#n )?3 Unem0'o%ment in t#e U3S3 ro"e to (? nd in "ome 2ountrie"

ro"e " #i1# " ++?3

Citie" '' round t#e -or'd -ere #it #rd5 e"0e2i''% t#o"e de0endent on #e6%

indu"tr%3 Con"tru2tion -" 6irtu''% #'ted in mn% 2ountrie"3 4rmin1 nd rur'

re" "u=ered " 2ro0 0ri2e" fe'' b% 00ro/imte'% ,)?3 42in1 0'ummetin1 demnd

-it# fe- 'ternte "our2e" of !ob"5 re" de0endent on 0rimr% "e2tor

indu"trie" "u2# " 2"# 2ro00in15 minin1 nd 'o11in1 "u=ered t#e mo"t3

Some e2onomie" "trted to re2o6er b% t#e mid>*<+)"3 In mn% 2ountrie"5 t#e

ne1ti6e e=e2t" of t#e $ret 8e0re""ion '"ted unti' t#e end of Wor'd Wr II3

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$ret 8e0re""ion in t#e US9 “Black Tuesday” 

 T#e $ret 8e0re""ion be1n in Au1u"t of *<(<5 -#en t#e United Stte" e2onom%

r"t -ent into n e2onomi2 re2e""ion3 A't#ou1# t#e 2ountr% "0ent t-o mont#" -it#

de2'inin1 $8P5 it -" not unti' t#e W'' Street Cr"# of O2tober5 *<(< t#t t#e

e=e2t" of de2'inin1 e2onom% -ere fe't5 nd m!or -or'd-ide e2onomi2 do-nturnen"ued3 T#e mr.et 2r"# mr.ed t#e be1innin1 of de2de of #i1#

unem0'o%ment5 0o6ert%5 'o- 0rot"5 deKtion5 0'un1in1 frm in2ome"5 nd 'o"t

o00ortunitie" for e2onomi2 1ro-t# nd 0er"on' d6n2ement3 A't#ou1# it"

2u"e" re "ti'' un2ertin nd 2ontro6er"i'5 t#e net e=e2t -" "udden nd 1ener'

'o"" of 2onden2e in t#e e2onomi2 future3

 T#e u"u' e/0'ntion" in2'ude numerou" f2tor"5 e"0e2i''% #i1# 2on"umer debt5 i''>

re1u'ted mr.et" t#t 0ermitted o6ero0timi"ti2 'on" b% bn." nd in6e"tor"5 nd

t#e '2. of #i1#>1ro-t# ne- indu"trie"5 '' inter2tin1 to 2rete do-n-rd

e2onomi2 "0ir' of redu2ed "0endin15 f''in1 2onden2e5 nd 'o-ered 0rodu2tion3

Indu"trie" t#t "u=ered t#e mo"t in2'uded 2on"tru2tion5 1ri2u'ture " du"t>bo-'

2ondition" 0er"i"ted in t#e 1ri2u'tur' #ert'nd5 "#i00in15 minin15 nd 'o11in1 "

-e'' " durb'e 1ood" 'i.e utomobi'e" nd 00'in2e" t#t 2ou'd be 0o"t0oned3 T#e

e2onom% re2#ed bottom in t#e -inter of *<+(++ t#en 2me four %er" of 6er%

r0id 1ro-t# unti' *<+:5 -#en t#e Re2e""ion of *<+:brou1#t b2. *<+7 'e6e'" of

unem0'o%ment3

Cu"e" of t#e $ret 8e0re""ion

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 T#e 2u"e" of t#e $ret 8e0re""ion in t#e er'% ()t# Centur% re mtter of 2ti6e

debte mon1 e2onomi"t"5 nd re 0rt of t#e 'r1er debte bout e2onomi2 2ri"e"5

't#ou1# t#e 0o0u'r be'ief i" t#t t#e $ret 8e0re""ion -" 2u"ed b% t#e *<(<

2r"# of t#e "to2. mr.et3 T#e "0e2i2 e2onomi2 e6ent" t#t too. 0'2e durin1

t#e $ret 8e0re""ion #6e been "tudied t#orou1#'%9 deKtion in ""et

nd 2ommodit% 0ri2e"5 drmti2 dro0" in demnd nd 2redit5 nd di"ru0tion oftrde5 u'timte'% re"u'tin1 in -ide"0red unem0'o%ment nd #en2e 0o6ert%3

Ho-e6er5 #i"torin" '2. 2on"en"u" in determinin1 t#e 2u"' re'tion"#i0 bet-een

6riou" e6ent" nd t#e 1o6ernment e2onomi2 0o'i2% in 2u"in1 or me'iortin1 t#e

8e0re""ion3

Bn." be1n to fi' in O2tober *<+) Gone %er fter t#e 2r"# -#en frmer"

defu'ted on 'on"3 T#ere -" no feder' de0o"it in"urn2e durin1 t#t time " bn.

fi'ure" -ere 2on"idered uite 2ommon3 T#i" -orried de0o"itor" t#t t#e% mi1#t

#6e 2#n2e of 'o"in1 '' t#eir "6in1"5 t#erefore5 0eo0'e "trted to -it#dr-

mone% nd 2#n1ed it into 2urren2%3 A" de0o"it" t.en out from t#e bn. in2re"ed5

t#e mone% "u00'% de2re"ed be2u"e t#e mone% mu'ti0'ier -or.ed in re6er"e5

for2in1 bn." to 'iuidte ""et" G"u2# " 2'' in 'on" rt#er t#n 2rete ne-

'on"3 T#i" 2u"ed t#e mone% "u00'% to "#rin. nd t#e e2onom% to 2ontr2t nd

"i1ni2nt de2re"e in 11re1te in6e"tment3 T#e de2re"ed mone% "u00'% furt#er

11r6ted 0ri2e deKtion5 0uttin1 furt#er 0re""ure on 'red% "tru11'in1

bu"ine""e"3

 T#ere -ere #o-e6er5 re2o1niFed fe- .e% 2u"e" " to -#% t#e de0re""ion

#00ened3 T#e"e re9

*3 Stock arket 'ras$ o- 1929

Mn% be'ie6e erroneou"'% t#t t#e "to2. mr.et 2r"# t#t o22urred on B'2.

 Tue"d%5 O2tober (<5 *<(< i" one nd t#e "me -it# t#e $ret 8e0re""ion3 In f2t5 it

-" one of t#e m!or 2u"e" t#t 'ed to t#e $ret 8e0re""ion3 T-o mont#" fter t#e

ori1in' 2r"# in O2tober5 "to2.#o'der" #d 'o"t more t#n 7) bi''ion do''r"3 E6en

t#ou1# t#e "to2. mr.et be1n to re1in "ome of it" 'o""e"5 b% t#e end of *<+)5 it

 !u"t -" not enou1# nd Ameri2 tru'% entered -#t i" 2''ed t#e $ret 8e0re""ion3

(3 !ank Failres

 T#rou1#out t#e *<+)" o6er <5))) bn." fi'ed3 Bn. de0o"it" -ere unin"ured nd

t#u" " bn." fi'ed 0eo0'e "im0'% 'o"t t#eir "6in1"3 Sur6i6in1 bn."5 un"ure of t#ee2onomi2 "itution nd 2on2erned for t#eir o-n "ur6i6'5 "to00ed bein1 " -i''in1 to

2rete ne- 'on"3 T#i" e/2erbted t#e "itution 'edin1 to 'e"" nd 'e""

e/0enditure"3

+3 #edction in /rc$asing Across t$e !oard

Wit# t#e "to2. mr.et 2r"# nd t#e fer" of furt#er e2onomi2 -oe"5 indi6idu'"

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from '' 2'""e" "to00ed 0ur2#"in1 item"3 T#i" t#en 'ed to redu2tion in t#e

number of item" 0rodu2ed nd t#u" redu2tion in t#e -or.for2e3 A" 0eo0'e 'o"t

t#eir !ob"5 t#e% -ere unb'e to .ee0 u0 -it# 0%in1 for item" t#e% #d bou1#t

t#rou1# in"t''ment 0'n" nd t#eir item" -ere re0o""e""ed3 More nd more

in6entor% be1n to 22umu'te3 T#e unem0'o%ment rte ro"e bo6e (? -#i2#

ment5 of 2our"e5 e6en 'e"" "0endin1 to #e'0 ''e6ite t#e e2onomi2 "itution3

73 American Economic /olicy wit$ Erope

A" bu"ine""e" be1n fi'in15 t#e 1o6ernment 2reted t#e Smoot>H-'e% Tri=  in

*<+) to #e'0 0rote2t Ameri2n 2om0nie"3 T#i" 2#r1ed #i1# t/ for im0ort"

t#ereb% 'edin1 to 'e"" trde bet-een Ameri2 nd forei1n 2ountrie" 'on1 -it#

"ome e2onomi2 ret'ition3

3 Drog$t 'onditions 

W#i'e not dire2t 2u"e of t#e $ret 8e0re""ion5 t#e drou1#t t#t o22urred in t#e

Mi""i""i00i V''e% in *<+) -" of "u2# 0ro0ortion" t#t mn% 2ou'd not e6en 0%

t#eir t/e" or ot#er debt" nd #d to "e'' t#eir frm" for no 0rot to t#em"e'6e"3 T#e

re -" ni2.nmed  T#e 8u"t Bo-'3 T#i" -" t#e to0i2 of Jo#n Steinbe2." T#e

$r0e" of Wrt#3

 T#e re"on"5 " mentioned bo6e5 -ere "ti'' 2ti6e'% debted nd t#u"5 6riou"

t#eorie" emer1ed " to t#e 2u"e" of t#e de0re""ion nd t#ere 2me u0 ne-

"2#oo'" of t#ou1#t"5 t#e mo"t notb'e of t#em ''5 t#e &e%ne"in one3

Emer1en2e of Ne- t#eorie"

&e%ne"

E2onomi"t Jo#n M%nrd &e%ne" in *<+, r1ued t#t t#ere re mn% re"on" -#%

t#e "e'f>2orre2tin1 me2#ni"m" t#t mn% e2onomi"t" 2'imed "#ou'd -or. durin1

do-nturn mi1#t not -or.3 In #i" boo. The &eneral The$ry $% )m'l$yment* +nterest

and M$ney 5 &e%ne" introdu2ed 2on2e0t" t#t -ere intended to #e'0 e/0'in t#e

$ret 8e0re""ion3 One r1ument for non>inter6entioni"t 0o'i2% durin1

re2e""ion -" t#t if 2on"um0tion fe'' due to "6in1"5 t#e "6in1" -ou'd 2u"e t#e

rte of intere"t to f''3 A22ordin1 to t#e 2'""i2' e2onomi"t"5 'o-er intere"t rte"

-ou'd 'ed to in2re"ed in6e"tment "0endin1 nd demnd -ou'd remin 2on"tnt3

Ho-e6er5 &e%ne" r1ue" t#t t#ere re 1ood re"on" -#% in6e"tment doe" not

ne2e""ri'% in2re"e in re"0on"e to f'' in t#e intere"t rte3 Bu"ine""e" m.e

in6e"tment" b"ed on e/0e2ttion" of 0rot3 T#erefore5 if f'' in 2on"um0tion

00er" to be 'on1>term5 bu"ine""e" n'%Fin1 trend" -i'' 'o-er e/0e2ttion" of

future "'e"3 T#erefore5 t#e '"t t#in1 t#e% re intere"ted in doin1 i" in6e"tin1 in

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in2re"in1 future 0rodu2tion5 e6en if 'o-er intere"t rte" m.e 20it' ine/0en"i6e3

In t#t 2"e5 t#e e2onom% 2n be t#ro-n into 1ener' "'um0 due to de2'ine in

2on"um0tion3 A22ordin1 to &e%ne"5 t#i" "e'f>reinfor2in1 d%nmi2 i" -#t o22urred to

n e/treme de1ree durin1 t#e 8e0re""ion5 -#ere bn.ru0t2ie" -ere 2ommon nd

in6e"tment5 -#i2# reuire" de1ree of o0timi"m5 -" 6er% un'i.e'% to o22ur3 T#i"

6ie- i" often 2#r2teriFed b% e2onomi"t" " bein1 in o00o"ition to S%" L-3

Monetri"t

In t#eir *<,+ boo.  A M$netary ,ist$ry $% the -nited States* 1.6/1605 Mi'ton

4riedmn nd Ann S2#-rtF 'id out t#eir 2"e for di=erent e/0'ntion of t#e

$ret 8e0re""ion3 E""enti''%5 t#e $ret 8e0re""ion5 in t#eir 6ie-5 -" 2u"ed b%

t#e f'' of t#e mone% "u00'%3 4riedmn nd S2#-rtF -rite9 4rom t#e 2%2'i2' 0e.

in Au1u"t *<(< to 2%2'i2' trou1# in Mr2# *<++5 t#e "to2. of mone% fe'' b% o6er

t#ird3 T#e re"u't -" -#t 4riedmn 2''" t#e $ret Contr2tion 0eriod of

f''in1 in2ome5 0ri2e"5 nd em0'o%ment 2u"ed b% t#e 2#o.in1 e=e2t" of re"tri2ted

mone% "u00'%3 4riedmn nd S2#-rtF r1ue t#t 0eo0'e -nted to #o'd moremone% t#n t#e 4eder' Re"er6e -" "u00'%in13 A" re"u't 0eo0'e #orded mone%

b% 2on"umin1 'e""3 T#i" 2u"ed 2ontr2tion in em0'o%ment nd 0rodu2tion "in2e

0ri2e" -ere not Ke/ib'e enou1# to immedite'% f''3 T#e 4ed" fi'ure -" in not

re'iFin1 -#t -" #00enin1 nd not t.in1 2orre2ti6e 2tion3

After t#e 8e0re""ion5 t#e 0rimr% e/0'ntion" of it tended to i1nore t#e im0ortn2e

of t#e mone% "u00'%3 Ho-e6er5 in t#e monetri"t 6ie-5 t#e 8e0re""ion -" Din f2t

tr1i2 te"timoni' to t#e im0ortn2e of monetr% for2e"3 In t#eir 6ie-5 t#e fi'ure of 

t#e 4eder' Re"er6e to de' -it# t#e 8e0re""ion -" not "i1n t#t monetr% 0o'i2%

-" im0otent5 but t#t t#e 4eder' Re"er6e im0'emented t#e -ron1 0o'i2ie"3 T#e%

did not 2'im t#e 4ed 2u"ed t#e de0re""ion5 on'% t#t it fi'ed to u"e 0o'i2ie" t#tmi1#t #6e "to00ed re2e""ion from turnin1 into de0re""ion3

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E2onomi2 Sitution in t#e United Stte"9

Miserable Statistics

 T#e "tor% of t#e $ret 8e0re""ion 2n be to'd -it# 'itn% of b'e. "tti"ti2"9

B% *<++5 t#e 2ountr%" GNP had fallen to barely half its 1929 level3 Indu"tri' 0rodu2tion fe''

b% more t#n #'f5 nd 2on"tru2tion of ne- indu"tri' 0'nt" fe'' b% more t#n <)?3

Produ2tion of utomobi'e" dro00ed b% t-o>t#ird" "tee' 0'nt" o0erted t *(? of

202it%3

8urin1 Herbert Hoover " 0re"iden2%5 more t#n *+ mi''ion Ameri2n" 'o"t t#eir !ob"3 Of 

t#o"e5 ,(? found t#em"e'6e" out of -or. for 'on1er t#n %er 77? 'on1er t#nt-o %er" (7? 'on1er t#n t#ree %er" nd **? 'on1er t#n four %er"3

Unem0'o%ment 0e.ed t "t11erin1 (73*? in *<++5 nd ne6er dro00ed be'o-

*73+? unti' Wor'd Wr II3 GB% 2ontr"t5 t#e unem0'o%ment rte #" ne6er "ur0""ed

<3:? "in2e315

 T#e nn2i' me'tdo-n initited b% W'' Street" Great Crash of *<(< 2u"ed bi''ion"

of do''r" in ""et" to 6ni"# into t#in ir3 We't#% Ameri2n"-#o o-ned 'mo"t ''

t#e ntion" "to2." t t#e time-ere -''o0ed b% n 80% decline in the value of the stock

arket3 E6en more troub'in1 to t#e entire 0o0u'tion -ere rm0nt  bank failures

bet-een *<(< nd *<++5 t-o out of e6er% 6e bn." in Ameri2 2o''0"ed5 2u"in1

more t#n : bi''ion of t#eir 2u"tomer" #rd>erned mone% to e60orte3

A Loo. t "tti"ti2"9 8t n'%"i"

The %$ll$!in %acts and ures may hel' t$ elab$rate the se4erity $% the situati$n5

• *+ mi''ion 0eo0'e be2me unem0'o%ed3 In *<+(5 +7 mi''ion 0eo0'e be'on1ed

to fmi'ie" -it# no re1u'r fu''>time -1e erner3

• Indu"tri' 0rodu2tion fe'' b% ner'% 7? bet-een *<(< nd *<+(3

• Homebui'din1 dro00ed b% ;)? bet-een t#e %er" *<(< nd *<+(3

• In t#e *<()"5 t#e bn.in1 "%"tem in t#e U3S3 -" bout ) bi''ion5 -#i2# -"

bout )? of $8P3

• 4rom *<(< to *<+(5 bout 5))) bn." -ent out of bu"ine""3

• B% *<++5 **5))) of t#e US (5))) bn." #d fi'ed3

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• Bet-een *<(< nd *<++5 U3S3 $8P fe'' round +)?5 t#e "to2. mr.et 'o"t

'mo"t <)? of it" 6'ue3

• In *<(<5 t#e unem0'o%ment rte 6er1ed +?3

• In *<++5 (? of '' -or.er" nd +:? of '' nonfrm -or.er" -ere

unem0'o%ed3

• In C'e6e'nd5 t#e unem0'o%ment rte -" )? in To'edo5 O#io5 ;)?3

• One So6iet trdin1 2or0ortion in Ne- Yor. 6er1ed +) 00'i2tion" d%

from Ameri2n" "ee.in1 !ob" in t#e So6iet Union3

• O6er one mi''ion fmi'ie" 'o"t t#eir frm" bet-een *<+) nd *<+73

• Cor0orte 0rot" #d dro00ed from *) bi''ion in *<(< to * bi''ion in *<+(3

• Bet-een *<(< nd *<+(5 t#e in2ome of t#e 6er1e Ameri2n fmi'% -"

redu2ed b% 7)?3

• Nine mi''ion "6in1" 22ount" #d been -i0ed out bet-een *<+) nd *<++3

• (:+5))) fmi'ie" #d been e6i2ted from t#eir #ome" in *<+(3

•  T#ere -ere t-o mi''ion #ome'e"" 0eo0'e mi1rtin1 round t#e 2ountr%3

• O6er ,)? of Ameri2n" -ere 2te1oriFed " 0oor b% t#e feder' 1o6ernment

in *<++3

•

In t#e '"t 0ro"0erou" %er G*<(<5 t#ere -ere (:<5,:; immi1rnt" re2orded5but in *<++ on'% (+5),; 2me to t#e U3S3

• In t#e er'% *<+)"5 more 0eo0'e emi1rted from t#e United Stte" t#n

immi1rted to it3

• Wit# 'itt'e e2onomi2 2ti6it% t#ere -" "2nt demnd for ne- 2oin1e3

No ni2.e'" or dime" -ere minted in *<+(++5 no urter do''r" in *<+* or

*<++5 no #'f do''r" from *<+) to *<+(5 nd no "i'6er do''r" in t#e %er"

*<(<++3

•  T#e U3S3 1o6ernment "0on"ored Me/i2n Re0trition 0ro1rm -#i2# -"

intended to en2our1e 0eo0'e to 6o'untri'% mo6e to Me/i2o5 but t#ou"nd"5

in2'udin1 "ome U3S3 2itiFen"5 -ere de0orted 1in"t t#eir -i''3 A'to1et#er

bout 7))5))) Me/i2n" -ere re0trited3

• Ne- Yor. "o2i' -or.er" re0orted t#t (? of '' "2#oo'2#i'dren

-ere m'nouri"#ed3 In t#e minin1 2ountie" of We"t Vir1ini5 I''inoi"5 &entu2.%5

nd Penn"%'6ni5 t#e 0ro0ortion of m'nouri"#ed 2#i'dren -" 0er#0" "

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 T#e de2'ine in $8P5 -#i'e drmti25 i" not "o "0e2t2u'r " t#e e/0'o"ion in t#e

unem0'o%ment rte3 T#i" i" be2u"e t#e umem0'o%ment rte re0re"ent" -#t -"

not 0rodu2ed t#t 2ou'd #6e been 0rodu2ed3 A 1r0# "#o-in1 t#e 0er2ent1e of

t#e 'bor for2e em0'o%ed -ou'd 'oo. mu2# t#e "me " t#e $8P 1r0#3 W#i'e t#e

8e0re""ion -" 2t"tro0#e it i" -e'' to .ee0 in mind t#t t -or"t t#ere -" "ti'': 0er2ent of t#e 'bor for2e -#o -ere em0'o%ed3 But5 t#e im0ortnt ue"tion i"

-#% 0rodu2tion #d f''en o= "o mu2# in *<++ 2om0red -it# *<(<3 Here it i"

in"tru2ti6e to 'oo. t t#e 2om0onent" of t#e demnd for t#e ntion" out0ut3 T#e

out0ut of n% ntion i" 0ur2#"ed b% four 2te1orie" of bu%er" 2on"umer"5 bu"ine""

in6e"tor"5 1o6ernment" nd forei1n bu%er" " e/0ort"3 T#e 0ur2#"e" of U3S3 out0ut

b% forei1n bu%er" i" o="et b% Ameri2n 0ur2#"e" of forei1n 0rodu2tion " im0ort"3

Additionally, a glance at t$e table below tells w$at was $appening to t$e

components o- demand.

 YEAR $8

P

CON

SUMP

 TION

INVES

 TMEN

 T

$OVER

N

MENT

PUR

EQPORT

S

IMPORTS NET

EQPO

RTS

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CHASE

S

*<(<:<)3<   593.9 92.4 105.4 35.6 46.3 -10.7

*<+)

:*<

3:   562.1 59.8 116.2 29.4 40.3 -10.9

*<+*

,:7

3)   544.9 37.6 121.2 24.4 35.2 -10.8

*<+(

;7

3+   496.1 9.9 117.1 19.1 29.2 -10.1

*<++

::

3+   484.8 16.4 112.8 19.2 30.4 -11.2

 T#e bo6e tb'e indi2te" t#t 2on"umer 0ur2#"e" fe'' "ome-#t5 1o6ernment"

0ur2#"e" did not f'' t '' 2om0red -it# *<(< but t#ere -" 2t"tro0#i2

2o''0"e of in6e"tment 0ur2#"e"3 E/0ort" fe'' but im0ort" fe'' " -e'' "o t#t t#ere

-" not mu2# of 2#n1e in net e/0ort"3

0$e problem in t$e early 193s was t$at t$e rate o- in4ation was

negati5e6 i.e., t$ere was de4ation instead o- in4ation. 0$is meant t$at

borrowers wold $a5e to pay back more 5alable dollars t$an t$e ones

t$ey borrowed.

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 YEAR PRICEIN8EQ

RATE O4

IN4LATION

?

NOMINAL

INTERESTRATE

?

REAL

INTERESTRATE

?

*<(< *+3*( >> 3; >>

*<+) *(3,) >+3<, +3< :3;:

*<+* **3+7 >*)3)) (3,7 *73)7

*<+( *)3) >**3+; (3:+ *3<(

*<++ <3:; >(3<, *3:+ 737

E=e2t" of t#e 8e0re""ion

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A" it -" m!or e2onomi2 0#enomenon it #d "ome m!or nd -ide"0red

e2onomi2 e=e2t"9

0rade 'ollapse

 T#e 8e0re""ion be2me -or'd-ide bu"ine"" do-nturn of t#e *<+)" t#t =e2ted

'mo"t '' 2ountrie"3 Interntion' 2ommer2e de2'ined ui2.'%3 T#ere -" "#r0

redu2tion in t/ re6enue"5 0rot" nd 0er"on' in2ome"3 It =e2ted bot# 2ountrie"

t#t e/0orted r- mteri'" nd t#e indu"tri'iFed 2ountrie"3 It 'ed to "#r0

de2re"e in -or'd trde " e2# 2ountr% tried to 0rote2t t#eir o-n indu"trie" nd

0rodu2t" b% ri"in1 tri=" on im0ort"3 Wor'd Trde 2o''0"ed -it# trde in *<+< "ti''

be'o- t#e *<(< 'e6e'3 It "et t#e -#ee'" ro''in1 to-rd" t#e end of interntion' 1o'd

"tndrd" nd 2on"euent'% t#e emer1en2e of t#e /ed e/2#n1e rte "%"tem

#edction in Go5ernment Spending

$o6ernment" '' round t#e -or'd redu2ed t#eir "0endin15 -#i2# 'ed to de2re"ed

2on"umer demnd3 Con"tru2tion 2me to "tnd"ti'' in mn% ntion"3 A"

2on"euen2e of 1o6ernment 2tion"5 t#e re' $ro"" Ntion' Produ2t of ntion" 'i.e

United Stte" nd Britin fe'' b% +)3?5 -#o'e"'e 0ri2e" fe'' b% +)3;?5 nd

2on"umer 0ri2e" fe'' b% (737?3

Employee Distress

W1e" -ere "2'ed do-n to () 0er2ent5 -#ere" ( 0er2ent of t#e -or.for2e -"

'eft unem0'o%ed3 T#i" 'ed to de2re"e in t#e "tndrd of 'i6in1 0u"#in1 t#e e2onom%

furt#er into t#e de0t# of t#e 8e0re""ion3

!reakdown o- t$e Financial ac$inery

 T#ou"nd" of in6e"tor" 'o"t 'r1e "um" of mone% nd "e6er' -ere -i0ed out5 'o"in1

e6er%t#in13 Bn."5 "tore"5 nd f2torie" -ere 2'o"ed nd 'eft mi''ion" of 0eo0'e

 !ob'e""5 0enni'e"" nd #ome'e""3 In *<(<5 ,< 0ub'i2 "e2tor bn." -ere "#ut nd b%

t#e end of *<+* t#i" number ro"e to ((<73 Mn% 0eo0'e 2me to de0end on t#e

1o6ernment or 2#ritie" to 0ro6ide t#em -it# food3

E7ect on Agricltre

8ue to '2. of "ub"idie" nd 'on"5 frmer" -ere unb'e to "u00ort m"" 0rodu2e

'edin1 to under>202it% out0ut3 Te/ti'e frmin1 f2ed t#e m!or b'o-3 T#e 0eriod

"er6ed " 0re2ur"or one of t#e -or"t drou1#t" in modern Ameri2n #i"tor% t#t

"tru2. t#e $ret P'in" in *<+73

Rod to Re2o6er%9

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Roo"e6e't nd t#e Ne- 8e'

In *<++ t#e ne- 0re"ident5 4rn.'in Roo"e6e't5 brou1#t n ir of 2onden2e nd

o0timi"m t#t ui2.'% r''ied t#e 0eo0'e to t#e bnner of #i" 0ro1rm5 .no-n " t#e

Ne- 8e'3 T#e on'% t#in1 -e #6e to fer i" fer it"e'f5 t#e 0re"ident de2'red in

#i" inu1ur' ddre"" to t#e ntion3

In 2ertin "en"e5 it i" fir to "% t#t t#e Ne- 8e' mere'% introdu2ed t%0e" of

"o2i' nd e2onomi2 reform fmi'ir to mn% Euro0en" for more t#n 1enertion3

Moreo6er5 t#e Ne- 8e' re0re"ented t#e 2u'mintion of 'on1>rn1e trend to-rd

bndonment of 'i""eF>fire 20it'i"m5 1oin1 b2. to t#e re1u'tion of t#e

ri'rod" in t#e *;;)"5 nd t#e Kood of "tte nd ntion' reform 'e1i"'tion

introdu2ed in t#e Pro1re""i6e er of T#eodore Roo"e6e't nd Woodro- Wi'"on3

W#t -" tru'% no6e' bout t#e Ne- 8e'5 #o-e6er5 -" t#e "0eed -it# -#i2# it

22om0'i"#ed -#t 0re6iou"'% #d t.en 1enertion"3 In f2t5 mn% of t#e reform"

-ere #"ti'% dr-n nd -e.'% dmini"tered "ome 2tu''% 2ontrdi2ted ot#er"3And durin1 t#e entire Ne- 8e' er5 0ub'i2 2riti2i"m nd debte -ere ne6er

interru0ted or "u"0ended in f2t5 t#e Ne- 8e' brou1#t to t#e indi6idu' 2itiFen

"#r0 re6i6' of intere"t in 1o6ernment3

W#en Roo"e6e't too. t#e 0re"identi' ot#5 t#e bn.in1 nd 2redit "%"tem of t#e

ntion -" in "tte of 0r'%"i"3 Wit# "toni"#in1 r0idit% t#e ntion" bn." -ere

r"t 2'o"ed >> nd t#en reo0ened on'% if t#e% -ere "o'6ent3 T#e dmini"trtion

do0ted 0o'i2% of moderte 2urren2% inKtion to "trt n u0-rd mo6ement in

2ommodit% 0ri2e" nd to =ord "ome re'ief to debtor"3 Ne- 1o6ernment' 1en2ie"

brou1#t 1enerou" 2redit f2i'itie" to indu"tr% nd 1ri2u'ture3 T#e 4eder' 8e0o"it

In"urn2e Cor0ortion G48IC in"ured "6in1">bn. de0o"it" u0 to 5)))5 nd

"e6ere re1u'tion" -ere im0o"ed u0on t#e "'e of "e2uritie" on t#e "to2. e/2#n1e3

But t#e de' -"nt enou1# nd "ub"euent'% "e2ond de' -" formed3

 T#e Se2ond Ne- 8e'

In it" er'% %er"5 t#e Ne- 8e' "0on"ored remr.b'e "erie" of 'e1i"'ti6e

inititi6e" nd 2#ie6ed "i1ni2nt in2re"e" in 0rodu2tion nd 0ri2e" >> but it did

not brin1 n end to t#e 8e0re""ion3 And " t#e "en"e of immedite 2ri"i" e"ed5

ne- demnd" emer1ed3 Bu"ine""men mourned t#e end of 'i""eF>fire nd 2#fed

under t#e re1u'tion" of t#e NIRA3 Vo2' tt2." '"o mounted from t#e 0o'iti2' 'eft

nd ri1#t " dremer"5 "2#emer" nd 0o'iti2in" 'i.e emer1ed -it# e2onomi2

0n2e" t#t dre- -ide udien2e" of t#o"e di""ti"ed -it# t#e 02e of re2o6er%3

 T#e% in2'uded 4rn2i" E3 To-n"end" 0'n for 1enerou" o'd>1e 0en"ion" t#e

inKtionr% "u11e"tion" of 4t#er Cou1#'in5 t#e rdio 0rie"t -#o b'med

interntion' bn.er" in "0ee2#e" in2re"in1'% 0e00ered -it# nti>Semiti2 im1er%

nd mo"t formidb'%5 t#e E6er% Mn &in1 0'n of Hue% P3 Lon15 "entor nd

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former 1o6ernor of Loui"in5 t#e 0o-erfu' nd rut#'e"" "0o.e"mn of t#e di"0'2ed

-#o rn t#e "tte 'i.e 0er"on' efdom3 GIf #e #d not been """"inted5 Lon1

6er% 'i.e'% -ou'd #6e 'un2#ed 0re"identi' 2#''en1e to 4rn.'in Roo"e6e't in

*<+,3

In t#e f2e of t#e"e 0re""ure" from 'eft nd ri1#t5 Pre"ident Roo"e6e't b2.ed ne-"et of e2onomi2 nd "o2i' me"ure"3 Prominent mon1 t#e"e -ere me"ure" to

1#t 0o6ert%5 to 2ounter unem0'o%ment -it# -or. nd to 0ro6ide "o2i' "fet%

net3

 T#e Wor." Pro1re"" Admini"trtion GWPA5 t#e 0rin2i0' re'ief 1en2% of t#e "o>2''ed

"e2ond Ne- 8e'5 -" n ttem0t to 0ro6ide -or. rt#er t#n -e'fre3 Under t#e

WPA5 bui'din1"5 rod"5 ir0ort" nd "2#oo'" -ere 2on"tru2ted3 A2tor"5 0inter"5

mu"i2in" nd -riter" -ere em0'o%ed t#rou1# t#e 4eder' T#eter Pro!e2t5 t#e

4eder' Art Pro!e2t nd t#e 4eder' Writer" Pro!e2t3 In ddition5 t#e Ntion' Yout#

Admini"trtion 16e 0rt>time em0'o%ment to "tudent"5 e"tb'i"#ed trinin1

0ro1rm" nd 0ro6ided id to unem0'o%ed %out#3 T#e WPA on'% in2'uded boutt#ree mi''ion !ob'e"" t time -#en it -" bndoned in *<7+ it #d #e'0ed tot'

of < mi''ion 0eo0'e3

But t#e Ne- 8e'" 2orner"tone5 22ordin1 to Roo"e6e't5 -" t#e So2i' Se2urit% A2t

of *<+3 So2i' Se2urit% 2reted "%"tem of in"urn2e for t#e 1ed5 unem0'o%ed

nd di"b'ed b"ed on em0'o%er nd em0'o%ee 2ontribution"3 Mn% ot#er

indu"tri'iFed ntion" #d 'red% en2ted "u2# 0ro1rm"5 but 2''" for "u2# n

inititi6e in t#e United Stte" b% t#e Pro1re""i6e" in t#e er'% *<))" #d 1one

un#eeded3 A't#ou1# 2on"er6ti6e" 2om0'ined t#t t#e So2i' Se2urit% "%"tem -ent

1in"t Ameri2n trdition"5 it -" 2tu''% re'ti6e'% 2on"er6ti6e3 So2i' Se2urit%

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