The Great Depression
By Gisele Hanhon
Table of Contents
Causes of the Crisis
Impact of the Economy
The First One Hundred Days Jose
The Second New Deal Issa
Began with the stock market crash on October 29, 1929
Lasted throughout the 1930s in the U.S. and did not
completely end until the U.S. entered WWII in 1941
Transmitted to other countries through the gold standard
Causes of the Crisis
Multiple causes: decline in consumer demand, financial panics, as
well as misguided government policies that led to a decrease in
Stock market bubble: “get-rich-quick” mentality and purchasing
on margin. The prices of stocks were far higher than their value
Throughout the 20s, investors were indulging in speculation
Farm debt: farmers could not pay back the loans they took
out during WWI due to an decrease in the prices of
agricultural goods (econ. historians view this as a reason that
contributed to the banking panics)
Government policies: In an attempt to regulate/ limit stock
market speculation, a tight monetary policy was
implemented in the Summer of 1929.
The Federal Reserve raised interest rates to slow the rise in
stock prices in 1928 and 1929
Impact on the Economy
Consequently, consumer demand fell as higher interest rates
depressed interest-sensitive spending/investment, such as
auto purchases as well as construction causing an oversupply
Excess supply led to a drop in prices, which led to a drop in
It also transmitted to other countries as high interest rates
decreased lending to foreign nations, which caused their
output to drop
During the Crisis
The bubble burst on October 24, 1929 (Black Thursday) and
panic selling of stocks started.
A group of banks attempted to restore people’s confidence
and reduce panic by pooling their resources and bought $40
mil. Of blue chip shares.
However, the stock market crashed on Black Tuesday, (Oct.
29) when stock prices fell 33%
Due to pessimism about the future, people wanted currency so
they rushed to the banks and demanded their deposits in Fall of
1930, Spring and Fall of1931, and Fall of 1932 &33
Many banks found themselves short of funds because they could
not liquidate loans
Response: FDR declared a national “bank holiday” on March 9,
1933 that closed down banks until deemed solvent
Around 9,000 banks failed
Such panics reduced the money supply
Scope of the Crisis
1929-1933 was the worst period of the depression due to
significant drop in real GDP and prices as well an increase in
Industrial production fell 47%.
Real GDP fell 30%.
Price level decreased 25%.
Unemployment reached 25% in1933 (it was <4% in 1929).
BUT…slow recovery began in Spring 1933 when real GDP
increased by 9% per year until 1937 and picked up again mid-
Full recovery occurred due to mobilization for WWII in 1941.
Policy Makers’ Response
Immediately after the crash, President Hoover asked
businesses to cut into profits instead of wages/jobs and urged
state and local governments to start public works projects.
However, the depression hit by 1930 and there was a drop in
wages, which led to a drop in consumption.
Policy Makers’ Response (cont’d)
President Hoover reduce d all 1929 income tax rate by 1%
due to budget surplus, but that turned into a deficit by 1930.
By 1932, a tax increase to balance the budget was approved,
which crippled recovery .
Consequently, disposable income dropped causing
consumption to drop and overall economic activity.
The Fed reduced money supply in September 1931 and raised
interest rate (to preserve the gold standard and prevent loss of
Revenue Act of 1932 increased American tax.
Fed’s Contractionary policy: some argued that the Fed chose this
over expansionary policy due to fear that an increase in money
supply would reignite speculation.
Political instability in Europe from 1933-1937 triggered gold
inflows to the U.S. which expanded the money supply 42% and
eventually encouraged spending/borrowing.
Other causes of the Great Depression:
1. Consumer debt increase.
3. Stock prices
4. 1% of the population controlled 40% of the wealth
Depositors withdrew several hundred millions of dollars.
Various protest occurred during 1932.
1. Bonus Army
2. Corn Belt Rebellion
Background on FDR
• Roosevelt studied in Harvard.
• He was diagnosed with polio.
• Ran for Vice President a couple years prior to the recession.
• Fireside chats
Alphabet Soup 1
Civilian Conservation Corps (CCC) was created on March
31th 1933. The CCC employed a quarter million young men
in their early twenties and late teens. They planted over 200
million trees, fought forest fires, cleaned beaches, built
reservoirs and dug drainage ditches. Furthermore, each
worker was paid $30 a month.
The $30 dollars paid to the CCC workers in 1933 would
amount to $1,200 per month in 2011. The book I read
mentioned that $5,000 equals roughly 200,000. I divided
200,000 by 5,000 = 40 *30 = $1,200.
Alphabet Soup 2
Agricultural Adjustment Administration (AAA) The AAA
was created on May 12th 1933. This program was created to
benefit farmers. The government paid farmers money to
reduce their production of crops such as; corn, cotton, wheat
and tobacco. Roosevelt intention was to allow other crops to
increase in prices.
Alphabet Soup 3
• The Tennessee River Valley (TVA). The TVA was created on May
18th 1933. The bill created the Tennessee Valley authority which
covered much of the southeast. A dam was built in Muscle Shoals,
Alabama to provide electricity to near by communities. Eventually,
other dams were built which the government owned. The power
was sold at a low price, which made it possible for people to afford
Alphabet Soup 4
• Public Works Administration (PWA). The PWA was
created on June 16th 1933. The program financed the
creation of public buildings, infrastructures , bridges and
facilities. The Budget of the program is estimated to be
around 3.3 billion dollars.
The Civilian Conservation Corps
NRA is the National Recovery
Administration which is it was created
by President FDR to help the economy.
• Eliminate unfair trade practices
• Reduce unemployment
• Establish minimum wages and
• Guarantee the right of labor
Banks had begun to hold large excess reserves.
The Federal Reserve knew that if banks used a large amount of those excess
reserves to increase lending, the money supply would quickly expand and price
inflation would go up as well.
Recession of 1937–1938
Cuts in federal spending
Increases in taxes
Unemployment went up from 14.3% in 1937 to 19.0% in 1938
Manufacturing output fell by 37% from the 1937
Producers reduced their expenditures on durable goods, and inventories
World War 2, and the recovery
As most of the economist argue, the world war 2 got United
States out of the Great Depression.
They believed that government spending on the war led to
recovery from the Great Depression, but other argue that war
world 2 did not play a big role, but it help in reducing the
The number of unemployed workers declined by 7,050,000
between 1940 and 1943, but the number in military service rose
Were the US citizen s better off or
worse off during WW2 ????
Some argue that the decrease in unemployment is because the war
and the draft, not because the economic recovery.
Business investment fell during the war. Government spending on
the war effort exceeded the expansion in real GNP.
• Because the war need a lot of supplies, most of the factories put
• A lot of unemployed people went to war fighting for their
country, which it lead to lower unemployed rate.
¿ Any Questions ?