Introduction to the Great Depression.

The Great Depression of 1929 was a period in the United States history where business was poor
and many people were out of work. It was a worldwide depression that lasted from 1929 to
1941.
Its kickoff in the U.S. economy was Black Thursday, October 24, 1929, when 12.9 million
shares of stock were sold in one day, triple the normal amount.
Share prices fell 15 - 20%, causing a stock market crash.
It was the worst and longest period of high unemployment and low business activity in modern
times. The Great Depression saw rapid declines in the production and sales of goods and a
sudden, severe rise in unemployment.
Business and banks closed their doors, people lost their jobs, homes, and savings and many
depended on charity to survive.

What are the causes of the Great Depression?

There are many causes which contributed to making the great depression as severe as it was.
During the 1920's, many bank failures, together with low incomes among farmers and factory
workers, helped to set the stage for the depression.
Uneven distribution of income among workers also contributed to the slump.
Most economists agreed that the stock market crash of 1929 started the depression.
The effects of the Great Depression were huge across the world. Not only did it lead to the New
Deal in America but more significantly, it was a direct cause of the rise of extremism in
Germany leading to World War II.
Many believe erroneously that the stock market crash that occurred on Black Tuesday, October
29, 1929 is one and the same with the Great Depression.
In fact, it was one of the major causes that led to the Great Depression.
Two months after the original crash in October, stockholders had lost more than $40 billion
dollars.
Even though the stock market began to regain some of its losses, by the end of 1930, it just was
not enough and America truly entered in the Great Depression
With the stock market crash, fears were abound that further economic problems were coming, so
people just stopped spending money and purchasing items. This led to a reduction in production,

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which in turn led to layoffs. The entire incident became a vicious cycle because as workforce
was reduced, people did not have enough money to spend and banks were not extending credit.
Although the 1920's were a prosperous year for business, most farmers did not prosper .Prices of
farm products fell about 40% in 1920 and 1921 and they remained low throughout the 1920's. As
a result, some farmers lost so much money that they could not pay their mortgage on their farm
Bank failures increased during the 1920's. Most of them occurred in agricultural areas because
farmers experienced such poor conditions.
Throughout the 1930's, about 10,000 banks failed. Bank deposits were uninsured and thus, as
banks failed, people simply lost their savings. Surviving banks were not sure about the economic
situation and were concerned only about their own survival and thus stopped to create new loans.
This exasperated the situation leading to less and less expenditures.
The crucial point came in 1920's when banks began to loan money to stock buyers since stocks
were the hottest commanding in the market place. Banks allowed Wall Street to use the stocks
themselves as collateral the stocks dropped in value, and investors could repay the banks, the
banks would be left holding near worthless collateral. It would then go bankrupt.
President Hoover believed that business, if left alone to operate without Government support,
would correct the economic conditions. He felt that they gave the federal Government too much
power. He declared that State and local Governments should provide relief to the needy. But,
those Governments did not have enough money to do so. As conditions worsened, Hoover's
administration eventually provided emergency loans to banks and industry, expanded public
works and helped states to offer relief. But, it was TOO LITTLE, TOO LATE.

The Deepening Depression

The Great Depression differed in both length and harshness from the previous depressions in the
United States .In earlier depressions, business activity had started to pick up after one or two
years. However, from October 1929 to March 1933, the economy slumped almost every month.
Millions of people lost their job, savings and home. This led to the Economic Breakdown.
The prices of industrial stocks fell about 80 percent from 1929 to 1933.. Banks and individuals
with investments in the stock market lost large sums of money. Banks had also loaned money to
many people who could not repay it. The deepening depression forced large number of people to
withdraw their savings. Banks had great difficulty meeting the withdrawals, which came at a
time when the banks were unable to collect on many loans.Between January 1929 and March
1933, around 10,000 banks failed. The bank failures wiped out the savings of millions of people.

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 An interview with Mr. Ben Isaacs, who lived in Chicago during the Depression, described what
happened to him at that time. In fact, he was a businessman, selling clothes on credit. But when
banks closed down overnight, he lost everything.
He couldnt repay the rent and had to sell his car for $15 in order to buy some foods for his
family. Therefore, Bank Failures made less money available for loans to industry. The decline in
available money caused a drop in production and a further rise in unemployment. From 1929 to
1933, the total value of goods and services produced annually in the United States fell from
about $104 billion to about $56 billion. In 1932, the number of business closings was almost a
third higher than the 1929 level.

Ben Bernankes views about what caused the Great depression of 1929:
According to Ben Bernanke, who is the current Chairman of the Federal Reserve, the stock
market crash and the subsequent Depression were actually caused by tight monetary policies
that the Federal Reserve instituted at that time.
The Federal Reserve acted as follows:
The Fed began raising the Fed Funds rate in the spring of 1928, and kept raising them
through a recession that began in August 1929. This led to the stock market crash in October
1929.
When the stock market crashed, investors turned to the currency markets. At that time, dollars
were backed by gold held by the U.S. Government. Speculators began selling dollars for gold
in September 1931, which caused a run on the dollar.
The Fed raised interest rates again to try and preserve the value of the dollar. This further
restricted the availability of money for businesses, causing more bankruptcies.
The Fed did not increase the supply of money to combat deflation.
As investors withdrew all their dollars from banks, the banks failed, causing more panic. The
Fed ignored the banks' plight, thus destroying any remaining consumers confidence in banks.
Most people withdrew their cash and put it under the mattress, which further decreased the
money supply.

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The Great Depression due to Bank Failures
Some economists argue that the bank crisis caused the great depression. However, the others
looked at fundamental economic factors and regional histories and argued that banks failed as a
result of economic collapse.
The monetarists' explanation for the great depression focuses on the changes in the money
supply.
In the case, the changes were not as a result of a deliberate policy experiment, but were instead
the outcome of a lack of Federal intervention in the banking sector at a time when conditions for
banks were quite perilous.
The collapse in the banking sector precipitated parallel contraction in the money supply .A
severe contraction in the money supply was whether as a result of a policy or as a result of bank
failures, then leads to severe contraction in economic activity.

The Role of the Federal Reserve play in causing the great depression.
According to the Federal Reserves own records, at no time did the Fed pull money out of the
system. Although it's true that the money supply contracted 31 percent between 1929 and 1933,
this was not because of the Fed. Rather, the contraction was caused by three dramatic runs on
banks, which would close 10,000 banks by 1933. So many failures were significant, because
bank deposits formed 92 percent of all the money in circulation.
Therefore, the public run on banks caused a 31-percent contraction in the money supply The first
banking panic occurred in late 1930; the second in the spring of 1931, and the third in March
1933. When it was over, 10,000 banks had gone out of business, with well over $2 billion in
deposits lost.
Banking panics occur when the public fears that monetary institutions are on the verge of
collapse.
The securities market falls so fast that investors scramble to convert their holdings into cash, thus
creating a public run on banks. But banks, whose loans are based on fractional reserves, cannot
afford to give everyone their money all at once, and therefore go bankrupt. A chain reaction
follows as deposit-owners who have lost their money can no longer afford to pay off other debts
and costs of business, driving others to scramble for cash as well.

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Milton Friedman's argument
Friedman's arguments are not shared by his peers in the economics profession, but they have
gained widespread fame among everyday conservatives. Milton Friedman viewed the 1920s as
years of vital and sustainable growth in the economy According to Friedman; everything seemed
to go quite well until 1929. He said that the Great Depression began after a series of bad
decisions made by the Federal Reserve. So, the sum of all those mistakes led to the collapse of
the money supply by one third.
Monetarism is a doctrine that holds that a money supply determines the level of economic
activity. If the supply shrinks, it leads to a shrinking of economic activity. That is why, in his
view, the most important function of the Federal Reserve is to keep the level of money supply
slightly growing.
Friedman claims that the Fed should have prevented people from withdrawing their money
simply by "suspension of payments," instituting a "banking holiday," and by printing more
money so that banks could have more reserves upon which they could still keep the money
supply growing. Friedman criticizes the Fed by defining "money" differently from other
economists. Most economists define "money" as cash in circulation plus bank reserves, including
checking accounts. But Friedman has devised a different measure, "monetary aggregates," which
include difficult-to-reach money like savings accounts and money market accounts. He points
out that during recessions, his monetary aggregates always decline.

What Friedman actually says is: "The Fed failed to inject enough money into the system to
sustain the desired minimum level of monetary aggregates. Because it failed to do this, the public
run on banks resulted in a contraction in the money supply, which caused the Great Depression."
Friedman doesn't claim that the Fed pulled money out of the system; instead, he criticizes it for
not intervening in the crisis
This monetarist also argued that the depression was caused not by the market, but by
government's failure to intervene, failure to monetize the debt, failure to print the money, and
failure to forbid bank runs.

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 Let us consider for examples the following statements below
The market is not responsible for the low-income of some people; government is, because it
did not print the money and give it to them.
The market is not responsible for the fact that some firms go bankrupt; government is, because
the firms should have been bailed out.

What Ended the Great Depression of 1929?:

Most Americans felt that Hoover did not do enough to fight the depression. If the Fed is to be
criticized for aggravating the Great Depression, then it's not because it intervened, but because it
did not intervene enough. It is yet one more example of how Hoover's laissez-faire policies
failed to head off the Depression.
The Americans elected Franklin D Roosevelt President in 1932.He believed that the Federal
Government had the chief responsibility of fighting the depression. He called his program the
New Deal. Within 100 days the New Deal was signed into law In one of his first acts as
president, Franklin Roosevelt declared a banking holiday and, as a result, no banks were open
from Monday, March 6 to Monday, March 13.
The New Deal created 42 new agencies designed to create jobs, allowed unionization, and
provided unemployment insurance. Many of these programs, such as Social Security, the SEC,
and FDIC (Federal Deposit Insurance Corporation) are still here today, helping to safeguard the
economy. Roosevelt would go on to create the Federal Deposit Insurance Commission to protect
the American economy from bank runs in the future. And although the 1987 crash on Wall Street
was the largest in American history, these safeguards worked admirably to prevent a bank panic
from depressing the economy.
New Government policies that resulted from the New Deal increased Federal control over banks
and the stock market. The laws also gave the Government more power to provide money for the
needy.
However, the extent of the Great Depression was so great that government programs alone could
not end it. Unemployment remained in the double-digits .until 1941, when the Great Depression
ended after nations increased their production of war materials at the start of World War II .This
increased level of production provided many jobs and put large amounts of money bank back
into circulation.

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 The Current Crisis: Is it 1929 all over again????
Todays crisis is triggered by real estate market bubble and wrong banking systems. Once again
in the history of human being, GREED played its role and won the best actress prize. She
seduced human to invent sub-prime mortgage to earn more, unaware of his inventions
consequences. And so, traditional way of lending has given its place to the new model of
borrowing, so called sub-prime mortgage, being the major cause of the current crisis.
In the 1920s, the prosperous economy makes it easier to contract a credit loan. Financial
speculation attracts many would-be traders. At that time, it was possible to pay only 10% of the
value of a stock option to acquire it, and borrow the 90% remaining. Those 90% were the target
of most speculations. However, when the crisis began in 1929, courtiers turned to small
shareholders asking them to pay back the 90% loan, driving many to bankruptcy.

Oddly enough, we can find the same type of situation in todays crisis, except that sub prime
credits were granted to by real estate instead of stock options. Millions of families, in particular
low-income families, contracted mortgages whose rates were variable and not fixed. Financial
markets then speculated on these mortgages.
The United States has seen the destruction of some of its biggest names in finance, thousands of
lost jobs and threats to the stability of the world banking system and all this in one week. There's
something about hundreds of billions of dollars vanishing overnight that begs a comparison to
the Great Depression and the current crisis

Contemporary regulations on banks

The Federal Reserve, who was designed to come to the aid of banks that were in trouble, did not
come immediately but after three years. Compared to the current crisis, the government is now
intervening expeditiously to steady the teetering economy. They are responding just within 3
weeks which come from taxpayer bailout, regulatory machinery, government financing and with
Hank Paulson $700 billion bailout plan for banks.
At the United States, in Asia and in Europe, governments have multiplied announces for partial
and total nationalization of previously powerful banks.

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 Politics of the 1920s are also partially to blame for the severity of the Great Depression.
The presidents of the 1920s followed a very conservative business-oriented model. When people
started experiencing economic failures and personal financial disaster, their attitude was that
poverty should be blamed on the individual. That explained why it took so long for the Hoover's
administration to take any action at all even when the situation became extremely dire.
However, in the current economic crisis, there is not as much difference between liberals and
conservatives. Mike Pence and Dennis Kucinich both voted against the bill.
About 10000 banks failed between 1929 and 1932. Due to lack of Deposit Insurance, causing
a huge run on bank. Today, fewer than 20 banks have collapsed, with 117 on the governments
watch list. Since the summer of 2007, banks once again find themselves at the forefront of the
crisis: Fannie Mae and Freddie Mac, Lehman Brothers, Northern Rock.
Industrial production dropped by 45% during the Great Depression. So far it is down 1.5%
this year, led by the downturn in the automotive sector.
Another big difference is the economy. Despite its problems, the current unemployment rate
stands at six percent compared to 25% during the Great depression.
In the crash of 1929, the Dow Jones industrials plunged 40% in two months but this time, it
has taken a year to fall around 22%.
The Gross Domestic Product shrank by 25% during the early 1930s but now it is up over 3%
during the past year.
Home prices dropped more than 30% during the Depression compared with about 16% today.
Some 40% of all mortgages were delinquent by 1934 compared with 4% today.
In the 1929, we got no information about the great depression but today with the development
of media, information is coming too quickly.
Thanks to lessons learned from the Great Depression 1929, that today we know how to prevent
banking panics from developing into a chain reaction. One of the solutions is to make sure that
banks have enough reserves to cover their deposits - that is, expand the money supply.
For example, the stock market crash of 1987 was even larger than the Crash of '29, but timely
government action prevented a run on banks.

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Conclusion
A Depression on the scale of that in 1929 could not happen exactly the way it did before. Central
banks around the world, including the U.S. Federal Reserve, are so much more aware of the
importance of monetary policy in regulating the economy. The current thinking is that a Great
Depression could not happen again because the global economy is much more integrated, and all
central banks are working together to make sure it doesnt.
The Wall Street crash is often talked of as the reason for the Great Depression. Clearly this is too
simplistic given the different experience 60 years later. For example, the late 1980's did not see a
repeat of the early 1930s.Most obviously; the policy response was very differently. Through the
earlier experience, monetary authorities around the world coordinated an immediate easing of
monetary policy which helped to stimulate aggregate demand. Equally important, the world was
not locked into the Gold Standard. Finally, it is doubtful that, in the absence of restrictive
monetary policy, the 1929 crash would have had devastating consequences for the American
economy.

References:
Modern Banking
Internet Sources: www.Chicagofed.com
www.cnn.com