An economy refers to a specific geological area of organization, administration

CHAPTER 1: LITERATURE REVIEW
1.1

Overview

1.1.1 Definition
According to Merriam-Webster Dictionary an Economy could be defined
as follows.
An Economy refers to a specific geological area of organization,
administration of currency, industries and commerce, concerning about the
distribution of scarce resources among members of society.
Furthermore the definitions of three major types of modern Economy are
included.
Market Economy : an economic system in which prices are based
on competition among private businesses and not controlled by a
government.
Command Economy : an economic system in which activity is
controlled by a central authority and the means of production are
publicly owned.
Green Economy : an economic system which is both low-carbon,
resource efficient, and socially inclusive.
1.1.2 Types of Economic System
Scarcity is the fundamental challenge confronting all individuals and
nations. We all face limitations... so we all have to make choices. We can't
always get what we want. How we deal with these limitations—that is, how
we prioritize and allocate our limited income, time, and resources—is the
basic economic challenge that has confronted individuals and nations
throughout history.
But not every nation has addressed this challenge in the same way.
Societies have developed different broad economic approaches to manage

their resources. Economists generally recognize four basic types of economic
systems—traditional, command, market, and mixed—but they don’t
completely agree on the question of which system best addresses the
challenge of scarcity. According to According to Macroeconomics by Evgeniy
Chernyshov, 2012, 4 economic systems are explained.
1.1.2.1 Traditional Economic System
As closely as stated in the name, literally this is the most traditional and
primal type of economy ever created by humankind. Goods and services are
produced according to demand patterns developed for a while among a
society, normally related to customs, beliefs, geographical properties, etc. It
still survives in some part of the globe today in some second/third world
countries, even though proves vulnerable against bigger economy due to
underdevelopment of technology.
Production is performed under mostly the basic needs of a group of
people, which mea1ns that trade only happens when producer has fulfilled his
own demand. As a result, changes are rare to happen. From range of goods,
demanding level, customers to quality, quantity, standard and price, both
remain stable for a long period. Unpredictable market fluctuation is also not
expected among buyers and suppliers. Therefore, Economic stability is
guaranteed due to specific roles of individuals in the economy, resulting in
social order and happiness.
Community power surpass individuality in means of each human living
in a society has to contribute both labour and wealth in order to flourish such
society.
Profit or surplus is unaffordable due to scarcity of resources, and even
somehow it happens, later it will be distributed or paid to authority.


1.1.2.2 Command Economic System

The system is one step advance from the traditional one, with the
government takes control of the economy in means of resources distribution.
The birth of the system demands a vast accumulation of wealth of the
authority. The government then has the decision over almost resources,
including the roles of individuals, price and wages. Which, how and how
much of a field should be taken over is in the management of the government,
which means some of the industries are completely under control of the
government while some are free in the hand of the people such as agriculture
in almost every nations under such system.
Provided that the government provides efficient policies, life standard of
the people would improve significantly as the mechanism allows the selfsufficiency among the people, leading to zero competition while price is
affordable according to the regulation of the government. On the contrary,
economy would fall into stagnancy if the government can not administrate
and outside force has no power in the market.
1.1.2.3 Market Economic System
Economic decisions are in the hand of individual. Resources, targets,
production, distribution of goods, etc are determined by the organizations
rather than the government.
The separation of market and government in Market/Pure Economy
allows freedom and reduce the power of the government on the development
of individuals.
Market under system similar to capitalism is highly safer than this
system due to the regulation on fair trade, anti-trust, government programs;
even though with the price of complete freedom.
The system only exist in a group of people with a specific interest.


1.1.2.4 Mixed Economic System
Mixed Economic System is a fusion of two Systems mentioned above:
decisions by individuals ( Market Economic System ) and the government

distributing resources ( Command Economic System ).
The market is on a level under control of the government. Particular
sectors are dominated fully by the government of some nations such as
education, medical healthcare, etc
The power of the government never can be indicated precisely. This has
been proven by the present American economy in which the authority is
interfering the market as the situation is getting out of hand.
1.2 Government Administration in the Economy
1.2.1 The necessity of Government intervention in the Economy
According to the theory of the market economy, the law of supply demand, competition law, law of value, etc must be respected by the State.
Thus the market economy is capable of balancing supply - demand; and labor
markets, capital or land only operated in accordance with the law of value as
it eliminates the interference of the State. The above reasoning is stated in
almost every present economics books, and is said to be the obvious,
undeniable. However, can popularity satisfy righteousness? The history of
more than two recent centuries of capitalism has never witnessed a pure
market economy, which is not subjected to regulation, under this form or
another, of the State.
Take a look at the financial and credit markets of which characteristics
leave a profound mark on the financial and credit market of America,
associations, bankers and financial firms are urging the US government to
publish stricter market management laws in order to restore the confidence of
the trade and prevent the collapse of the whole banking and finance sector.


History has proved that the most successful market economies cannot
developed spontaneously without the intervention and support of the State.
The primal market economy operated on simple production and exchange can
work effectively without a Government. However, as the external influence
increasingly growing complex, State intervention appears as an indispensable

for the effective operation of the market economy. In the developed market
economy, the State has three distinct economic functions : intervention,
management and regulation of welfare. Although certain restrictions still
exist, regulation by the Authority remains one of the activities of the market
economy. Accordingly, the free market with its own rights can not exist,
except in the economic theory.
However, while confirming the importance of the Government in the
Market, pros-cons must be taken into thorough consideration. The
workaround is not to leave the market, but to improve the efficiency of such
intervention. The State has a legitimate role in the modern economy, which
particularly expresses the determination of "the rules of the game" to
intervene in the regions that flaws in the market economy, to ensure the
capability of the economy and to provide welfare services.
The Government plays a huge role in creating the economic conditions
for the private sector in order to boost their operational efficiency. One of
these conditions is to create and maintain a stable currency market, that is
widely accepted and capable of removing cumbersome, inefficient trading
system, and at the same time maintaining monetary value through policies to
limit inflation.
Historically, the market economy has always been threatened by sudden
currency appreciation, rising unemployment rate, or inflation. History has yet
to forget the severe period of hyperinflation in Germany in the 1920s, the


Great Depression the world economy in the 30s of the twentieth century,
when the whole world fall into unemployment.
Financial policies indicates tax and spending policies of the State budget
in order to regulate the economic cycle, ensuring employment, price stability
and continuous growth of the economy. During periods of economic
downturn, fiscal policy works as stimulus to demand and production by

increasing government spending, tax cuts, thus generating national income.
And in times of economic "overheating", the government practises the
contrary. To rebalance the intentional fiscal measures, the State created the socalled stabilization mechanism, such as the progressive income tax and
unemployment. Fiscal policy running independently with the monetary policy
is a policy to regulate economic activity by controlling the money supply.
The Government and Central Bank have two important tools for
economic management namely fiscal policy and monetary policy. If used
properly, both tools can bring about the same results in stimulating the
economy and slow economic growth when hot.
According to Macroeconomics by Evgeniy Chernyshov, 2012, Fiscal and
Monetary Policies are defined as below.
1.2.2 Fiscal Policies
Definition : Systems of government policies on finance, is often planned
and performed completely in a fiscal year in order to influence the
development of economy through adjusting government spending and budget
revenues policies (mostly tax revenues).
Fiscal policies can be roughly divided into Balanced fiscal policies,
Expansionary fiscal policies and Tight fiscal policies.


Balanced fiscal policies is fiscal policy under which the Government's
total expenditure in balance with revenues from taxes, charges, fees and other
revenues that are not debt.
Expansionary fiscal policies (also known as the Reflationary fiscal
policies) is made to strengthen the government's spending compared to
revenues through three solutions Increase the level of government spending
without increasing revenues or Reduce tax revenues without reducing
spending or Increase the level of government spending and reduce tax
revenues.
Expansionary fiscal policies works as to stimulate economic growth,

create jobs. However, expansionary fiscal policy often lead to the government
having to borrow to offset the budget deficit.
Tight fiscal policies (also called Contractionary fiscal policies) are the
policies limiting government spending compared to revenues by three ways :
Reduce government spending without increasing revenues or Increase tax
revenues without reducing spending or Increase tax revenues and reduce
spending
The main functions of Fiscal Policies in market management:
Allocation : The first major function of fiscal policy is to determine
exactly how funds will be allocated. This is closely related to the issues of
taxation and spending, because the allocation of funds depends upon the
collection of taxes and the government using that revenue for specific
purposes. The national budget determines how funds are allocated. This
means that a specific amount of funds is set aside for purposes specifically
laid out by the government. This has a direct economic impact on the country.
Distribution : Whereas allocation determines how much will be set
aside and for what purpose, the distribution function of fiscal policy is to


determine more specifically how those funds will be distributed throughout
each segment of the economy. For instance, the government might allocate $1
billion toward social welfare programs, but $100 million could be distributed
to food stamp programs, while another $250 million is distributed among lowcost housing authority agencies. Distribution provides the specific explanation
of what allocation was intended for in the first place.
Stabilization : Stabilization is another important function of fiscal
policy in that the purpose of budgeting is to provide stable economic growth.
Without some restraints on spending, the economic growth of the nation could
become unstable, resulting in periods of unrestrained growth and contraction.
While many might frown upon governmental restraint of growth, the stock
market crash of 1929 made it clear that unfettered growth could have serious

consequences. The cyclical nature of the market means that unrestrained
growth cannot continue for an indefinite period. When growth periods end,
they are followed by contraction in the form of recessions or prolonged
recessions known as depressions. Fiscal policy is designed to anticipate and
mitigate the effects of such economic lulls.
Development : The fourth major function of fiscal policy is that of
development. Development seems to indicate economic growth, and that is, in
fact, its overall purpose. However, fiscal policy is far more complicated than
determining how much the government will tax citizens one year and then
determining how that money will be spent. True economic growth occurs
when various projects are financed and carried out using borrowed funds.
This stems from the the belief that the private sector cannot grow the
economy by itself. Instead, some government input and influence are needed.
Borrowing funds for this economic growth is one way in which the
government brings about development. This economic model developed by


John Maynard Keynes has been adopted in various forms since the World War
II era.
1.2.3 Monetary Policies
Definition : process of management of money supply of the monetary
authorities (probably central bank), usually towards a desired interest rate to
achieve stability purposes and economic growth - such as controlling
inflation, maintaining stable exchange rates, achieve full employment or
economic growth.
Monetary Policies use mainly three tools in administrating the flow of
money in market:
Open market operations involve the buying and selling of government
securities. The term “open market” means that the Fed doesn’t decide on its
own which securities dealers it will do business with on a particular day.

Rather, the choice emerges from an “open market” in which the various
securities dealers that the Fed does business with – the primary dealers –
compete on the basis of price. Open market operations are flexible, and thus,
the most frequently used tool of monetary policy.
The discount rate is the interest rate charged by Federal Reserve Banks
to depository institutions on short-term loans.
Reserve requirements are the portions of deposits that banks must
maintain either in their vaults or on deposit at a Federal Reserve Bank.
With the three tools, the functions of Monetary Fiscal Policies serve the
functions to develop economy, namely economy stabilization and exchangerate intervention.
1.2.4 Fiscal Policies and Monetary Policies Interaction
In his speech in Mexico Nov 14 2005, Otmar Ising stated that: How
should fiscal and monetary authorities co-ordinate their policies to stabilise


the economy? To avoid being vague and too general, let me take again the
case of EMU as an example. With an independent central bank and its
stability-oriented strategy, the euro area has a highly predictable monetary
policy. There is no ambiguity as to how monetary policy will respond to
economic, including fiscal developments: it will respond to the extent that
they pose risks to price stability. The principle of central bank independence
and the overriding focus of the single monetary policy on the objective of
price stability are two cornerstones of the economic policy constitution
enshrined in the Maastricht Treaty. They reflect the underlying economic
logic that a clear division of responsibilities between the ECB and other
economic policy actors is the institutional arrangement most conducive to the
attainment of the wider objectives of the European Union. Naturally, fiscal
policies and structural reforms have monetary policy implications if such
reforms affect price developments. Therefore, a stability oriented monetary
policy will take fiscal policy measures into account in its analysis. Yet, there

cannot be a commitment to an automatic or even ex-ante monetary policy
reaction in response to fiscal consolidation policies or structural reforms.
Given the absence of credible enforcement mechanisms, ex-ante coordination
between monetary and fiscal policies are unlikely to be successful, as I have
argued elsewhere in detail. In addition, ex-ante coordination tends to blur the
fundamental responsibilities for the respective economic actors and may even
increase uncertainty about the general policy framework.
A clear division of responsibilities between monetary and fiscal actors is
consistent with implicit policy co-ordination between authorities. A single
monetary policy that is committed to maintaining price stability in the euro
area will by itself facilitate “appropriate” economic outcomes in the Member
States. If national fiscal authorities correctly perceive the behaviour of the


single monetary policy they will take actions that would likely lead to
implicitly “co-ordinated” policy outcomes ex post. Of course, an open
exchange of views and information between individual policy actors –
without any commitment or mandate to take and implement joint decisions –
will assist the overall outcome, if it manages to improve the understanding of
the objectives and responsibilities of the respective policy areas and does not
dilute accountability.


CHAPTER 2 : THE SITUATION OF THE GREAT DEPRESSION
The Great Depression was a catastrophic global economic event taking effect
during the 1930s. The reign of the Great Depression started and ended at varied
period in each nations; however, in most initiation flared in 1929 and survived till
the end of 1930s. It was a dark and stormy duration of the 20th century. Nowadays,
the Great Depression is often known as an example of a sudden and deep fall of
economy that could happen anytime.

The depression first took place in the United States before spread out
worldwide, after a slump in stock prices sometime around September 4 1929, and
grew into global meltdown after the stock market crash in October 29, 1929 (AKA
Black Tuesday). From 1929 to 1932, worldwide GDP fell around 15 percent in
comparison to less than 1% during 2008 and 2009 Great Recession. Recovery
showed up in some economies since mid 1930s. However, many other countries still
suffered the negative impacts of the Great Depression until the beginning of WWII.
The Great Depression left dire consequences in countries regardless rich or
poor. Tax revenue, personal income and profits and prices plummeted, while
international trade dropped by more than 50 percent. Rate of unemployment
increased by almost 25 percent in the US and 33 percent elsewhere.
Economies all around the globe were struck hard, especially where heavy
industry flourished. Virtually construction was held everywhere. Farming suffered
when crop prices fell almost 60 percent. Mining and logging endured the most
under decreased demand and hardship of finding an alternative job.
2.1

The

US

Economy

in

the

1920s

2.1.1 Achievements

This is a period of BOOMING ECONOMY. In spite of the 1920-1921
depression . and the minor distractions in 1924 and 1927, there was a massive
growth in the Economy of the US during such period. Increasing individual


ownership of automobiles, new household appliances and real estate became the
trend. Innovation in new products and production drove this growth. Especially as
the case of Ford Motor, they successfully produced a cheap model that made every
10 seconds, satisfying the demand in low price market cars and made it accessible
for almost everyone ( in 1927 30 million owned themselves a car compared to 8
million 10 years before). The combination of the growing exploitation of electricity
in production and the widening adoption of moving assembly line in construction
worked in order to bring on development of productivity and increase employment.
New products and services allowed the market to expand both in quality and
quantity. A lot of industries such as entertainment, communication, chemist found
their opportunity to thrive on. The economy of the US enjoyed a stability and
constancy of growth during the time period, according to Charles E. Persons in his
book “Credit Expansion, 1920 to 1929, and Its Lessons.” in 1930.
GNP (Gross National Product ), as the most popular means of measuring the
aggregate economic activity, shows us how US economy flourished. Only 7 years
from 1922, GNP of the US rose as much as 40 percent, at an estimated rate of 4.2
percent each year during the whole decade. Real GNP per capita increased by 2.7
percent from 1920 to 1929. Despite the depression starting in the early 1920 and
lasted for about a year, alongside with two minor recessions, one happened in 1924
and one in 1927, both related to oil price shocks, US economy founds its way to
recover and get back in pace in a only a short period. Since 1923 after a full
recovery from the depression, which was arguably caused by the Federal Reserve,
was appreciated, the growth was smoother until the late 1929, before the Great
Depression. The downfall came with the crash of stock market at the end of

October. GNP plummeted by 11.5 percent in just one year ever since.

Figure 1: Real GNP per Capita 1919-1930
US Economy enjoyed great development in industries. Non-reproducible
fuels contributed a large part in the growth of industrial production and commerce.
Markets, Suppliers, Buyers altogether were knit without the internal barriers
through the increasing of cheap transportation or in another way, the whole
Economy was pretty much relying in the exploitation of natural resources. As a
result, the US became a dominant industry force of the world ever since the
beginning of 1920. Moreover, other technological changes during the period tended


to increase the productivity through the replacement of certain types of equipments
with superior equipments and through changes in administration methods. Some
changes, for example the standardization of processes and parts and the contraction
of styles and designs, boosted productivity of both capital and labour. Also, the
mechanization in American manufacturing paced in the 1920s, which resulted in a
much more rapid growth in productivity of manufacturing compared to the previous
decades and other sectors at the time. The promotion of the mechanization was
initiated by various factors. On the market aspects, increasing aggregate demand in
the prosperous time called for changes while on the technical field, technology
development enabled such.
One of the most important forces contributing to vast production and escalated
productivity was the transfer of energy to Electricity. The reduced power losses and
further distance over which electric power could be transmitted more than outweigh
the necessity for converting the current back into direct current for general use.
Expanding adoption of machines and appliances in industries and by consumers
then relied on an increase in the line-up of products using electric power, heat or
light with the development of an efficient, cheaper method of generating electricity.

By 1929 almost 70 percent of manufacturing activities relied on electricity,
compared to 30 percent in 1914. Steam provided about 80 percent of the mechanical
capacity in manufacturing in 1900, while electricity provided over half by 1920 and
80 percent by 1929. More and more factories were supplied with their power from
electric utilities. By 1909, electricity generated from factory contributed to 64
percent of capacity in motors of manufacturers; by 1919, about 57 percent
electricity consumed in manufacturing was bought from independent electric
utilities.
Transportation marked a historical movement in the economy of the US ever
since the 1900s. As a result of Henry Ford’s introduction to moving assembly
production . line in 1914, car prices plummeted, and in the late of 1920s about two
thirds of American households owned an automobile. The thriving of cheap


personal transportation led to a migration of population from the crowded cities to
homes in the suburbs and the car created a decline in inner-city public passenger
transportation, which is still in use today. Massive infrastructure programs allowed
the intercity movement of human and goods. Trucks rapidly took over the favor of
long-distance carriage in competition with the railroads ever since the WWI broke
out in Europe, as trucks began its reign in transporting freight, firstly in the role of
military use before proved to be feasible and economical in the long run. Rising
industries like gasoline service stations, motels, and the rubber tyre industry, were
born to assist the automobile and truck traffic. With the vast geographic feature of
the US, the development of traffic contributed largely in the role of connecting
suppliers with buyers in the inter-city economy under a unified market.
In nineteenth century, communications and transportation developments had
been combined to tie the American economy more completely. The reduction of
communications cost and the acceleration of information transfer speed has
facilitated the development of firms with multiple plants at distant locations. And
during the interwar era, these development has been continuously improved with

the supplantation of the telegraph with the telephone and the rise of the new
medium of radio to transmit news and provide new entertainment source. Thanks to
the

domination of telegraph in business and personal communications the

telephone as long distance telephone calls between the east and west coasts with the
new electronic amplifiers had been given way to became possible in 1915. In the
20s, the number of telegraph handled had grown 60.4%. The local telephone
conversations grew 46.8% and long distance conversation grew 71.8% between
1920 and 1930, 5 times more than long distance calls and telegraph messages
handled in 1920.
The stock market is a place where the trading of stocks, which are the partial
ownership of a company, are organized. In the 1920’s, the stock market was
massively expanded, stock prices increased dramatically and made everyone,
included those who convinced that stock investing is a risky action, spent their


money to invest in the stock market. The more companies got involved in the stock
market, the more people invested in it, thus made the stocks prices increase quickly.
This caused the stock market became extremely risky and depended greatly on the
stock prices since a lot of people had bought on margin. During the 1920’s, the
stock market had been considered a short term investment instead of a long-term
investment. And people tend to think that buying stock and selling it quickly when
the prices increased is the best way to make easy money. Eventually, the stock
market became the talk of the country, at every corners of every cities, people
asked each other about the stock market and how prices were that day.
2.1.2 Downfalls
American farmers had received an unprecedented prosperity due to the onset
of the 1st World War in Europe. Because of the war, the agricultural production in

Europe was dramatically declined, this made the demand of American agricultural
export rose, leading to the increase of farm product prices and incomes. Seeing this
opportunity, the American farmers increased their production by expanding to the
marginal farmland, also they purchased more machinery, tractor, plows, mowers
and thresher in order to increase the productivity. And since the demand of
farmland, or more specific, the marginal farmland quickly increased, so did price of
them, and the debt of American farmers also increased substantially.
Although the 1st world war had solidified the dominance of the American
Federation of Labor among labor unions in the United States, the 1920’s was not a
good time for the union. In 1919, the AFL received a large growth in membership
fostered by federal government policies. But then in the same year, the union
undertook 2 large strikes known as the Steel strike and the Coal strike, which was
both lost. These 2 lost strikes and the 1920-1921 depression had discouraged the
development of the union and led to severe membership losses that continued
through the twenties.


Old industry – in the 20’s the coal production was over exploited, also the coal
was being replaced by oil and gas. This 2 factors had caused the mine closure and
falling wages in the old industry. In 1929, the national average income was 3 times
bigger than a coal miner wage.
Poor black Americans – in 1920s, 1 million black farm workers was
unemployed, the only work they found available were low-paying, menial jobs. The
black community was severely over-crowded and segregated. In New York's black
Harlem district, more than 250,000 citizens crammed into an area 50 blocks long
and eight blocks wide, they had to share bed with many others, going to bed when
others went off to work.
Unemployment – due to the technology development, more and more people
were threw out of work, throughout 1920s, nearly 2 million people were
unemployed.

Trade problems – high tariffs (which was a retaliation to other countries) had
reduced the export ability of American companies, this especially affect the farmers,
who relied on exporting wheat.
2.2
Causes of the Great Depression
Through the morning of October 24, in the streets of New York, crowds
walked quietly downtown to Wall Street where they gathered silently and stood
looking at the New York Stock Exchange, as if suddenly its abstract activities could
become manifest, giving evidence of the disaster now plainly happening to them all.
That was Black Thursday. The market rallied afterward but then fell again. The oil
tycoon John D. Rockefeller announced that ‘‘there is nothing in the business
situation to warrant the destruction of values that has taken place’’ and that he was
busy buying. Neither this gesture nor others like it shored up stock prices. By midNovember, more than a third of the stock market’s value had vanished.
Reasons for the Great Depression varied and debated among economists. I will
explain the most popular that has been widely agreed based on the knowledge
accumulated throughout the period.


2.2.1 Theoretical Reasons
It is way too simple to regard the stock market crash as the only cause of the
Great Depression. An active economy can come back from such a contraction under
time and management. Long-term governing causes sent the nation into abyss of
despair.
The two major competing theories of the initiation of the Great Depression are
the Keynesian and the monetarist.
Keynesian Explanation: According to John Maynard Keynes, in his book in
1936 named “The General Theory of Employment, Interest and Money”, when
unconfidence set off in large, there occurs a sudden cutdown in consumption and
investment. As uncertainty and doubt kick in, many people believed avoidance for
further losses is necessary by backing out of the markets. Saving money became

profitable when prices fell deeper and money gained more in value, inflaming the
drop in demand. Keynes argued that lesser spendings in the economy contributed to
an enormous decline in income and to employment rate which was well beneath the
average rate. In such situation, the economy reached balance at low activeness of
economic activity with high unemployment.
The basic idea was plain: to keep employment rate stable, governments have
to activate deficits when the economy is stagnant, while the private sector would not
supply adequately for the sustainability of production and further drive economy
out of hardship. Keynesian economists regard the government as the biggest
administrator during recession by boosting

government expenditure and/or

reducing taxes.
Keynes also argued that when the national government expenditure uses
money to compensate for the amount spent by business firms and consumers,
unemployment rates would decline. The solution was for the Federal Reserve
System to “create new money for the national government to borrow and spend”
and to lessen taxes so as for consumers to spend more, alongside with other
beneficial factors. Herbert C. Hoover (US president 1929-1933) chose to do the
contrary of what Keynes expected to be the solution. He allowed the federal


government to increase taxes exceedingly to comprehend with budget deficits
caused by the depression. On the other side, Keynes proclaimed that employment
rate would escalate with the decreasing interest rates, which encourages firms to
borrow more money and develop production. Employment then helps the
government in means of expenditure by increasing the spending level among
consumers. Keynes’ theory was then proved again by the reign of the Great
Depression in the US. Employment rates flared with the preparation for WWII by

increasing government expenditure. “In light of these developments, the Keynesian
explanation of the Great Depression was increasingly accepted by economists,
historians, and politicians”.
Monetarist Explanation: followed by the explanation by Milton Friedman
and Anna J. Schwartz’ “A Monetary History of the United States 1867–1960”
(1963), many people argued that the Great Depression was initiated due to the
banking crisis resulting in one-third of all banks to fade with a vast disappearance of
shareholder wealth and most important money shrinkage of 35 percent. Deflation as
in the latter event raised by 33 percent. Great Depression thereby developed from a
normal recession with no intervention from Federal Reserve with interest rates,
liquidity and monetary base. In other way, Friedman argued that were actions by the
Federal Reserve been performed, the stock market crash would have been solved
and the Great Depression would not have happened.
With no aid from the Federal Reserve, some large public banks went bankrupt,
leading to the widespread of fear and collapse of local banks. Friedman blamed the
Federal Reserve inactive attitude, claimed that with a loan to these key banks, or
simply buyings of government bonds on the open market in order to increase
liquidity and quantity of money after such banks failed, falling of all other banks
would have been halted, and money supply could have been saved.
Businesses find themselves in hard time as loans or loan renewal were not
allowed by the lack of money in flow, restricting investment from happening.


Federal Reserve was criticized for such stagnancy, especially in the New York
Branch.
Gold standard was the first to explain for the idling of Federal Reserve.
Federal Reserve Act set a limit at the amount of credit Federal Reserve could issue
by that time, which required 40% gold backing of Federal Reserve Notes issued. In
the last half of 1920s, the limit for credit set as stated above was almost exceeded
before the gold in the possession could back it. Such credit was in the form of

Federal Reserve demand notes. A "promise of gold" was not as reliable as "gold in
the hand", especially when they barely had sufficient gold to cover 40 percent of
the Federal Reserve Notes.
2.2.2 Specific Reasons
According to an article on ic.galegroup.com causes of the Great Depression
are due to the followings.
Overproduction : Agriculture sector did not enjoy prosperity during the
1920s while manufacturing slowly drowned itself until the beginning of the Great
Depression. Farming was vastly encouraged ever since the broke out of WWI,
under the management of Herbert C. Hoover as the Fed Government food
administration. Production of the sector had always been excessive during the war
in order to supply the troops in both America and Europe, which at the time was
greatly disrupted and not self-sufficient. The war boosted yield largely, from
690,000 bushels of wheat yearly to 945,000 bushels per year. However, after the
war when agriculture was at the fast pace of development, many European countries
soon found their way around and stopped importing food from the US while many
others found themselves unaffordable for US food due to postwar hardship.
Moreover, global competition is growing in heat. Nevertheless, agricultural
production of the US remained high. Farmers produced too much more than they
could sell. Prices in farming products declined dramatically
Calvin Coolidge ( US president 1924-1929) paid little effort to improve the
situation as he did not regard farming an important sector. The Congress also failed


in protecting domestic farmers in competition. As a result 1920s showed no hope
for farmers. They had to borrow for seeds and equipments. Most took homes and
lands as mortgages. But food prices kept falling, and the debt grew hopelessly for
farmers. Their loans quickly became hard to collect and affected local banks. From
1921 to 1929 as many as six hundred banks collapsed every year (compared to
sixty-six a year 1910=-1919), most of which are rural banks. By late 1920s,

American Farm families, taking up to a quarter of population, were deeply in
trouble.
Contrary to farmers, manufacturers enjoyed the economy until the end of the
period. Six years from 1923 output of manufactured goods pumped up 32 percent.
New and advanced technology boosted productivity. As a result, profit poured in
with more and more goods produces and. Electrification widespread all over the US
created opportunity for the new market of electric appliances to thrive.

Most

American still found their budget out of everyday necessities such as food and
power to buy new cars, equipments and electric stuffs. Credit, or installment buying
was popular. A small beforehand payment (down payment) was made; the rest will
be paid off through time. Such method was never practised until the late 1920s.
Before that people only accepted cash in hand before purchase. However, even with
installment plans, there was still a limit on how much a person could afford with so
many appliances available but needs did not state. Demand grew narrow. By 1929
factories stopped receiving orders from the stores full of inventories and stocks.
Overproduction was experienced and manufacturers had to cut down output.
Workers from factories were forced to quit even before the major disaster. The more
people unemployed after 1929 meant less luxury goods desired. Goods remained in
stocks of warehouses and stores. Manufacturing faced stagnancy and had to cut
down employees while less people could afford manufactured goods
Concentration of Wealth : In his book published in 1992 called Anxious
Decades: America in Prosperity and Depression, Michael E. Parrish stated that
Americans did not share the prosperity of 1920s equally with each other. Obviously


there happened a phenomenon called maldistribution in the period, which means a
very uneven distribution of wealth. Maldistribution was experienced much

throughout history: while many struggle with little or not much possession of the
current status, a few hold a great deal of wealth and keep as personal belongings.
The US before 1929 was an example. Only top 0.1 percent of American families
hold the income equal to the aggregate income of the bottom 42 percent of the
population. Between 1920 and 1929 the disposable income (money beyond what is
needed for necessities) per person rose by 9 percent for most Americans, but the top
1 percent of the population saw a 75 percent increase. Concerning wealth (not
income, but all forms of material goods that have money value), the maldistribution
was even greater than it was for income: The top 2.3 percent of families with
incomes of over $10,000 held 66 percent of all savings. In 1929 just prior to the
stock market crash, of America's 27.5 million families, 78 percent—21.5 million—
were not able to save anything after necessities were purchased. These 21.5 million
earned under $3,000 a year. Six million earned less than $1,000 yearly. The root
cause of the Great Depression was a global overinvestment while the level of wages
and earnings from independent businesses fell short of creating enough purchasing
power. It was argued that government should intervene by an increased taxation of
the rich to help make income more equal. With the increased revenue the
government could create public works to increase employment and ‘kick start’ the
economy. In the USA the economic policies had been quite the opposite until 1932.
The Revenue Act of 1932 and public works programs introduced in Hoover's last
year as president and taken up by Roosevelt, created some redistribution of
purchasing power.
Gold Standard: The harshness of Gold Standard was indicated to be the first
reason for the worsening of Great Depression worldwide. Gold Standard was
practically banned in almost every nation during the crisis, as it was dedicated as
the solution to improve the situation, starting with the Great Britain. While Pound
was theoretically under threats and gold reserves was pouring fast, the British


Government decided to cease gold convertibility into currency in order to save

Pound in foreign exchange market. Alongside with Japan and North of Europe they
successfully left gold standard in 1931, while other nations, like Italy or the U.S.,
maintain the gold standard until 1932 or 1933, followed later by while nations socalled "gold bloc", including France ,Poland, Switzerland and Belgium, where Gold
Standard survived until mid 1930s.
According to later analysis, the timing at which a country decided to ban gold
standard is dedicated to the recovery of such. The Great Britain and Scandinavian,
who pioneered in gold standard abolishment in 1931, got back in pace sooner than
France and Belgium, who delayed such process for a couple of years . Asian nations
such as China, of which standard is silver, had the chance to evade the crisis from
the beginning. Gold Standard, as shown in the analysis of several countries who
was affected by the event, had strong bond with the time and intensity of the
Depression. It is a main reason for the difference in level of damage as well as the
recovery of each nation.
2.3 The Damage caused by the Great Depression
2.3.1 The US drowning deep
In 1932 the United States economy stood at its lowest ebb in modern history.
An army of out-of-work military veterans camped and marched in Washington, DC.
Unemployment stood at around 25 percent. Long lines of starved people waiting for
free food from charity organizations became popular. Current situation of that time
guaranteed a dark future ahead.
On Black Tuesday, October 29, more than sixteen million shares were traded
and stock-holders lost over $14 billion in just one single day. The crash caused a
devastating outcome to the U.S’ finance. From September 1 st and November 30th,
1929, stock market’s value dropped from $64 billion to $30billion, losing more than
one-half of its value. And there are nothing could be done to stem the tide. The
crash happened in the stock market but it had affected not just a few Americans who
invested in the stock market since 90% of all banks had invested in stock market. A


lot of bank failed because their cash reserves had decrease dramatically. There are 2

reasons of the cash reserves dwindling, this was in part due to the policy given by
the Federal Reserve allow Banks to lowering the limits of cash reserves, another
reason is the fact that during this time, many bank had invested in stock market
themselves. Eventually, thousands of banks went bankrupt, making their customers
lose all of their saving. And then, the contagion effect of the crash continued to
terrorized the United State of America. After lost billions of dollars, investors had
very little motivation to invested in new or expand business. Two industries suffered
the most from the crash is automotive and construction, this also was the 2
industries that had the greatest impact on the country’s economic future in terms of
investment, potential growth, and employment. During the last month of 1929,
fewer cars was built than in any other months before due to the reduce in cars
demand. And afterward, only a few culd afford them. By 1933, a lot of automobile
production was halt, all luxury models, were largely unavailable and they could not
recover until 1949. In construction, the drop-off was also dramatic. It took another
30 years for a new hotel or theater to be built in New York city. The famous Empire
State Building itself stood half empty for years after being completed in 1931.
So quickly after the crash did the crisis grow to such an appalling extent that
its full dimensions resisted comprehension. When the unemployment rate ran to
around a quarter of the workforce in 1932, about 11.5 million Americans had no
work. To put this in some perspective, we might imagine that nearly the entire
population of New York, then the most populous state, had no jobs: that from the
easternmost tip of Long Island to the shores of Lake Erie, from the Canadian border
to Pennsylvania, nobody had work. But this perspective does not give quite the right
picture. Some of the people of New York—children, dependent wives—would
ordinarily have held no formal jobs. And the 11.5 million out of work represented
only the workers who had no paycheck. Many of them had families who depended
on them for a living. So the 11.5 million who had no jobs represented something
like thirty million Americans who had lost their source of income. Perhaps a quarter