Lira B.

Espirituoso

August 12, 2015

2BSABE

ECO 101- N

The Great Depression and the Rise of Macroeconomics

The Great Depression was the longest economic downturn in the history of the Western
industrialized world. The American economy entered a recession during the summer of 1929. The
consumers spending dropped, there were many unsold goods and at the same time, stock prices rose.
On October 24, 1929, the stock market bubble finally popped and the investors started dumping
shares en masse. A record of 12.9 million shares were traded that day, known as the Black
Thursday. Five days later, on Black Tuesday 16 million shares were traded. Millions of shares
were worthless and those investors who had bought stock on margin were wiped out. (Histotry.com
Staff, 2009)
After the crash of the stock market, it led the factories and other businesses to slow down in
production and construction firms began firing their workers. For those who were able to keep their
jobs, their wages fell and the purchasing power of money decreased drastically. Many Americans fell
into debt and the number of foreclosures and repossessions of properties rose. The gold standard
which joined the countries around the world in a fixed currency exchange helped spread the
Depression from the United States throughout the world, especially in Europe. (Histotry.com Staff,
2009)
The United States had emerged from the World War I as the major creditor and financier of
the postwar Europe, whose national economies had been greatly weakened by the war itself. Once
the American economy slumped and the flow of American investments credits to Europe dried up,
prosperity dried there as well. The Depression hit hardest those nations who were indebted to United
States, i.e., Germany and Great Britain. In Germany, unemployment rose rapidly beginning in late
1929 and by early 1932 it had reached 6 million worker, or 25% of the workforce. Britain was less
severely affected but its industrial and export sectors remained seriously depressed until World War
II. (Histotry.com Staff, 2009)
By 1930, 4 million Americans were unemployed; the number rose to 6 million by 1931. 25% 30% of the workforce are unemployed. The countrys industrial production dropped by half. Oil
companies lost money. People had little to no money to spend. The number of homeless people
became more and more common in Americas town and cities. Farmers had also been struggling due
to the drought and falling food prices. They could not afford to harvest their own crops and were
forced to leave their fields. (Department of English, University of Illinois at Urbana-Champaign,
2014)
In the fall of 1930, large number of investors demanded deposits in cash. Forcing banks to
liquidate loan in order to supplement their insufficient cash reserves. By early 1933, 11,000 of the
United States 25,000 banks had failed. The failure of many banks combined with the nationwide loss
of confidence in the economy led to reduced levels of spending and demand. In which eventually led
to drastically falling output and rising unemployment. President Herbert Hoover facing this dire

situation, tried to support failing banks with government loans. In turn, banks would loan to
businesses which would be able to hire back their employees. (Department of English, University of
Illinois at Urbana-Champaign, 2014)
The Depression spread rapidly around the world because the intervention made by the
government were flawed. They increased tariffs severely on imports that reduced trade. Since
deflation was the only policy supported by the economic theory by that time, the initial response of
every government was to cut their spending. As a result consumer demand fell even further.
Deflationary policies were linked to exchange rates. During the Depression, they were forced to keep
the interest rates high to persuade banks to buy and hold their currency. (Department of English,
University of Illinois at Urbana-Champaign, 2014)
When Franklin D. Roosevelt became the president by 1932 he initiated programs that would
reduce the falling of wages and prices. He introduced a number of major changes in the structure of
the American economy, using increased government regulation and massive public-works projects to
promote a recovery. Despite the active intervention, there was still a massive unemployment and the
economy was still struggling. It stopped further reduction in nominal wages in 1933, thus stopping
further shifts in aggregate supply. (Rittenberg and Tregarthen, 2012)
When World War II erupted, the unemployment dropped rapidly as American factories were
flooded with orders from the overseas for armaments and ammunitions. The depression ended
completely when United States entered World War II in 1941. In Europe, the Great Depression
strengthened the extremist forces. In Germany, economic distress contributed to Adolf Hitlers power
in 1933. Their public-works projects and their rapid expansion of ammunition production ended the
Depression there by 1936. (Rittenberg and Tregarthen, 2012)
John Maynard Keynes was a British economist whose ideas fundamentally affected the
theory and practice of modern macroeconomics. (Jenkins, 2011) He saw that President Roosevelts
solution to the falling wages and prices during his administration in 1933 was the reason that the
economy has a great recession gap. Roosevelts solution to the problem at that time, reduced nominal
wages thus blocking the aggregate supply side. Also, with no policy to boost the aggregate demand it
left the economy locked in a recession gap for so long. (Rittenberg and Tregarthen, 2012)
The New Deal policy of President Roosevelt did stir up the employment through a variety of
federal programs. But, with the state and local governments continuing to cut purchases and raise
taxes, the net effect of the government at all levels of the economy did not increase aggregate
demand until the onset of the world war. (Rittenberg and Tregarthen, 2012)
Keynes argued that the expansionary fiscal policy represented the exact tool for bringing
back the economy to full employment. The United States did not carry out such policies until the
world war prompted to increase their federal spending for defense. When the Japan forces attacked
Pearl Harbor on December 1941 it led to a much sharper increases in government purchases and the
economy pushed quickly into an inflationary gap. (Rittenberg and Tregarthen, 2012)
The Great Depression provided impressive confirmation of Keynes ideas. The reduction of
aggregate demand had gotten the trouble started. The recessionary gap created by the change in
aggregate demand that had persisted for more than a decade. The expansionary fiscal policy had put a
swift end in the macroeconomic nightmare in the U.S. history. (Rittenberg and Tregarthen, 2012)

References:
History.com Staff. 2009. The Great Depression. August 11, 2015.
http://www.history.com/topics/great-depression
Rittenberg and Tregarthen. 2012. Macroeconomics. August 11, 2015. http://lardbucket.org
Jenkins. 2011. John Maynard Keynes. August 11, 2015.
https://en.wikipedia.org/wiki/John_Maynard_Keynes
Department of English, University of Illinois at Urbana-Champaign. 2014. About the Great
Depression. August 11, 2015.
https://www.eduplace.com/ss/socsci/ca/books/bkd/ilessons/ils_gr4_ca_u1_c09_l3.pdf