Worldwide economic downturn began in 1929 and lasted until about 1939.

It resulted in drastic declines in output, severe unemployment, and acute deflation in almost every country of the globe. In U.S. industrial production declined 47%, real GDP fell 30% and WPI declined by 33%. The fundamental cause of the Great Depression in the United States was a decline in spending (sometimes referred to as aggregate demand, which led to a decline in production as manufacturers and merchandisers noticed an unintended rise in inventories.) US presidents during this period were o Herbert Hoover (1929-1933) o Franklin D. Roosevelt (1933-1945) In the 1930s, the government began to use fiscal policy not just to support itself or pursue social policies but to promote overall economic growth and stability as well. Policy-makers were influenced by John Maynard Keynes, an English economist. (According to him, people did not have enough income to buy everything the economy could produce, so prices fell and companies lost money or went bankrupt. As more companies went bankrupt, he argued, more people would lose their jobs, making income fall further and leading yet more companies to fail in a frightening downward spiral. Without government intervention, Keynes said, this could become a vicious cycle. Keynes argued that government could halt the decline by increasing spending on its own or by cutting taxes. Either way, incomes would rise, people would spend more, and the economy could start growing again.) Both the Hoover and Roosevelt administrations increased government spending. The Hoover administration ramped up nominal federal expenditures by 52% from $3.1 billion in fiscal year 1929 to $4.7 billion in 1932 and $4.6 billion in fiscal year 1933 The Hoover administration ran deficits because nominal and real tax revenues fell after 1930, largely because the economy was falling apart. Less than 10 percent of households earned enough to pay income taxes throughout the 1930s because individuals with less than $2000 in income and families of four with less than $5,000 were exempt. Those who were required to pay saw their tax rates jump sharply. The tax on corporations rose from 12 to 13.75 percent. The Roosevelt administration proceeded to raise annual nominal government spending by $2 billion to roughly 6.5 billion in both 1934 and 1935, and then reached a temporary peak in 1936 at $8.4 billion After a reduction to $6.8 billion over two years, the spending ramped up again to $8.8 billion in 1939. The Hoover and Roosevelt administrations ran deficits in most years. In 1928 and 1929, federal receipts on the administrative budget (the administrative budget excludes any amounts received for or spent from trust funds and any amounts borrowed or used to pay down the debt) averaged 3.80

percent of GNP while expenditures averaged 3.04 percent of GNP. In 1939, federal receipts were 5.50 percent of GNP, while federal expenditures had tripled to 9.77 percent of GNP. In December 1929, as a means of demonstrating the administrations faith in the economy, Hoover had reduced all 1929 income tax rates by 1 percent because of the continuing budget surpluses. By 1930 the surplus had turned into a deficit that grew rapidly as the economy contracted. By the end of 1931 Hoover had decided to recommend a large tax increase in an attempt to balance the budget; Congress approved the tax increase in 1932. Personal exemptions were reduced sharply to increase the number of taxpayers, and rates were sharply increased. The lowest marginal rate rose from 1.125 percent to 4.0 percent, and the top marginal rate rose from 25 percent on taxable income in excess of $100,000 to 63 percent on taxable income in excess of $1 million as the rates were made much more progressive. By reducing households disposable income, it led to a reduction in household spending and a further contraction in economic activity. President Roosevelt came into office proposing a New Deal for Americans, but his advisers believed, mistakenly, that excessive COMPETITION had led to overproduction, causing the depression. The centerpieces of the New Deal were the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA), both of which were aimed at reducing production and raising wages and prices. But the recovery that had seemed so promising largely stopped, and there was little increase in economic activity from the fall of 1933 through midsummer 1935.