Learning's from The Great

Depression

Group K1
 The Great Depression
• Worldwide economic downturn that began in
1929 and lasted until about 1939.
• The Great Depression originated in the United
States, it resulted in drastic declines in output,
severe unemployment, and acute deflation in
almost every country of the globe.
• Unemployment rose to 25% in US and 33% in
other countries.

The Great Depression

 Lesson 1

Small fiscal expansion has only

small effects

The Great Depression

• Fiscal expansion was not sustained

• Difference in fiscal policy of fed & state/ local

governments

• Confidence Restoration

The Great Depression

 Lesson 2

Monetary Expansion helps even

when interest rates are near zero by
affecting expectations

The Great Depression

• US was on Gold Standard in 1929
• 1933, Roosevelt suspended the Gold Standard
• Dollar depreciated substantially
• Reverted to Gold at new higher price , hence gold
inflows into US Treasury
• Money Supply increased by 17% per yr from 1933
to 1936
• Replaced Deflation expectations with Price
Stability
• Real interest rates plunged
• Interest – sensitive consumer spending rose
The Great Depression
 Lesson 3

Beware of cutting back on stimulus

too soon

The Great Depression

• Fiscal deficit rose by 1 ½ % of GDP due to bonuses
given to WWI veterans
• Real GDP increased 11% & 13% in ‘34 & ‘36 resp.
• Unemployment fell by 10% points but was still
above 15%
• 1937, both Fiscal policy & Monetary policy was
made contractionary
• As a result, GDP rose by only 5 % in 1937 & then
fell by 3 % in 1938 ; Unemployment rose to 19%

The Great Depression

 Lesson 4

Financial Recovery & Real

Recovery go hand in hand

The Great Depression

• Roosevelt ordered shutting of banks till the books
were checked
• Increased money supply by temporary suspension
of Gold Standard
• Help for the distressed home owners & farmers
• Short-term effects on financial markets : Real
stock prices rose over 40% ; commodity prices
soared & interest rates shrank
• Strengthening real economy improved health of
financial system

The Great Depression

 Lesson 5

Worldwide expansionary policy

shares the burden & benefits of
recovery

The Great Depression

• Going off the Gold Standard increased money
supply which lowered world interest rates

• More the countries worldwide move towards

monetary & fiscal expansion, the faster the end to
recessionary times

The Great Depression

 Lesson 6

The Protectionist Temptation

The Great Depression

• The adoption of restrictive trade policies was
destructive and counterproductive

• Fiscal Stimulus v/s Monetary Stimulus

Monetary stimulus involves the manipulation of the
available money supply within the economy.
Fiscal Stimulus on the other hand means "Increased
Government Spending" in Infrastructure etc
(thereby creating more jobs ) and "Higher Tax Cuts"
(thereby increasing the purchasing power of people
The Great Depression
2009 V/s 1930

The Great Depression

 2009 Recession V/s Great Depression
Economic Recession (2009)
• Unemployment Rate - 8.1%
• Real GDP fell by 2% from peak
• Collapse of housing prices &
stock prices ; Consumer saving
rates rose
• Derivatives caused credits to
dry up
• Europe, Export economies like
China, Taiwan & South Korea
The Great Depression
Great Depression (1930’s)
• Unemployment Rate - 25%
• Real GDP fell over 25%
from peak
• Decline in Asset prices &
fall on BFSIs ; Collapse of
Stock prices ; Consumers
stopped spending
• Worldwide nature of decline
THANK
YOU

The Great Depression

Q&A

The Great Depression