Great Depression K1

8/8/2019 Great Depression K1

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Group K1

Learning's from The GreatDepression


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The Great Depression

Worldwide economic downturn that began in

1929 and lasted until about 1939.

The Great Depression originated in the UnitedStates, 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.



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Lesson 1

Small fiscal expansion has only

small effects



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Fiscal expansion was not sustained

Difference in fiscal policy of fed & state/ localgovernments

Confidence Restoration



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Lesson 2

Monetary Expansion helps evenwhen

interest rates arenear zero byaffecting expectations



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US was on Gold Standard in 1929

1933, Roosevelt suspended the Gold Standard

Dollar depreciated substantially

Reverted to Gold at new higher price , hence goldinflows into US Treasury

Money Supply increased by 17% per yr from 1933to 1936

Replaced Deflation expectations with PriceStability

Real interest rates plunged

Interest sensitive consumer spending rose



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Lesson3

Bewareof cutting back onstimulus

too soon


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Fiscal deficit rose by 1 % 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 stillabove 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%



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Lesso

n4

Financial Recovery & Real Recovery

go hand inhand



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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 offinancial system



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Lesson5

Worldwideexpansionary policy

shares theburden& benefits ofrecovery



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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



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Lesson6

TheProtectionist Temptation



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The adoption of restrictive trade policies wasdestructive and counterproductive

Fiscal

Stimulus v/s Monetary

Stimulus

Monetary stimulus involves the manipulation ofthe available money supply within the economy.

Fiscal Stimulus on the other hand means

"Increased Government Spending" inInfrastructure etc (thereby creating more jobs )and "Higher Tax Cuts" (thereby increasing thepurchasing power of people



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2009 V/s 1930


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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 savingrates rose

Derivatives caused credits to

dry up Europe, Export economies like

China, Taiwan & South Korea

Great Depression (1930s)

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



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Q & A


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Great Depression K1