Topics: Great Depression, Public finance, Federal Reserve System Pages: 5 (1505 words) Published: January 24, 2013
1st case: Fiscal policy During the great depression

The Great Depression is the worldwide economic breakdown that began in 1929 and lasted until 1939. It was the longest and hardest hit to the economy ever experienced by the industrialized Western world. Although the 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. The fundamental cause of the Great Depression in the United States was a decline in spending; in this case it is called aggregated demand. This led to the decline in production, hence, output deteriorated.

Before the Great Depression the U.S. government did not have a fiscal policy, at least not in the sense that economists have meant for the past two generations. The deficit and the surplus were not tuned by the government in order to achieve full employment rate, and low inflation. This is not to say that the government’s budget was typically in balance. United States’ government borrowed extremely large sum in wartime: a typical pre-World War two would end with total federal debt equal to some three-tenths of a year’s national product. But after a typical war was over the debt would rapidly be redeemed: the War of 1812 debt had been paid off by the 1830s. The Mexican War debt had been extinguished by the early 1850s. The enormous Civil War debt and the less enormous Spanish-American War debt had been extinguished by the eve of World War I. Thus U.S.’s “fiscal policy” before the Great Depression was simple: the federal government borrowed what it could during wartime. It strove thereafter to run peacetime surpluses to reduce the ratio of debt to national product. All this changed with the Great Depression.

During The Great Depression, in 1933, 25 percent of all workers and 37 percent of all non-farm workers were completely out of work. Many people lost their farm and home. United State has to borrow money more than she can earn. As one of the book stated that wars are very expensive. This means when United State involves in any war, it borrow a very large sum of money relative to its size of economy. The figure below shows the United State of America’s federal debt as a share of national product in 1996.


As the graph illustrated, we can see that the federal debt as a share of national product shot up to nearly 120% during mid-1940s, during war time.

Let me start out by explaining the factors that cause The Great Depression. All of us know that during The Great Depression, output decline as manufacturers do not want to produce. This happens because of the drop in prices of their goods and lower investment and also lower consumption. Actually, there are some main factors that we should know about The Great Depression. The first factor is stock market crash.

The initial decline in output in the United States in the summer of 1929 is widely believed to have stemmed from tight U.S. monetary policy aimed at limiting stock market speculation. The one obvious area of excess was the stock market. Stock prices had risen more than fourfold from the low in 1921 to the peak reached in 1929. In 1928 and 1929, the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices. These higher interest rates depressed interest-sensitive spending in areas such as construction and automobile purchases, which in turn reduced production. By the fall of 1929, U.S. stock prices had reached levels that could not be justified by reasonable anticipations of future earnings. As a result, when a variety of minor events led to gradual price declines in October 1929, investors lost confidence and the stock market bubble burst. Panic selling began on “Black Thursday,” October 24, 1929. Many stocks had been purchased on margin that is, using loans secured by only a small fraction of the stocks’ value. What happen next was the...
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