Timeline of the Great Depression
Encyclopedia
The Great Depression
era can be divided into two parts. The initial decline lasted from mid-1929 to mid-1931. Around mid-1931, there was a change in people’s expectations about the future of the economy. This fear of reduced future income coupled by the Fed’s
deflationary monetary policy
resulted in a Mundell effect
. This further depressed the economy until Roosevelt
stepped into office in 1933 and ended the gold standard
, thereby ending the deflationary policy.
A true understanding of the Great Depression requires not only knowledge of the U.S. monetary system but also the implications of the gold standard on its participatory nations. The gold standard made the involved nations interdependent on each others’s monetary policy. Due to a fixed exchange rate
, the only way to affect the demand for gold was through interest rates. For example, if interest rates were high in one country, then investors would have no reason to exchange currency for gold and the gold reserves would remain stable. However if interest rates were low in a different country then its investors would elect to move their funds abroad where interest rates were higher. In order to stop this from happening, each nation within the gold standard union had no choice but to raise its interest rates in correspondence with its fellow nation. This interconnectivity of deflationary policy amongst so many nations resulted in the prolongation of the greatest economic downturn.
Germany's industrial production
declines
Spring 1928: The Fed increases interest rates
August: The recession
begins, two months before the crash. Production falls by 20%.
October 24: Stock market crash
begins.
October 25: Brief surge on the market.
October 29: 'Black Tuesday'. U.S. Stock market collapse.
Decline in the commodity
prices.
rates from 6% to 4%
June 17: Smoot-Hawley Tariff Act
passed.
September - December: First U.S. bank failures
, Austria's premier bank, goes insolvent.
May-June: Second U.S. bank failures / Change in people's expectation of the economy
July: Germany banking crisis
September 21: Britain goes off the gold standard
.
September - October: Substantial amount of dollar assets are converted to gold in the US
September - December: Fed increases interest rates
November - Summer 1932: Foreign trade restrictions
/ Imperial Preference
.
July: The Government discontinued open market operations.
November: Franklin D. Roosevelt
elected President.
In 1933 approximately 500 tonnes of gold were turned in to the Treasury at the exchange rate of $20.67 per troy ounce
The price of gold from the treasury for international transactions was thereafter raised to $35 an ounce. The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.
US goes off the gold standard for US currency. Gold continues to be used to settle international debts.
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
era can be divided into two parts. The initial decline lasted from mid-1929 to mid-1931. Around mid-1931, there was a change in people’s expectations about the future of the economy. This fear of reduced future income coupled by the Fed’s
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
deflationary monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
resulted in a Mundell effect
Mundell-Tobin effect
The Mundell–Tobin effect suggests that nominal interest rates would rise less than one-for-one with inflation because in response to inflation the public would hold less in money balances and more in other assets, which would drive interest rates down...
. This further depressed the economy until Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
stepped into office in 1933 and ended the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, thereby ending the deflationary policy.
A true understanding of the Great Depression requires not only knowledge of the U.S. monetary system but also the implications of the gold standard on its participatory nations. The gold standard made the involved nations interdependent on each others’s monetary policy. Due to a fixed exchange rate
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
, the only way to affect the demand for gold was through interest rates. For example, if interest rates were high in one country, then investors would have no reason to exchange currency for gold and the gold reserves would remain stable. However if interest rates were low in a different country then its investors would elect to move their funds abroad where interest rates were higher. In order to stop this from happening, each nation within the gold standard union had no choice but to raise its interest rates in correspondence with its fellow nation. This interconnectivity of deflationary policy amongst so many nations resulted in the prolongation of the greatest economic downturn.
1928
France significantly increases its gold reservesOfficial gold reserves
A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders , or trading peers, or to secure a currency....
Germany's industrial production
Industrial production
Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of GDP , they are highly sensitive to interest rates and consumer demand...
declines
Spring 1928: The Fed increases interest rates
- Increases in interest rates restrict credit to businesses.
1929
U.S. decline in industrial productionAugust: The recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
begins, two months before the crash. Production falls by 20%.
October 24: Stock market crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
begins.
October 25: Brief surge on the market.
October 29: 'Black Tuesday'. U.S. Stock market collapse.
Decline in the commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
prices.
- The stock market crash had little substantive effect on the recession because only 16% of the population was involved in the market, and only 10% of wealth was lost. However, the crash created uncertainly in people’s minds about the future of the economy. This distrust in future income reduced consumption expenditure. As demand for commodities decreased, so did their prices.
1930
February: Federal Reserve cuts interestInterest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
rates from 6% to 4%
June 17: Smoot-Hawley Tariff Act
Smoot-Hawley Tariff Act
The Tariff Act of 1930, otherwise known as the Smoot–Hawley Tariff was an act, sponsored by United States Senator Reed Smoot and Representative Willis C. Hawley, and signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.The overall level tariffs...
passed.
September - December: First U.S. bank failures
1931
May: CreditanstaltCreditanstalt
The Creditanstalt was an Austrian bank. The Creditanstalt was based in Vienna, founded in 1855 as K. k. priv. Österreichische Credit-Anstalt für Handel und Gewerbe by the Rothschild family...
, Austria's premier bank, goes insolvent.
May-June: Second U.S. bank failures / Change in people's expectation of the economy
- If people expect the deflation to continue, they anticipate that prices will be even lower in the future than they are now. They hold off on purchases to take advantage of the expected lower prices. They are reluctant to borrow at any nominal interest rate because they will have to pay back the loan in dollars that are worth more when prices are lower than they are now. In short, the real interest rate rises above the nominal rate (Temin 56).
July: Germany banking crisis
September 21: Britain goes off the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
.
September - October: Substantial amount of dollar assets are converted to gold in the US
September - December: Fed increases interest rates
- Fed wanted to stabilize the dollar without going off the gold standard. As a result, production continued to plummet and the depression intensified.
November - Summer 1932: Foreign trade restrictions
Trade restriction
A trade restriction is an artificial restriction on the trade of goods between two countries. It is the result of protectionism. However, the term is not uncontroversial since what one part may see as a trade restriction another may see as a way to protect consumers from inferior, harmful or...
/ Imperial Preference
Imperial Preference
Imperial Preference was a proposed system of reciprocally-levelled tariffs or free trade agreements between the dominions and colonies within the British Empire...
1932
April - June: Government conducted open market transactions to increase money supplyMoney supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
.
July: The Government discontinued open market operations.
November: Franklin D. Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
elected President.
1933
Executive Order 6102 signed on April 5, 1933 by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by U.S. citizens. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Violation of the order was punishable by fine up to $10,000 or up to ten years in prison, or both.In 1933 approximately 500 tonnes of gold were turned in to the Treasury at the exchange rate of $20.67 per troy ounce
The price of gold from the treasury for international transactions was thereafter raised to $35 an ounce. The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.
US goes off the gold standard for US currency. Gold continues to be used to settle international debts.
External links
- http://www.hyperhistory.com/online_n2/connections_n2/great_depression.html
- http://www.huppi.com/kangaroo/Timeline.htm