An economy refers to a specific geological area of organization, administration

Market Economy : an economic system in which prices are based on competition among private businesses and not controlled by a government.. The separation of market and government in Mark

CHAPTER 1: LITERATURE REVIEW 1.1 Overview

1.1.1 Definition

According to Merriam-Webster Dictionary an Economy could be defined

as follows

An Economy refers to a specific geological area of organization,

administration of currency, industries and commerce, concerning about the distribution of scarce resources among members of society.

Furthermore the definitions of three major types of modern Economy are included

Market Economy : an economic system in which prices are based

on competition among private businesses and not controlled by a government.

Command Economy : an economic system in which activity is

controlled by a central authority and the means of production are publicly owned.

Green Economy : an economic system which is both low-carbon,

resource efficient, and socially inclusive.

1.1.2 Types of Economic System

Scarcity is the fundamental challenge confronting all individuals and

nations We all face limitations so we all have to make choices We can't always get what we want How we deal with these limitations—that is, how

we prioritize and allocate our limited income, time, and resources—is the basic economic challenge that has confronted individuals and nations throughout history.

But not every nation has addressed this challenge in the same way Societies have developed different broad economic approaches to manage

their resources Economists generally recognize four basic types of economic systems—traditional, command, market, and mixed—but they don’t completely agree on the question of which system best addresses the challenge of scarcity According to According to Macroeconomics by Evgeniy

Chernyshov, 2012, 4 economic systems are explained.

1.1.2.1 Traditional Economic System

As closely as stated in the name, literally this is the most traditional and primal type of economy ever created by humankind Goods and services are produced according to demand patterns developed for a while among a society, normally related to customs, beliefs, geographical properties, etc It still survives in some part of the globe today in some second/third world countries, even though proves vulnerable against bigger economy due to underdevelopment of technology.

Production is performed under mostly the basic needs of a group of people, which mea1ns that trade only happens when producer has fulfilled his own demand As a result, changes are rare to happen From range of goods, demanding level, customers to quality, quantity, standard and price, both remain stable for a long period Unpredictable market fluctuation is also not expected among buyers and suppliers Therefore, Economic stability is guaranteed due to specific roles of individuals in the economy, resulting in social order and happiness.

Community power surpass individuality in means of each human living

in a society has to contribute both labour and wealth in order to flourish such society.

Profit or surplus is unaffordable due to scarcity of resources, and even somehow it happens, later it will be distributed or paid to authority.

1.1.2.2 Command Economic System

The system is one step advance from the traditional one, with the government takes control of the economy in means of resources distribution The birth of the system demands a vast accumulation of wealth of the authority The government then has the decision over almost resources, including the roles of individuals, price and wages Which, how and how much of a field should be taken over is in the management of the government, which means some of the industries are completely under control of the government while some are free in the hand of the people such as agriculture

in almost every nations under such system.

Provided that the government provides efficient policies, life standard of the people would improve significantly as the mechanism allows the self- sufficiency among the people, leading to zero competition while price is affordable according to the regulation of the government On the contrary, economy would fall into stagnancy if the government can not administrate and outside force has no power in the market.

1.1.2.3 Market Economic System

Economic decisions are in the hand of individual Resources, targets, production, distribution of goods, etc are determined by the organizations rather than the government.

The separation of market and government in Market/Pure Economy allows freedom and reduce the power of the government on the development

of individuals.

Market under system similar to capitalism is highly safer than this system due to the regulation on fair trade, anti-trust, government programs; even though with the price of complete freedom.

The system only exist in a group of people with a specific interest.

1.1.2.4 Mixed Economic System

Mixed Economic System is a fusion of two Systems mentioned above: decisions by individuals ( Market Economic System ) and the government distributing resources ( Command Economic System ).

The market is on a level under control of the government Particular sectors are dominated fully by the government of some nations such as education, medical healthcare, etc

The power of the government never can be indicated precisely This has been proven by the present American economy in which the authority is interfering the market as the situation is getting out of hand.

1.2 Government Administration in the Economy

1.2.1 The necessity of Government intervention in the Economy

According to the theory of the market economy, the law of supply demand, competition law, law of value, etc must be respected by the State Thus the market economy is capable of balancing supply - demand; and labor markets, capital or land only operated in accordance with the law of value as

-it eliminates the interference of the State The above reasoning is stated in almost every present economics books, and is said to be the obvious, undeniable However, can popularity satisfy righteousness? The history of more than two recent centuries of capitalism has never witnessed a pure market economy, which is not subjected to regulation, under this form or another, of the State.

Take a look at the financial and credit markets of which characteristics leave a profound mark on the financial and credit market of America, associations, bankers and financial firms are urging the US government to publish stricter market management laws in order to restore the confidence of the trade and prevent the collapse of the whole banking and finance sector.

History has proved that the most successful market economies cannot developed spontaneously without the intervention and support of the State The primal market economy operated on simple production and exchange can work effectively without a Government However, as the external influence increasingly growing complex, State intervention appears as an indispensable for the effective operation of the market economy In the developed market economy, the State has three distinct economic functions : intervention, management and regulation of welfare Although certain restrictions still exist, regulation by the Authority remains one of the activities of the market economy Accordingly, the free market with its own rights can not exist, except in the economic theory.

However, while confirming the importance of the Government in the Market, pros-cons must be taken into thorough consideration The workaround is not to leave the market, but to improve the efficiency of such intervention The State has a legitimate role in the modern economy, which particularly expresses the determination of "the rules of the game" to intervene in the regions that flaws in the market economy, to ensure the capability of the economy and to provide welfare services.

The Government plays a huge role in creating the economic conditions for the private sector in order to boost their operational efficiency One of these conditions is to create and maintain a stable currency market, that is widely accepted and capable of removing cumbersome, inefficient trading system, and at the same time maintaining monetary value through policies to limit inflation.

Historically, the market economy has always been threatened by sudden currency appreciation, rising unemployment rate, or inflation History has yet

to forget the severe period of hyperinflation in Germany in the 1920s, the

Great Depression the world economy in the 30s of the twentieth century, when the whole world fall into unemployment.

Financial policies indicates tax and spending policies of the State budget

in order to regulate the economic cycle, ensuring employment, price stability and continuous growth of the economy During periods of economic downturn, fiscal policy works as stimulus to demand and production by increasing government spending, tax cuts, thus generating national income And in times of economic "overheating", the government practises the contrary To rebalance the intentional fiscal measures, the State created the so- called stabilization mechanism, such as the progressive income tax and unemployment Fiscal policy running independently with the monetary policy

is a policy to regulate economic activity by controlling the money supply The Government and Central Bank have two important tools for economic management namely fiscal policy and monetary policy If used properly, both tools can bring about the same results in stimulating the economy and slow economic growth when hot.

According to Macroeconomics by Evgeniy Chernyshov, 2012, Fiscal and

Monetary Policies are defined as below.

1.2.2 Fiscal Policies

Definition : Systems of government policies on finance, is often planned

and performed completely in a fiscal year in order to influence the development of economy through adjusting government spending and budget revenues policies (mostly tax revenues)

Fiscal policies can be roughly divided into Balanced fiscal policies, Expansionary fiscal policies and Tight fiscal policies

Balanced fiscal policies is fiscal policy under which the Government's

total expenditure in balance with revenues from taxes, charges, fees and other revenues that are not debt.

Expansionary fiscal policies (also known as the Reflationary fiscal

policies) is made to strengthen the government's spending compared to revenues through three solutions Increase the level of government spending

without increasing revenues or Reduce tax revenues without reducing spending or Increase the level of government spending and reduce tax

revenues.

Expansionary fiscal policies works as to stimulate economic growth, create jobs However, expansionary fiscal policy often lead to the government having to borrow to offset the budget deficit.

Tight fiscal policies (also called Contractionary fiscal policies) are the

policies limiting government spending compared to revenues by three ways :

Reduce government spending without increasing revenues or Increase tax revenues without reducing spending or Increase tax revenues and reduce

spending

The main functions of Fiscal Policies in market management:

Allocation : The first major function of fiscal policy is to determine

exactly how funds will be allocated This is closely related to the issues of taxation and spending, because the allocation of funds depends upon the collection of taxes and the government using that revenue for specific purposes The national budget determines how funds are allocated This means that a specific amount of funds is set aside for purposes specifically laid out by the government This has a direct economic impact on the country.

Distribution : Whereas allocation determines how much will be set

aside and for what purpose, the distribution function of fiscal policy is to

determine more specifically how those funds will be distributed throughout each segment of the economy For instance, the government might allocate $1 billion toward social welfare programs, but $100 million could be distributed

to food stamp programs, while another $250 million is distributed among cost housing authority agencies Distribution provides the specific explanation

low-of what allocation was intended for in the first place.

Stabilization : Stabilization is another important function of fiscal

policy in that the purpose of budgeting is to provide stable economic growth Without some restraints on spending, the economic growth of the nation could become unstable, resulting in periods of unrestrained growth and contraction While many might frown upon governmental restraint of growth, the stock market crash of 1929 made it clear that unfettered growth could have serious consequences The cyclical nature of the market means that unrestrained growth cannot continue for an indefinite period When growth periods end, they are followed by contraction in the form of recessions or prolonged recessions known as depressions Fiscal policy is designed to anticipate and mitigate the effects of such economic lulls.

Development : The fourth major function of fiscal policy is that of

development Development seems to indicate economic growth, and that is, in fact, its overall purpose However, fiscal policy is far more complicated than determining how much the government will tax citizens one year and then determining how that money will be spent True economic growth occurs when various projects are financed and carried out using borrowed funds This stems from the the belief that the private sector cannot grow the economy by itself Instead, some government input and influence are needed Borrowing funds for this economic growth is one way in which the government brings about development This economic model developed by

John Maynard Keynes has been adopted in various forms since the World War

II era.

1.2.3 Monetary Policies

Definition : process of management of money supply of the monetary

authorities (probably central bank), usually towards a desired interest rate to achieve stability purposes and economic growth - such as controlling inflation, maintaining stable exchange rates, achieve full employment or economic growth.

Monetary Policies use mainly three tools in administrating the flow of money in market:

Open market operations involve the buying and selling of government

securities The term “open market” means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price Open market operations are flexible, and thus, the most frequently used tool of monetary policy.

The discount rate is the interest rate charged by Federal Reserve Banks

to depository institutions on short-term loans.

Reserve requirements are the portions of deposits that banks must

maintain either in their vaults or on deposit at a Federal Reserve Bank

With the three tools, the functions of Monetary Fiscal Policies serve the

functions to develop economy, namely economy stabilization and rate intervention.

exchange-1.2.4 Fiscal Policies and Monetary Policies Interaction

In his speech in Mexico Nov 14 2005, Otmar Ising stated that: How should fiscal and monetary authorities co-ordinate their policies to stabilise

the economy? To avoid being vague and too general, let me take again the case of EMU as an example With an independent central bank and its stability-oriented strategy, the euro area has a highly predictable monetary policy There is no ambiguity as to how monetary policy will respond to economic, including fiscal developments: it will respond to the extent that they pose risks to price stability The principle of central bank independence and the overriding focus of the single monetary policy on the objective of price stability are two cornerstones of the economic policy constitution enshrined in the Maastricht Treaty They reflect the underlying economic logic that a clear division of responsibilities between the ECB and other economic policy actors is the institutional arrangement most conducive to the attainment of the wider objectives of the European Union Naturally, fiscal policies and structural reforms have monetary policy implications if such reforms affect price developments Therefore, a stability oriented monetary policy will take fiscal policy measures into account in its analysis Yet, there cannot be a commitment to an automatic or even ex-ante monetary policy reaction in response to fiscal consolidation policies or structural reforms Given the absence of credible enforcement mechanisms, ex-ante coordination between monetary and fiscal policies are unlikely to be successful, as I have argued elsewhere in detail In addition, ex-ante coordination tends to blur the fundamental responsibilities for the respective economic actors and may even increase uncertainty about the general policy framework.

A clear division of responsibilities between monetary and fiscal actors is consistent with implicit policy co-ordination between authorities A single monetary policy that is committed to maintaining price stability in the euro area will by itself facilitate “appropriate” economic outcomes in the Member States If national fiscal authorities correctly perceive the behaviour of the

single monetary policy they will take actions that would likely lead to implicitly “co-ordinated” policy outcomes ex post Of course, an open exchange of views and information between individual policy actors – without any commitment or mandate to take and implement joint decisions – will assist the overall outcome, if it manages to improve the understanding of the objectives and responsibilities of the respective policy areas and does not dilute accountability.

CHAPTER 2 : THE SITUATION OF THE GREAT DEPRESSION

The Great Depression was a catastrophic global economic event taking effect

during the 1930s The reign of the Great Depression started and ended at variedperiod in each nations; however, in most initiation flared in 1929 and survived tillthe end of 1930s It was a dark and stormy duration of the 20th century Nowadays,the Great Depression is often known as an example of a sudden and deep fall ofeconomy that could happen anytime

The depression first took place in the United States before spread outworldwide, after a slump in stock prices sometime around September 4 1929, andgrew into global meltdown after the stock market crash in October 29, 1929 (AKABlack Tuesday) From 1929 to 1932, worldwide GDP fell around 15 percent incomparison to less than 1% during 2008 and 2009 Great Recession Recoveryshowed up in some economies since mid 1930s However, many other countries stillsuffered the negative impacts of the Great Depression until the beginning of WWII The Great Depression left dire consequences in countries regardless rich orpoor Tax revenue, personal income and profits and prices plummeted, whileinternational trade dropped by more than 50 percent Rate of unemploymentincreased by almost 25 percent in the US and 33 percent elsewhere

Economies all around the globe were struck hard, especially where heavyindustry flourished Virtually construction was held everywhere Farming sufferedwhen crop prices fell almost 60 percent Mining and logging endured the mostunder decreased demand and hardship of finding an alternative job

2.1.1 Achievements

This is a period of BOOMING ECONOMY In spite of the 1920-1921

depression and the minor distractions in 1924 and 1927, there was a massivegrowth in the Economy of the US during such period Increasing individual

ownership of automobiles, new household appliances and real estate became thetrend Innovation in new products and production drove this growth Especially asthe case of Ford Motor, they successfully produced a cheap model that made every

10 seconds, satisfying the demand in low price market cars and made it accessiblefor almost everyone ( in 1927 30 million owned themselves a car compared to 8million 10 years before) The combination of the growing exploitation of electricity

in production and the widening adoption of moving assembly line in constructionworked in order to bring on development of productivity and increase employment.New products and services allowed the market to expand both in quality andquantity A lot of industries such as entertainment, communication, chemist foundtheir opportunity to thrive on The economy of the US enjoyed a stability andconstancy of growth during the time period, according to Charles E Persons in hisbook “Credit Expansion, 1920 to 1929, and Its Lessons.” in 1930

GNP (Gross National Product ), as the most popular means of measuring the

aggregate economic activity, shows us how US economy flourished Only 7 yearsfrom 1922, GNP of the US rose as much as 40 percent, at an estimated rate of 4.2percent each year during the whole decade Real GNP per capita increased by 2.7percent from 1920 to 1929 Despite the depression starting in the early 1920 andlasted for about a year, alongside with two minor recessions, one happened in 1924and one in 1927, both related to oil price shocks, US economy founds its way torecover and get back in pace in a only a short period Since 1923 after a fullrecovery from the depression, which was arguably caused by the Federal Reserve,was appreciated, the growth was smoother until the late 1929, before the GreatDepression The downfall came with the crash of stock market at the end of

October GNP plummeted by 11.5 percent in just one year ever since.

Figure 1: Real GNP per Capita 1919-1930

US Economy enjoyed great development in industries Non-reproducible

fuels contributed a large part in the growth of industrial production and commerce.Markets, Suppliers, Buyers altogether were knit without the internal barriersthrough the increasing of cheap transportation or in another way, the wholeEconomy was pretty much relying in the exploitation of natural resources As aresult, the US became a dominant industry force of the world ever since thebeginning of 1920 Moreover, other technological changes during the period tended

to increase the productivity through the replacement of certain types of equipmentswith superior equipments and through changes in administration methods Somechanges, for example the standardization of processes and parts and the contraction

of styles and designs, boosted productivity of both capital and labour Also, themechanization in American manufacturing paced in the 1920s, which resulted in amuch more rapid growth in productivity of manufacturing compared to the previousdecades and other sectors at the time The promotion of the mechanization wasinitiated by various factors On the market aspects, increasing aggregate demand inthe prosperous time called for changes while on the technical field, technologydevelopment enabled such

One of the most important forces contributing to vast production and escalated

productivity was the transfer of energy to Electricity The reduced power losses and

further distance over which electric power could be transmitted more than outweighthe necessity for converting the current back into direct current for general use.Expanding adoption of machines and appliances in industries and by consumersthen relied on an increase in the line-up of products using electric power, heat orlight with the development of an efficient, cheaper method of generating electricity

By 1929 almost 70 percent of manufacturing activities relied on electricity,compared to 30 percent in 1914 Steam provided about 80 percent of the mechanicalcapacity in manufacturing in 1900, while electricity provided over half by 1920 and

80 percent by 1929 More and more factories were supplied with their power fromelectric utilities By 1909, electricity generated from factory contributed to 64percent of capacity in motors of manufacturers; by 1919, about 57 percentelectricity consumed in manufacturing was bought from independent electricutilities

Transportation marked a historical movement in the economy of the US ever

since the 1900s As a result of Henry Ford’s introduction to moving assemblyproduction line in 1914, car prices plummeted, and in the late of 1920s about twothirds of American households owned an automobile The thriving of cheap

personal transportation led to a migration of population from the crowded cities tohomes in the suburbs and the car created a decline in inner-city public passengertransportation, which is still in use today Massive infrastructure programs allowedthe intercity movement of human and goods Trucks rapidly took over the favor oflong-distance carriage in competition with the railroads ever since the WWI brokeout in Europe, as trucks began its reign in transporting freight, firstly in the role ofmilitary use before proved to be feasible and economical in the long run Risingindustries like gasoline service stations, motels, and the rubber tyre industry, wereborn to assist the automobile and truck traffic With the vast geographic feature ofthe US, the development of traffic contributed largely in the role of connectingsuppliers with buyers in the inter-city economy under a unified market.

In nineteenth century, communications and transportation developments had

been combined to tie the American economy more completely The reduction ofcommunications cost and the acceleration of information transfer speed hasfacilitated the development of firms with multiple plants at distant locations Andduring the interwar era, these development has been continuously improved withthe supplantation of the telegraph with the telephone and the rise of the newmedium of radio to transmit news and provide new entertainment source Thanks tothe domination of telegraph in business and personal communications thetelephone as long distance telephone calls between the east and west coasts with thenew electronic amplifiers had been given way to became possible in 1915 In the20s, the number of telegraph handled had grown 60.4% The local telephoneconversations grew 46.8% and long distance conversation grew 71.8% between

1920 and 1930, 5 times more than long distance calls and telegraph messageshandled in 1920

The stock market is a place where the trading of stocks, which are the partial

ownership of a company, are organized In the 1920’s, the stock market wasmassively expanded, stock prices increased dramatically and made everyone,included those who convinced that stock investing is a risky action, spent their

money to invest in the stock market The more companies got involved in the stockmarket, the more people invested in it, thus made the stocks prices increase quickly.This caused the stock market became extremely risky and depended greatly on thestock prices since a lot of people had bought on margin During the 1920’s, thestock market had been considered a short term investment instead of a long-terminvestment And people tend to think that buying stock and selling it quickly whenthe prices increased is the best way to make easy money Eventually, the stockmarket became the talk of the country, at every corners of every cities, peopleasked each other about the stock market and how prices were that day

2.1.2 Downfalls

American farmers had received an unprecedented prosperity due to the onset

of the 1st World War in Europe Because of the war, the agricultural production inEurope was dramatically declined, this made the demand of American agriculturalexport rose, leading to the increase of farm product prices and incomes Seeing thisopportunity, the American farmers increased their production by expanding to themarginal farmland, also they purchased more machinery, tractor, plows, mowersand thresher in order to increase the productivity And since the demand offarmland, or more specific, the marginal farmland quickly increased, so did price ofthem, and the debt of American farmers also increased substantially

Although the 1st world war had solidified the dominance of the AmericanFederation of Labor among labor unions in the United States, the 1920’s was not agood time for the union In 1919, the AFL received a large growth in membershipfostered by federal government policies But then in the same year, the unionundertook 2 large strikes known as the Steel strike and the Coal strike, which wasboth lost These 2 lost strikes and the 1920-1921 depression had discouraged thedevelopment of the union and led to severe membership losses that continuedthrough the twenties

Old industry – in the 20’s the coal production was over exploited, also the coalwas being replaced by oil and gas This 2 factors had caused the mine closure andfalling wages in the old industry In 1929, the national average income was 3 timesbigger than a coal miner wage.

Poor black Americans – in 1920s, 1 million black farm workers wasunemployed, the only work they found available were low-paying, menial jobs Theblack community was severely over-crowded and segregated In New York's blackHarlem district, more than 250,000 citizens crammed into an area 50 blocks longand eight blocks wide, they had to share bed with many others, going to bed whenothers went off to work

Unemployment – due to the technology development, more and more peoplewere threw out of work, throughout 1920s, nearly 2 million people wereunemployed

Trade problems – high tariffs (which was a retaliation to other countries) hadreduced the export ability of American companies, this especially affect the farmers,who relied on exporting wheat

2.2 Causes of the Great Depression

Through the morning of October 24, in the streets of New York, crowdswalked quietly downtown to Wall Street where they gathered silently and stoodlooking at the New York Stock Exchange, as if suddenly its abstract activities couldbecome manifest, giving evidence of the disaster now plainly happening to them all.That was Black Thursday The market rallied afterward but then fell again The oiltycoon John D Rockefeller announced that ‘‘there is nothing in the businesssituation to warrant the destruction of values that has taken place’’ and that he wasbusy buying Neither this gesture nor others like it shored up stock prices By mid-November, more than a third of the stock market’s value had vanished

Reasons for the Great Depression varied and debated among economists I willexplain the most popular that has been widely agreed based on the knowledgeaccumulated throughout the period

2.2.1 Theoretical Reasons

It is way too simple to regard the stock market crash as the only cause of theGreat Depression An active economy can come back from such a contraction undertime and management Long-term governing causes sent the nation into abyss ofdespair

The two major competing theories of the initiation of the Great Depression arethe Keynesian and the monetarist

Keynesian Explanation: According to John Maynard Keynes, in his book in

1936 named “The General Theory of Employment, Interest and Money”, whenunconfidence set off in large, there occurs a sudden cutdown in consumption andinvestment As uncertainty and doubt kick in, many people believed avoidance forfurther losses is necessary by backing out of the markets Saving money becameprofitable when prices fell deeper and money gained more in value, inflaming thedrop in demand Keynes argued that lesser spendings in the economy contributed to

an enormous decline in income and to employment rate which was well beneath theaverage rate In such situation, the economy reached balance at low activeness ofeconomic activity with high unemployment

The basic idea was plain: to keep employment rate stable, governments have

to activate deficits when the economy is stagnant, while the private sector would notsupply adequately for the sustainability of production and further drive economyout of hardship Keynesian economists regard the government as the biggestadministrator during recession by boosting government expenditure and/orreducing taxes

Keynes also argued that when the national government expenditure usesmoney to compensate for the amount spent by business firms and consumers,unemployment rates would decline The solution was for the Federal ReserveSystem to “create new money for the national government to borrow and spend”and to lessen taxes so as for consumers to spend more, alongside with otherbeneficial factors Herbert C Hoover (US president 1929-1933) chose to do thecontrary of what Keynes expected to be the solution He allowed the federal

government to increase taxes exceedingly to comprehend with budget deficitscaused by the depression On the other side, Keynes proclaimed that employmentrate would escalate with the decreasing interest rates, which encourages firms toborrow more money and develop production Employment then helps thegovernment in means of expenditure by increasing the spending level amongconsumers Keynes’ theory was then proved again by the reign of the GreatDepression in the US Employment rates flared with the preparation for WWII byincreasing government expenditure “In light of these developments, the Keynesianexplanation of the Great Depression was increasingly accepted by economists,historians, and politicians”.

Monetarist Explanation: followed by the explanation by Milton Friedman

and Anna J Schwartz’ “A Monetary History of the United States 1867–1960”(1963), many people argued that the Great Depression was initiated due to thebanking crisis resulting in one-third of all banks to fade with a vast disappearance ofshareholder wealth and most important money shrinkage of 35 percent Deflation as

in the latter event raised by 33 percent Great Depression thereby developed from anormal recession with no intervention from Federal Reserve with interest rates,liquidity and monetary base In other way, Friedman argued that were actions by theFederal Reserve been performed, the stock market crash would have been solvedand the Great Depression would not have happened

With no aid from the Federal Reserve, some large public banks went bankrupt,leading to the widespread of fear and collapse of local banks Friedman blamed theFederal Reserve inactive attitude, claimed that with a loan to these key banks, orsimply buyings of government bonds on the open market in order to increaseliquidity and quantity of money after such banks failed, falling of all other bankswould have been halted, and money supply could have been saved

Businesses find themselves in hard time as loans or loan renewal were notallowed by the lack of money in flow, restricting investment from happening

Federal Reserve was criticized for such stagnancy, especially in the New YorkBranch.

Gold standard was the first to explain for the idling of Federal Reserve.Federal Reserve Act set a limit at the amount of credit Federal Reserve could issue

by that time, which required 40% gold backing of Federal Reserve Notes issued Inthe last half of 1920s, the limit for credit set as stated above was almost exceededbefore the gold in the possession could back it Such credit was in the form ofFederal Reserve demand notes A "promise of gold" was not as reliable as "gold inthe hand", especially when they barely had sufficient gold to cover 40 percent ofthe Federal Reserve Notes

2.2.2 Specific Reasons

According to an article on ic.galegroup.com causes of the Great Depressionare due to the followings

Overproduction : Agriculture sector did not enjoy prosperity during the

1920s while manufacturing slowly drowned itself until the beginning of the GreatDepression Farming was vastly encouraged ever since the broke out of WWI,under the management of Herbert C Hoover as the Fed Government foodadministration Production of the sector had always been excessive during the war

in order to supply the troops in both America and Europe, which at the time wasgreatly disrupted and not self-sufficient The war boosted yield largely, from690,000 bushels of wheat yearly to 945,000 bushels per year However, after thewar when agriculture was at the fast pace of development, many European countriessoon found their way around and stopped importing food from the US while manyothers found themselves unaffordable for US food due to postwar hardship.Moreover, global competition is growing in heat Nevertheless, agriculturalproduction of the US remained high Farmers produced too much more than theycould sell Prices in farming products declined dramatically

Calvin Coolidge ( US president 1924-1929) paid little effort to improve thesituation as he did not regard farming an important sector The Congress also failed

in protecting domestic farmers in competition As a result 1920s showed no hopefor farmers They had to borrow for seeds and equipments Most took homes andlands as mortgages But food prices kept falling, and the debt grew hopelessly forfarmers Their loans quickly became hard to collect and affected local banks From

1921 to 1929 as many as six hundred banks collapsed every year (compared tosixty-six a year 1910=-1919), most of which are rural banks By late 1920s,American Farm families, taking up to a quarter of population, were deeply introuble

Contrary to farmers, manufacturers enjoyed the economy until the end of theperiod Six years from 1923 output of manufactured goods pumped up 32 percent.New and advanced technology boosted productivity As a result, profit poured inwith more and more goods produces and Electrification widespread all over the UScreated opportunity for the new market of electric appliances to thrive MostAmerican still found their budget out of everyday necessities such as food andpower to buy new cars, equipments and electric stuffs Credit, or installment buyingwas popular A small beforehand payment (down payment) was made; the rest will

be paid off through time Such method was never practised until the late 1920s.Before that people only accepted cash in hand before purchase However, even withinstallment plans, there was still a limit on how much a person could afford with somany appliances available but needs did not state Demand grew narrow By 1929factories stopped receiving orders from the stores full of inventories and stocks.Overproduction was experienced and manufacturers had to cut down output.Workers from factories were forced to quit even before the major disaster The morepeople unemployed after 1929 meant less luxury goods desired Goods remained instocks of warehouses and stores Manufacturing faced stagnancy and had to cutdown employees while less people could afford manufactured goods

Concentration of Wealth : In his book published in 1992 called Anxious

Decades: America in Prosperity and Depression, Michael E Parrish stated thatAmericans did not share the prosperity of 1920s equally with each other Obviously

there happened a phenomenon called maldistribution in the period, which means avery uneven distribution of wealth Maldistribution was experienced muchthroughout history: while many struggle with little or not much possession of thecurrent status, a few hold a great deal of wealth and keep as personal belongings.The US before 1929 was an example Only top 0.1 percent of American familieshold the income equal to the aggregate income of the bottom 42 percent of thepopulation Between 1920 and 1929 the disposable income (money beyond what isneeded for necessities) per person rose by 9 percent for most Americans, but the top

1 percent of the population saw a 75 percent increase Concerning wealth (notincome, but all forms of material goods that have money value), the maldistributionwas even greater than it was for income: The top 2.3 percent of families withincomes of over $10,000 held 66 percent of all savings In 1929 just prior to thestock market crash, of America's 27.5 million families, 78 percent—21.5 million—were not able to save anything after necessities were purchased These 21.5 millionearned under $3,000 a year Six million earned less than $1,000 yearly The rootcause of the Great Depression was a global overinvestment while the level of wagesand earnings from independent businesses fell short of creating enough purchasingpower It was argued that government should intervene by an increased taxation ofthe rich to help make income more equal With the increased revenue thegovernment could create public works to increase employment and ‘kick start’ theeconomy In the USA the economic policies had been quite the opposite until 1932.The Revenue Act of 1932 and public works programs introduced in Hoover's lastyear as president and taken up by Roosevelt, created some redistribution ofpurchasing power

Gold Standard: The harshness of Gold Standard was indicated to be the first

reason for the worsening of Great Depression worldwide Gold Standard waspractically banned in almost every nation during the crisis, as it was dedicated asthe solution to improve the situation, starting with the Great Britain While Poundwas theoretically under threats and gold reserves was pouring fast, the British

Government decided to cease gold convertibility into currency in order to savePound in foreign exchange market Alongside with Japan and North of Europe theysuccessfully left gold standard in 1931, while other nations, like Italy or the U.S.,maintain the gold standard until 1932 or 1933, followed later by while nations so-called "gold bloc", including France ,Poland, Switzerland and Belgium, where GoldStandard survived until mid 1930s.

According to later analysis, the timing at which a country decided to ban goldstandard is dedicated to the recovery of such The Great Britain and Scandinavian,who pioneered in gold standard abolishment in 1931, got back in pace sooner thanFrance and Belgium, who delayed such process for a couple of years Asian nationssuch as China, of which standard is silver, had the chance to evade the crisis fromthe beginning Gold Standard, as shown in the analysis of several countries whowas affected by the event, had strong bond with the time and intensity of theDepression It is a main reason for the difference in level of damage as well as therecovery of each nation

2.3 The Damage caused by the Great Depression

2.3.1 The US drowning deep

In 1932 the United States economy stood at its lowest ebb in modern history

An army of out-of-work military veterans camped and marched in Washington, DC.Unemployment stood at around 25 percent Long lines of starved people waiting forfree food from charity organizations became popular Current situation of that timeguaranteed a dark future ahead

On Black Tuesday, October 29, more than sixteen million shares were tradedand stock-holders lost over $14 billion in just one single day The crash caused adevastating outcome to the U.S’ finance From September 1st and November 30th,

1929, stock market’s value dropped from $64 billion to $30billion, losing more thanone-half of its value And there are nothing could be done to stem the tide Thecrash happened in the stock market but it had affected not just a few Americans whoinvested in the stock market since 90% of all banks had invested in stock market A