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The terrible, terrible conditions which occurred in the United States and the rest of the world in the 1930's are known as the Great Depression. This depression was not only an economic catastrophe, it was social and political catastrophes as well. Its origins then and even now are notentirely clear. The document is an attempt to tell the story of theDepression in terms of statistics in the form of graphs and tables.
The first statistic for demonstrating the decline of the economy intodepression is the unemployment rate.
As the above graph indicates the economy descended from full employment inin 1929 where the unemployment rate was 3.2 percent into massive unemploymentin 1933 when the unemployment rate reached 25 percent. The first questionis why was there such high unemployment in 1933. The answer is that theeconomy was not producing (because it could not sell) as much output as itwas capable of producing. The output of an economy is measured by itsGross Domestic Product and the graph below shows the decline in productionfrom its high point in 1929 to its low point in 1933.
The decline in GDP, while dramatic, is not so spectacular as the explosionin the unemployment rate. This is because the umemployment rate representswhat is not produced that could be produced. A graph showing the percentageof the labor force employed would look much the same as the GDP graph. Whilethe Depression was a catastrophe it is well to keep in mind that at worst75 percent of the labor force was employed. But, the important question iswhy production had fallen off so much in 1933 compared with 1929. Here itis instructive to look at the components of the demand for the nation'soutput. The output is purchased by consumers, business investors, governmentsand foreign buyers as exports. The purchases of U.S. output by foreignbuyers is offset by American purchases of foreign production as imports.A glance at the table below tells what was happening to the components ofdemand.
| YEAR | GDP | CON SUMP TION | INVEST MENT | GOVERN MENT PUR CHASES | EXPORTS | IMPORTS | NET EXPORTS |
| 1929 | 790.9 | 593.9 | 92.4 | 105.4 | 35.6 | 46.3 | -10.7 |
| 1930 | 719.7 | 562.1 | 59.8 | 116.2 | 29.4 | 40.3 | -10.9 |
| 1931 | 674.0 | 544.9 | 37.6 | 121.2 | 24.4 | 35.2 | -10.8 |
| 1932 | 584.3 | 496.1 | 9.9 | 117.1 | 19.1 | 29.2 | -10.1 |
| 1933 | 577.3 | 484.8 | 16.4 | 112.8 | 19.2 | 30.4 | -11.2 |
The above table indicates that consumer purchases fell somewhat, governments'purchases did not fall but there was a collapse of investment purchases. Exportsfell but imports fell as well so that there was not much of a change innet exports. It is investment purchases, the purchases of equipment andbuildings and inventory, which is the dramatic case, as shown below.
Consumer purchases fell also but this may have been an effect of the Depressionrather than a cause of it. People's incomes fell and quite naturally theyreduced their purchases. It is therefore reasonable to look into thecollapse of investment purchases for an explanation of the causes of theDepression. The collapse of investment purchases can be considered theimmediate cause of the Depression. The next question is why did investmentpurchases collapse so dramatically.
Interest rates affect investment. They are not the only thing thatdetermines the amount of investment and are not necessarily even the mostimportant determinant of investment but they do affect investment and sointerest rates need to be considered. The important thing concerning theaffect of interest rates on investment is that it is not the nominalinterest rate that is important but instead the interest rate relative tothe rate of inflation, the so-called real interest rate. The real interestrate is roughly the difference between the nominal rate and the rate ofinflation. The problem in the early 1930's was that the rate of inflationwas negative; i.e., there was deflation instead of inflation.
| YEAR | PRICE INDEX | RATE OF INFLATION % | NOMINAL INTEREST RATE % | REAL INTEREST RATE % |
| 1929 | 13.12 | -1.15 | 5.85 | 7.00 |
| 1930 | 12.60 | -3.96 | 3.59 | 7.87 |
| 1931 | 11.34 | -10.00 | 2.64 | 14.04 |
| 1932 | 10.05 | -11.38 | 2.73 | 15.92 |
| 1933 | 9.78 | -2.96 | 1.73 | 4.54 |
As the above table shows the nominal interest rate was declining over thecourse of the decline but because the rate of inflation was negative thereal interest rate was much higher than the nominal interest rate. Thefollowing graph shows the trends.
The high real interest rate which came as a result of deflation couldhave been a major factor in the collapse of investment which was theimmediate cause of the Depression. To find a cause of the deflation inthe early 1930s we should look at monetary policy and the money supplyduring those years. Here is the record of the quantites of money beforeand during the decline into the Depression.
M1 is the money supply including currency and demand deposits (checking accounts).M2 is M1 plus the savings account deposits. As can be seen, after 1929 all but one of thequantities declined at increasing rates. The amount of currency in circulation actuallyincreased but it is such a small component of the money supply its increase was of nosignificance.
The significance of the money supply is its correlation with the price level. Here is thecorrelation of M2 with te consumer price index.
For more details on the money supply and the Depression see Monetary Policy and theMoney Supply
Appendix
| YEAR | GDP | CON SUMP TION | INVEST MENT | GOVERN MENT PURCHASES | EXPORTS | IMPORTS | NET EXPORTS |
| 1929 | 790.9 | 593.9 | 92.4 | 105.4 | 35.6 | 46.3 | -10.7 |
| 1930 | 719.7 | 562.1 | 59.8 | 116.2 | 29.4 | 40.3 | -10.9 |
| 1931 | 674.0 | 544.9 | 37.6 | 121.2 | 24.4 | 35.2 | -10.8 |
| 1932 | 584.3 | 496.1 | 9.9 | 117.1 | 19.1 | 29.2 | -10.1 |
| 1933 | 577.3 | 484.8 | 16.4 | 112.8 | 19.2 | 30.4 | -11.2 |
| 1934 | 641.1 | 519.0 | 31.5 | 127.3 | 21.4 | 31.1 | -9.7 |
| 1935 | 698.4 | 550.9 | 58.0 | 131.3 | 22.6 | 40.7 | -18.1 |
| 1936 | 790.0 | 606.9 | 75.5 | 152.5 | 23.7 | 40.2 | -16.5 |
| 1937 | 831.5 | 629.7 | 94.0 | 147.0 | 29.9 | 45.3 | -15.4 |
| 1938 | 801.2 | 619.5 | 61.3 | 157.8 | 29.6 | 35.2 | -5.6 |
| 1939 | 866.5 | 654.0 | 79.5 | 171.8 | 31.2 | 36.9 | -5.7 |
| 1940 | 941.2 | 688.0 | 111.3 | 174.2 | 35.4 | 37.8 | -2.4 |
| 1941 | 1101.8 | 737.1 | 137.3 | 288.0 | 36.4 | 46.5 | -10.1 |
| 1942 | 1308.9 | 719.7 | 72.1 | 692.0 | 23.9 | 42.2 | -18.3 |
