Let me first start with a little history. (1)
Pre-1929: The over-stimulated economic euphoria of the 1920s. (2)
Low margin requirements (10%) with low interest of less than 1% created speculation of continuous prosperity. Then the stock market collapsed, taking many people that owned stocks on margin to loose not only principle but to be negative in their assets.
1929-1933: Monetary Collapse caused by the Federal Reserve allowing the money stock (M1) to decline by 30%.
1930: The Demise of Trade manifested through the Smoot-Hawley Tariff Act created unemployment in the USA. It was a case of everyone wanting to promote their exports but not allowing imports and thus international trade dropped considerably during this period.
1932: “Marginal income tax rates were raised from 1.5% to 4% at the low end and from 25% to 63% at the top of the scale. A huge tax increase by any measure.” (2)
1933: Launching of the New Deal along with increasing the money supply and more regulation of security markets and deposit insurance initiated.
One of the economic advisors stated “This is the end of Western civilization” in reference to the US leaving the gold standard. But this allowed the US to control the money supply more closely.
1937-1938: Restrictive Monetary and Fiscal Policies created a jump in unemployment from 14.3% to 19.1. “The Federal Reserve tightened monetary policy by doubling the required reserve ratios on deposits.” (1, page 643) Fiscal policy was implemented by raising taxes and spending reductions.
1. Richard T. Froyen, 1986 Macroeconomics, Second Edition, Macmillan Publishing Company
2. What Caused the Great Depression of the 1930's?