The Great Depression
1929-1940: Causes and Lessons
“Migrant Mother”
photo taken by
Dorothea Lange
1936 in CA
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Goals: SWBAT
Describe
major causes & conditions
of the GD
Analyze major causes of the GD
Apply economic concepts to the GD
Evaluate “lessons” from the GD
Apply lessons from the GD
Economic Concepts
Boom-Bust Cycle
Bull Market vs. Bear
Market
Recession and Depression
Inflation/Deflation
Unemployment
Economic Growth
Monetary Policy
Interest Rates
Fiscal Policy
Debt
The Stock Market Crash!
Tuesday,
October 29, 1929
Aka Black Tuesday!
16.4 million shares traded (normal
was 3 million)
Stock values fell 37 percent in Oct.
The Stock Market Crash caused
the Great Depression?
http://images.businessweek.com/ss/07/04/0426_dow/image/2_great_depression.jpg
The Stock Market Crash caused
the Great Depression?
Many
say not true
Cause vs. Symptom (ex: fuel gauge)
Initially, markets actually recovered
The Crash was a Psychological Blow
(see Behavioral Economics)
But only 2-4% traded in market
The Crash and Depression were
caused by larger, structural problems
What caused the Great
Depression?
Instability
in Economy
–Income, Taxes & Production
–Personal Debt & Margin Buying
–Government Policies (Fiscal
and Monetary)
–International Trade
Income, Taxes & Production in 1920s
The
“Roaring 20s”?
Income, Taxes & Production in 1920s
The
“Roaring 20s”?
Many were well off, but…
Depressed crop prices & wages
Increases in production
Unstable jobs
Demand for goods dropping
New housing down in 1927
Steel and car production down in ’29
Business inventories up
Income, Taxes & Production in 1920s
Tax
Cuts for Wealthy during decade
Top 5% earned over 1/3 of income
They were saving not spending
Treasury Secretary Andrew Mellon’s
laissez-faire “scorched earth” policy
Mellon: “Liquidate labor, liquidate
stocks, liquidate the farmer, liquidate
real estate” to help the economy
Why was Over Production a
Problem?
Personal Debt and Margin
Buying in ‘20s
People
wanted to buy, but no $
Installment plans
Borrow to buy/invest in stocks (“on
margin”) – 10% down
Stock prices didn’t reflect value
Growing personal debt
When market crashed, people
couldn’t “cover” – wealth vanished!
Run on Banks and Bankruptcies
Bank Failures
4500
4000
3500
3000
2500
2000
1500
1000
500
1944
1942
1940
1938
1936
1934
1932
1930
1928
1926
1924
1922
0
Government Policies: Fiscal
Herbert Hoover’s “hands off”
policies caused the GD?
Landslide
victory in 1928
Conservative Republican
“General Prosperity”
Keep tariffs high
Pay down govt. debt
Balance the budget
Keep inflation low
Keep govt. out of economy
http://www.tribbleagency.com/wp-content/uploads/2008/12/the-great-depression.jpg
Herbert Hoover’s “hands off”
policies caused the GD?
Herbert Hoover’s “hands off”
policies Caused the GD?
Not
completely true
Hoover encouraged businesses to
keep wages high
Agriculture Marketing Act (1929)
created Federal Farm Board
Reconstruction Finance Corp (1932)
for railroads and banks
Relief and Reconstruction Act (1932)
for public works ($1.5 billion) – but
credit went to FDR
Herbert Hoover’s “hands off”
policies Caused the GD?
Kept
promising recovery is
here!
Believed in hands-off govt
But did more than any
previous president
Too little, too late!
Hoovervilles
and Hoover Blankets
2
million migrants and “hobos”
13 million out of work by 1933
Bonus Army to DC in 1932
aka
Bonus Expeditionary Force
Great War Vets ask for early bonus
Hopeless, desperate families
Hoover sent in military killing a few
– General Douglas MacArthur
– Aide Dwight D. Eisenhower
– Major George Patton
Govt Policies: Fiscal (cont)
Tariff
made Recession worse
Smoot-Hawley Tariff (1930) raised
import taxes up to 50 percent
Farmers & consumers devastated!
Govt Policy: Fiscal
Why Were Tariff Rates Raised?
“Protect” businesses and jobs
Today we know this was a
Bad Idea!
Measuring Economic Growth
(See John Maynard Keynes)
Gross
Domestic Product
GDP = C + I + G + ( x – m )
C = Consumer spending
I = Investment spending
G = Government spending
x = exports, m = imports
C, I, G, and/or x go up = GROWTH!
Impact of Smoot-Hawley (1930)
and
Trade Agreements Act (1934)
Billions of Nominal Dollars
Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934
7
6
5
4
Exports
Imports
3
2
1
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
International Trade
Smoot-Hawley
Tariff (1930)
Britain set “imperial preference”
Austria’s Credit Ansalt Bank
failed on May 11, 1931
Germany’s Danat Bank
suspended operations on July 13,
1931
Germany still paying Great War
reparations; Allies still paying
debt
International Trade
1929
Global Trade at $36 billion
1933 Global Trade at …..
International Trade
1929
Global Trade at $36 billion
1933 Global Trade at $12 billion
Billions of Nominal Dollars
Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934
7
6
5
4
Exports
Imports
3
2
1
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
Government Policies: Monetary
Federal
Reserve System (1913)
“Easy money” policy in 1920s
Low interest rates
Allowed Bank of United States to
fail on Dec. 11, 1930:
–Deposits of $268 million gone!
Maintain Gold Standard
Govt Policy: Monetary
Why
maintain the Gold Standard?
Stable, but very restrictive
What did it mean?
To maintain gold reserves, govt
had to RAISE interest rates and
CUT money supply – DISASTER!
Great Depression Numbers
1929-1931
failed
over 1.5 million mortgages
Great Depression Numbers
1929-1933
over 9,000 banks failed
Great Depression Numbers
1933
over 13 million out of work
(over 25%)
Great Depression Numbers
1929-1932
Stock Market lost 90%
Great Depression Numbers
Dow Jones Industrial Average
Sept
1929 – 381
July 1932 – 41
Dec 1954 finally reached 1929 level!
Great Depression Numbers
DJIA: Some perspective
May
1999 – above 11,000 for 1st time
2003 – down to 7,000
Oct. 2007 – up to 14,100
March 2009 – down to 6,500
Jan. 2011 – up to 11,891
Oct. 2011 – down to 10,400
Now – up to 12,660
Unemployment 8.5 percent (Dec. 2011)
FDR’s Inaugural Address on March 4, 1933
“…So first of all let me assert my firm belief that
the only thing we have to fear is fear itself –
nameless, unreasoning, unjustified terror which
paralyzes needed efforts to convert retreat into
advance.”
Lesson #1:
The
government must respond
to an Economic Crisis
But How?
John Maynard Keynes
Milton Friedman
John Maynard Keynes
“Father” of Macro Economics
The General Theory of Employment,
Interest and Money (1936)
aka: Demand-Side economics
Economic goals & measurement?
– Economic Growth (GDP)
– Employment (Unemp. Rate)
– Price Stability(Inflation Rate)
How to “guide” an economy?
– Fiscal and Monetary Policy
– Stimulate Demand during recession
30
1200
25
1000
20
800
15
600
10
400
5
200
0
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
Billions of Dollars
Percent
Great Depression
Unemployment
Real GDP
Lesson #2: from the 4 year old
“we were
ashamed”
“save your
money and
don’t
overextend
yourself”
http://www.cnn.com/2008/LIVING/12/02/dustbowl.photo/index.html
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