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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