The Economics of the The Economics of the Great DepressionGreat Depression

Mr. BrinkMr. Brink

United States HistoryUnited States History

12.112.1

Optimism Sweeps Optimism Sweeps Hoover to VictoryHoover to Victory

Why popular?Why popular?– 1.1.

– 2.2.

– 3.3.

What is a Depression?What is a Depression?

A severe economic A severe economic downturn.downturn.–High UnemploymentHigh Unemployment–Low GNP (Gross Low GNP (Gross National Product).National Product).

What is GNP?What is GNP?

Gross National Product Gross National Product is a measurement of the is a measurement of the total value of goods and total value of goods and services produced by a services produced by a nation.nation.

The stock market:The stock market: the public invests in the public invests in

cos. by purchasing cos. by purchasing stocks; in return for stocks; in return for this they expect a this they expect a profitprofit

b/c of booming 1920's b/c of booming 1920's economy, $ were economy, $ were plentiful, so banks plentiful, so banks were quick to make were quick to make loans to investors loans to investors

also investors only also investors only had to pay for 10% of had to pay for 10% of the stock's actual the stock's actual value at time of value at time of purchasepurchase– this was known as this was known as

BUYING ON BUYING ON MARGINMARGIN, and the , and the balance was paid at balance was paid at a later datea later date

this encouraged this encouraged STOCK STOCK SPECULATIONSPECULATION - people - people would buy and sell stocks would buy and sell stocks quickly to make a quick quickly to make a quick buckbuck

b/c of all this buying & b/c of all this buying & selling, stock value selling, stock value increased (Ex: G.E stock increased (Ex: G.E stock $130 $130 $396/share) $396/share)

this quick turnover didn't this quick turnover didn't aid cos. aid cos. they needed long they needed long term investments so they term investments so they could pay bills (stock value could pay bills (stock value was like an illusion)was like an illusion)

unscrupulous traders would unscrupulous traders would buy and sell shares buy and sell shares intentionally to inflate a intentionally to inflate a given co.'s stock valuegiven co.'s stock value

all of this gave a false sense all of this gave a false sense of security/confidence in the of security/confidence in the American marketAmerican market

1920's had been a period of good 1920's had been a period of good economic times economic times

Tues. Oct. 29th, 1929Tues. Oct. 29th, 1929 - NYC - NYC Stock market crashed, causing Stock market crashed, causing a depression that would last a depression that would last until 1942until 1942

Stock Market Crash

The Reality of the The Reality of the Great DepressionGreat Depression Hundreds of banks close which Hundreds of banks close which

wipes out billions in savings.wipes out billions in savings. In 1933In 1933

– 364,000 farms went bankrupt364,000 farms went bankrupt– GNP had decreased by 40%.GNP had decreased by 40%.– Unemployment Rate = 25%Unemployment Rate = 25%

Cause #1: Stock Market Cause #1: Stock Market CrashCrash Many investors were buying on marginMany investors were buying on margin

– Paying for only part of the stock and Paying for only part of the stock and borrowing the rest from the borrowing the rest from the stockbroker.stockbroker.

– If the stock goes up, you make $ and If the stock goes up, you make $ and can pay back the loan.can pay back the loan.

– But if the stock goes down you will But if the stock goes down you will lose $ and may not be able to pay lose $ and may not be able to pay back the loan.back the loan.

Also called speculation.Also called speculation.

Cause #1: Stock Market CrashCause #1: Stock Market Crash As more speculators entered As more speculators entered

the market, stocks became the market, stocks became over-valued.over-valued.

When the economy slowed, When the economy slowed, big investors started to pull big investors started to pull their money out of the their money out of the market.market.

This caused a panic (a sudden This caused a panic (a sudden massive sell off of stocks).massive sell off of stocks).

Cause #1: Stock Market CrashCause #1: Stock Market Crash On Black Tuesday (October On Black Tuesday (October

29, 1929), the Dow fell by 29, 1929), the Dow fell by 40% and $30 billion was lost.40% and $30 billion was lost.

Many investors went Many investors went bankrupt.bankrupt.–Some committed suicide.Some committed suicide.

This is the official start of the This is the official start of the Great Depression.Great Depression.

The Big CrashThe Big Crash

beginning in Oct. beginning in Oct. 1929, investors’ 1929, investors’ confidence dropped, confidence dropped, leading to a leading to a market collapsemarket collapse

all tried to sell at all tried to sell at once and bottom once and bottom fell out of market = fell out of market = panic sellingpanic selling… … (many bankruptcies (many bankruptcies as banks called in as banks called in loans)loans)

only a tiny minority only a tiny minority of people traded on of people traded on the stock exchange, the stock exchange, but they possessed but they possessed vast wealth, and vast wealth, and the crash had a the crash had a ripple effect ripple effect on the on the economy economy

Cause #2: Economic Cause #2: Economic Overconfidence Overconfidence

Business Cycle: Business Cycle: periodic regular up periodic regular up and down movement and down movement in the economy.in the economy.

The Business CycleThe Business Cycle

Great Depression Business Great Depression Business CycleCycle

Cause #2: Economic Cause #2: Economic OverconfidenceOverconfidence

The government and The government and individuals defied the individuals defied the business cycle in the business cycle in the 1920s – many thought the 1920s – many thought the economy would continue economy would continue to go up.to go up.

Cause #3: Wealth Cause #3: Wealth DistributionDistribution In 1929,In 1929,

– The top 5% of the U.S. The top 5% of the U.S. received 70% of the nation’s received 70% of the nation’s income.income.

– Thus, little money trickled-Thus, little money trickled-down to the common laborers down to the common laborers in the form of higher wages or in the form of higher wages or lower prices for products.lower prices for products.

Cause #3: Wealth Cause #3: Wealth DistributionDistribution

The rich can only buy so The rich can only buy so many cars, houses, etc.many cars, houses, etc.

Lower consumer spending Lower consumer spending led to less need for labor.led to less need for labor.

The rich put their excess The rich put their excess money into the stock money into the stock market, causing market, causing overvaluation.overvaluation.

Cause #4: Credit Cause #4: Credit SpendingSpending

Too many consumers were Too many consumers were buying products on credit.buying products on credit.

As bankruptcies rose, As bankruptcies rose, fewer businesses extended fewer businesses extended credit.credit.

This led to less consumer This led to less consumer spending = fewer products spending = fewer products bought = fewer jobs.bought = fewer jobs.

UnemploymentUnemployment

For the poor.......For the poor....... mass mass

consumption was consumption was already low (poor already low (poor could afford to could afford to buy little)buy little)

unemployment unemployment rose rose no gov't no gov't assistance at firstassistance at first

since people since people could not buy, could not buy, productivity was productivity was cut back = cut back = further unemp.further unemp.

so w/ additional so w/ additional unemployment unemployment purchasing power purchasing power declined again declined again reduced reduced productivity yet productivity yet again (= again (= ECONOMIC ECONOMIC CYCLECYCLE))

UnemploymentUnemployment

Purchasing PowerPurchasing Power ProductivityProductivity

Cause #5: Industrial Cause #5: Industrial OverproductionOverproduction

Products such as cars Products such as cars and ovens are durable and ovens are durable goods (they last a long goods (they last a long time).time).

As factories started to As factories started to have a surplus of have a surplus of products, they started to products, they started to lay off workers.lay off workers.

Cause #6: Agricultural Cause #6: Agricultural OverproductionOverproduction

Farmers had huge surpluses of Farmers had huge surpluses of crops, and they would take a loss crops, and they would take a loss if they sold them on the private if they sold them on the private market.market.

Government (laissez-faire) would Government (laissez-faire) would not buy their surplus crops.not buy their surplus crops.

Farmers lost huge amounts of Farmers lost huge amounts of money and some even burned money and some even burned their crops in protest.their crops in protest.

Cause #7: Bank Cause #7: Bank FailuresFailures Banks make money by loaning out Banks make money by loaning out

the money of their depositors.the money of their depositors. Banks were making risky Banks were making risky

investments as well (stock investments as well (stock market).market).

Bank Runs – panicked investors Bank Runs – panicked investors try to withdraw their money from try to withdraw their money from banks, but the banks do not have banks, but the banks do not have enough money left.enough money left.

Bank Failures Bank Failures

A Depression Era Bank A Depression Era Bank RunRun

Cause #8: Federal Cause #8: Federal ReserveReserve

The Federal Reserve is the The Federal Reserve is the Central Bank of the United Central Bank of the United States.States.

It is an independent It is an independent government agency government agency –Its chairman is appointed Its chairman is appointed by the President.by the President.

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Federal Reserve ClevelandCleveland

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Monetary Federal Reserve Monetary Policy:Policy:– Reserve Requirement – the Reserve Requirement – the

amount of money banks must amount of money banks must keep in reserve to satisfy keep in reserve to satisfy withdrawals (not lend out).withdrawals (not lend out).Member banks could not Member banks could not satisfy the withdrawal needs satisfy the withdrawal needs of bank runs.of bank runs.

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Monetary Policy:Federal Reserve Monetary Policy:– Discount Rate: the amount of Discount Rate: the amount of

interest the Fed charges banks for interest the Fed charges banks for borrowing money from them.borrowing money from them.Influences interest rates for Influences interest rates for other loans across the nation.other loans across the nation.

In the early 1930s, the Fed In the early 1930s, the Fed would not adjust the discount would not adjust the discount rate and allowed banks to fail in rate and allowed banks to fail in mass.mass.

Hawley-Smoot TariffHawley-Smoot Tariff

Effects of the CrashEffects of the Crash

IndividualsIndividuals

BanksBanks

BusinessBusiness

OverseasOverseas

EconomistsEconomists

John M. KeynesJohn M. Keynes– more government controlmore government control– Deficit spendingDeficit spending

HayekHayek