01_causesof thegdepression

8/10/2019 01_Causesof theGDepression

1/56

Causes of

the Great Depression &

Hoovers Response

IB History of the Americas


2/56

Myths and Misconceptions

Many people believe that the crash of the stock market was thecause of the Depression. Not so, it was only a symptom.

Many people also believe that Herbert Hoovers laissez-faireconomic philosophy prevented the federal government fromtaking steps to prevent the crisis. Hoover was proactive in trying to

ease the impact of the depression, it was too little, too late.

Many people think that the Great Depression was the only majoreconomic crisis in U.S. history. Nope, but it was the worst.

Many people do not realize that the Depression was globalandaffected almost every capitalist economy on earth

Some believe that FDR and the New Deal ended the Depression.Wrong again, WWII ended he Depression


3/56

The Facts

In September of 1929 the U.S. economy began showing signs ofcontraction (decline from the growth of the 1920s)

August 1929, recession begins, GDP falls by and unemploymentrises.

Automobile sales fall 30% in 1929.

By 1929 farm incomes fall more than 50% September 1929 stock prices begin to fall, the market crash onBlack Tuesday October 29thlosing 90% of its value by 1932.

By 1932 US GDP fell 30%

1929-1932 US factory production fell 46%

1929-1932 US wholesale prices fell 32% 1929-1932 US exports fell 70%

1929-1932 US unemployment will reach 25% (33% in someregions)


4/56

US Unemployment 1910-1960

Abstract of the US Department of Labor


5/56

US GDP 1910-1960

Based on data from: Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP


6/56

US Farm Prices 1928-1932

US Bureau of Labor Statistics


7/56

US Industrial Production


8/56

US Stock Market 1928-1932

US Bureau of Labor Statistics


9/56


10/56

Many did not realize how severe the downturnwas until 1932, when the economy had

technically hit bottom.


11/56

Brother Can You Spare a Dime?

Once I built a railroad, I made it run

I made it race against time

Once I built a railroad, now it's done

Brother, can you spare a dime?

Once I built a tower, up to the sun

Bricks and mortar and limeOnce I built a tower, now it's done

Brother, can you spare a dime?


12/56

Causes of the Great Depression

Overproduction

Political DecisionsStock Market

Banking Practices& Fed Policies


13/56

1. Over-production


14/56

Overproduction The roaring twentieswas an era of great prosperity and

economic growth. Average output per worker increased 32% in

manufacturing and corporate profits rose 62%.

The availability of so many consumer goods, such aselectric appliances, radios and automobiles, offered to

make life easier. Americans felt they deserved to reward themselves after

the sacrifices of World War I. A return to normalcy.

This led to a high demand for such goods,so companies began to produce more and more, in orderto meet that demand.


15/56


16/56

Overproduction Mass advertisingfed mass consumptionto satisfy the

needs of mass production. Wages for labor remained stagnant (mechanization of

labor, Taylorism, suppression of union collectivebargaining). Businesses were investing profits in the stockmarket and not in workers wages. So.

The uneven distribution of wealth grows. 1922 1% of thepopulation owns 36.7% of the nations wealth by 1929 ithas grown to 44.2%

Eventually business produced more than consumers couldpurchase. You can only own so many radios, cars, andappliances.

August 1929 Recession begins, two months before thestock market crash. During this two month period,production fell 20%, wholesale prices at 7.5 %, andpersonal income fell 5%.


17/56

Farm Overproduction In 1929, Agriculture still makes up half of the US economy

During World War I, with European farms in ruin, theAmerican farm was a prosperous business.

Increased food production during World War Iwas aneconomic boom for many farmers, who borrowed moneyto enlarge and modernize their farms.

The government had also subsidized farms during thewar, paying high prices for wheat and grains.

When the subsidies were cut, it became difficult for manyfarmers to pay their debts when commodity prices

dropped to normal levels.


18/56

So Over production of consumer goods and

agricultural goods means Supply was greater than demand.

A surplus of goods in the market begins

to drive prices down. Declining prices means declining profits

Declining profits means stock values

(for corporations) begin to fall. Oh my!!!


19/56

2. Banking & Money Policies


20/56

The uneven distribution of

wealth didnt stop the poorand middle class fromwanting to possess luxuryitems, such ascars and radios

But, wageswere notkeeping up with theprices and that createdproblems!

Consumer Credit


21/56

Consumer Credit

One solution was to let products be purchased on credit. The concept of buying now and paying later

caught on quickly.

By the end of the 1920s, 60% of the cars and 80% of theradios were bought on installment credit.

Consumerism in the New Era saw a change in US buyingbehavior. Thrift, saving, and frugality were replaced withconsumption, and keeping up with the Jones


22/56

The Federal Reserve Board

The Federal Reserve Boardwas created by Congress in 1917 inresponse to the Banking Crisis of 1907.

The Fed was created as the US central bank with two primaryfunctions:

1) Regulate and inspect the nations commercial banks,

by assuring banks had sufficient cash reserves 2) Regulate the amount of money circulating in the

economy. Known as Monetary Policy

To stimulate growth the Fed increases money in circulation bylowering interest rates for member banks, and decrease in the

amount of money banks are required to keep in reserve


23/56

The Federal Reservewas suppose to serve as aprotective watchdogof the nations economy.

It had the power to set the interest ratefor loansissued by banks.

In the 1920s, the Fed encouraged buying on credit by

lowering interest rates (discount rate)

Eventually so many people were buying on credit thatinflation increased.

Fed Monetary Policy


24/56

By 1929 the Fed decided to slow the rapid

(runaway?) growth by increasing interest rates. Raising interest rates means that it cost more to

borrow and raises the price of existing debt.

So. People borrowed less and purchased fewergoods.

They also started using available cash to pay offdebt and therefore purchased fewer goods.

Less demand = surplus goods = deflation =declining profits = declining stock prices = risingunemployment

Oh my!

So


25/56

3. STOCK MARKET ACTIONS


26/56

The Stock Market

The Stock Market is seen as an indicator of the nationseconomy.

In reality it is only and index of the value of corporatestocks based primarily on the market demand for aparticular stock

As an investment the goal is to buy low and sell high. The value of stocks soared in the 1920s as corporate

profits rose, fueled by mass consumption. (Fueled bycredit, shhhhhh!!!)

Once a rich mans game, everyone was in the marketin

the 20s Optimism was high, and speculation was rampant


27/56

Stock Market: Buying on

Margin

Buying on the margin means that you can purchaseshares with a don payment.

The Margin Requirement in 1926 was 10%. So a $100share of stock could be yours with only a $10 downpayment

Speculatorsexpect the value of the stock to go up in priceenough (at least 90% to break even) covering thebalance.

Buying on the margin encouraged thousands of smalltime, new (inexperienced) investors to purchase stocks

As long as corporations were selling goods and turning aprofit stock prices rose and buying on the margin wassafe.

As long as


28/56

George Olsen

"I'm In The Market For You

I' l l have to see my b roker

Find out what he can do.

'Cause I'm in the market for you .With margin I'm al l through .

'Cause I want you ou tr igh t i t 's true.

We'l l coun t the hugs and kisses,When d ividends are due,

'Cause I'm in the market for you .


29/56

Stock Market: Banks &

Margins

In 1927 banks did two stupid, greedy things 1) Banks began letting customers borrow money to buy

stocks and used the customers stock holdings ascollateral for the loan.They gave money to people with no money to gamble

2) Banks started to use depositors money to speculate in thestock market. Normally banks pay you interest for savings.Then they loan it to businesses or families that were goodrisks to buy homes or start companies etc.

Not speculate in the market! By 1929, banks had made billions of dollars in risky loans

with little collateral to back them up if borrowers defaulted.


30/56


31/56

Stock Market Crash

Black Tuesday, October 29th

1929. The market bubble bursts with a panic sell off of 16 million

shares of stock.

Investors lose 26 billion dollars (312 billion in 2010 dollars)

The crash was not a one day event, stocks falling in September.

Wealthy investors stepped in a bought up shares at bargainprices.

Those who bought on margin, however, panicked.

It is impossible to know exactly what caused the initial panic butthe market crash exposed the other problems in the economysetting into motion a deep lack of confidence in the economy.


32/56


33/56

So

Banks made risky loans to borrowers tobuy stocks on the margin.

Banks used depositors money to

speculate in the market When panic shook the market, the

banks were left holding the bag

Oh my


34/56

4. Bad Fed Banking Policies

With the loss of confidencein stocks, people began tolose confidence in the security of their money being heldin banks.

Customers raced to their banks to withdraw their savings.(k.a. bank run)

Customers closed accounts and banks were left withoutcash reserves putting them on the brink of failure.


35/56


36/56

4. Bad Fed Banking Policies In its regulatory role, the Federal Reservewas also

established to prevent bank closings. It was suppose to serve as the lender of last resortto

banks on the verge of collapsing.

However,

The Fed lowered the reserve requirement for banks, so

the banks did not have the cash to cover customerwithdrawals. And the Fed did not provide short term loansto banks to cover the loses.

1930 the Fed cuts interest rates from 6% to 4% in attemptto increase the money supply

So

Banks started to close, increasing the panic.

1930, 60 banks fail every month, by 1933 over 9,000banks fail (40% of the 1929 total)


37/56

So

The Fed fails to manage the bank andcurrency crisis.

Depositors now hide their money athome and banks have no money to lend

Banks close and large amounts ofmoney disappear from the economy


38/56

So

Less money = less consumption = less

production Businesses go bankrupt

People get laid off

Thus the economy begins an irreversibledownward spiral.

Banks close and large amounts of moneydisappear from the economy

By 1931, GNP falls by 18%,unemployment reaches 16%(8 million)


39/56

4. Bad Political Decisions:


40/56


41/56

The sole function of thegovernment is to bring abouta condition of affairsfavorable to the beneficialdevelopment of privateenterprise.

~Herbert Hoover (1930)

The Fed will stand by as themarket works itself out:Liquidate labor, liquidatestocks, liquidate real estatevalues will be adjusted, andenterprising people will pick

up the wreck from less-competent people."

~ Andrew Mellon (1930)


42/56

Hoovers Political Decisions

Contrary to popular historyHoover commitment to laissezfair made the Depression worse

Hoover initiated several

programs to help the economyrecover but it was too little, toolate

Hoover favored volunteerism, or

cooperation between businessand government over coercivepolicy


43/56

Hoovers Political Decisions Hoover promoted

volunteerism. Cooperationbetween government andbusiness instead of coercivepolicies.

He showed some pro-laborpolicies:

Asked business leaders tohold wages steady eventhough profits were falling

Authorized repatriation for50,000 Mexicans (andMexican-Americans) to easeunemployment and cut therelief rolls in California


44/56


Hoover promoted volunteerism to prop up failing banks.

National Credit Corporation / Reconstruction FinanceCorporation (RFC)

1931, Hoover urged the larger (East Coast) banks to

provide low interest loans to struggling rural banks

Large banks were unwilling to offer loans without holdingthe smaller banks most valuable collateral.

RFC failed to help the smaller banks.


45/56


Rising unemployment led tohomeowners defaulting onmortgages and renters beingevicted from apartments.

The homeless settled inshanty towns calledHoovervilles

1932, Federal Home LoanBank Act, was passed tospur new home construction,and reduce foreclosures.

Foreclosures dropped brieflyin late 1932.


46/56


The Revenue Act of 1932reversed the Mellon tax cuts.Increase taxes on struggling corporations and the wealthy= more money in the federal treasury to fund aid withoutdeficit spending (more on this later)

Emergency Relief and Construction Act of 1932. federalmoney funneled to states to start public works projects(roads, drainage, schools) to put people back to work

Problem, it is not that easy to spend large amounts of moneyquickly on shovel-ready projects

Federal money trickled into states as the problem ofunemployment grew exponentially


47/56

Signing the Smoot-Hawley Tariff

Revenue Act of 1932

Balancing the budget

Hoovers Three Biggest

Mistakes


48/56

The Smoot-Hawley Tariff was signed (reluctantly) byHoover in 1932

It came on top of the Fordney-McCumber Tariff of 1922,which had already put American agriculture into a tailspin.

Smoot-Hawley raised tariffs by 50%

Congress believed the tariff would make imports tooexpensive and Americans would buy American goods,increasing demand

European countries retaliated with their own tariffs and

U.S. exports fell by almost 70%

Hoover & Smoot-Hawley


49/56

The trade war cost American farmers 1/3 of their marketcausing agricultural prices to fall and putting more farmersinto bankruptcy.

Tariffs damaged an already shaky economy in Germany.

Germany begins to default on reparations payments to

England and France required by the Versailles Treaty France and England fall behind in their payments on loans

from U.S. banks (used to buy weapons during WWI)

Weakening large U.S. banks

Hoover & Smoot-Hawley


50/56

Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934

0

1

2

3

4

5

6

7

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

B

illionsofNominalDollars

Exports

Imports

Revenue Act of 1932 &


51/56

Concern over growing deficits Congress passes and Hoover

signs the Revenue Act of 1932 The act reversed Mellons tax cuts.

Raising business taxes from 12% to 13.75%

Raised taxes on every bracket

Lower income brackets increases form 1% to 4%

Raised taxes on the wealthy from 24% to 64%

The problem with raising taxes is that it takes money out of theeconomy.

Business facing lower profits had to now pay more taxes. To cutcost they laid off workers

Since nothing seemed to help the economy, Hoover andCongress decided to balance the Federal budget.

Cut spending (ex. veterans benefits)

This shrunk the money supply even more

Revenue Act of 1932 &

Balancing the Budget


52/56

So


53/56

Hoover was not the laissez-fairie

He supported government actions toease the crisis

But

It was not enoughAnd

He fell back on conservative economicpolicy and tried to balance the budget

Smoot-Hawley

Ohhh.!!!

So

L t R i


54/56

Lets Review

Overproduction

Stagnant wages

Federal monetary policy

Banking practices - Stock market

Political decisions


55/56

Next. The FDR Mystique


56/56

01_causesof thegdepression

Documents