The Great DepressionThe Great Depression1929-1940: Causes and Lessons1929-1940: Causes and Lessons

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““Migrant MotherMigrant Mother”” photo taken by photo taken by

Dorothea Lange Dorothea Lange 1936 in CA1936 in CA

Goals: SWBATGoals: SWBAT

Describe major causes & conditions Describe major causes & conditions of the GDof the GD

Analyze major causes of the GDAnalyze major causes of the GD Apply economic concepts to the GDApply economic concepts to the GD Evaluate Evaluate ““lessonslessons”” from the GD from the GD Apply lessons from the GDApply lessons from the GD

Economic ConceptsEconomic Concepts Boom-Bust CycleBoom-Bust Cycle Bull Market vs. Bear MarketBull Market vs. Bear Market Recession and DepressionRecession and Depression Inflation/DeflationInflation/Deflation UnemploymentUnemployment Economic GrowthEconomic Growth Monetary PolicyMonetary Policy Interest RatesInterest Rates Fiscal PolicyFiscal Policy DebtDebt

The Stock Market Crash!The Stock Market Crash!

Tuesday, October 29, 1929Tuesday, October 29, 1929 Aka Black Tuesday!Aka Black Tuesday! 16.4 million shares traded (normal 16.4 million shares traded (normal

was 3 million)was 3 million) Stock values fell 37 percent in Oct.Stock values fell 37 percent in Oct.

The Stock Market Crash caused The Stock Market Crash caused the Great Depression?the Great Depression?

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The Stock Market Crash caused The Stock Market Crash caused the Great Depression?the Great Depression?

Many say not trueMany say not true Cause vs. Symptom (ex: fuel gauge)Cause vs. Symptom (ex: fuel gauge) Initially, markets actually recovered Initially, markets actually recovered The Crash was a Psychological BlowThe Crash was a Psychological Blow

(see Behavioral Economics)(see Behavioral Economics) But only 2-4% traded in marketBut only 2-4% traded in market The Crash and Depression were The Crash and Depression were

caused by larger, structural problemscaused by larger, structural problems

What caused the Great What caused the Great Depression?Depression?

Instability in EconomyInstability in Economy– Income, Taxes & ProductionIncome, Taxes & Production– Personal Debt & Margin BuyingPersonal Debt & Margin Buying– Government Policies (Fiscal Government Policies (Fiscal

and Monetary)and Monetary)– International TradeInternational Trade

The The ““Roaring 20sRoaring 20s””??Income, Taxes & Production in 1920sIncome, Taxes & Production in 1920s

The The ““Roaring 20sRoaring 20s””? ? Many were well off, but…Many were well off, but… Depressed crop prices & wagesDepressed crop prices & wages Increases in productionIncreases in production Unstable jobsUnstable jobs Demand for goods droppingDemand for goods dropping New housing down in 1927New housing down in 1927 Steel and car production down in Steel and car production down in ’’2929 Business inventories upBusiness inventories up

Income, Taxes & Production in 1920sIncome, Taxes & Production in 1920s

Tax Cuts for Wealthy during decadeTax Cuts for Wealthy during decade Top 5% earned over 1/3 of incomeTop 5% earned over 1/3 of income They were saving not spendingThey were saving not spending Treasury Secretary Andrew MellonTreasury Secretary Andrew Mellon’’s s

laissez-faire laissez-faire ““scorched earthscorched earth”” policy policy Mellon: Mellon: ““Liquidate labor, liquidate Liquidate labor, liquidate

stocks, liquidate the farmer, liquidate stocks, liquidate the farmer, liquidate real estatereal estate”” to help the economy to help the economy

Income, Taxes & Production in 1920sIncome, Taxes & Production in 1920s

Why was Over Production a Why was Over Production a Problem?Problem?

Personal Debt and Margin Personal Debt and Margin Buying in Buying in ‘‘20s20s

People wanted to buy, but no $People wanted to buy, but no $ Installment plansInstallment plans Borrow to buy/invest in stocks (Borrow to buy/invest in stocks (““on on

marginmargin””) – 10% down) – 10% down Stock prices didnStock prices didn’’t reflect valuet reflect value Growing personal debtGrowing personal debt When market crashed, people couldWhen market crashed, people could

nn ’’t t ““covercover”” – wealth vanished! – wealth vanished!

Run on Banks and BankruptciesRun on Banks and Bankruptcies

Bank Failures

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Government Policies: FiscalGovernment Policies: Fiscal

Herbert HooverHerbert Hoover’’s s ““hands offhands off”” policies caused the GD?policies caused the GD?

Landslide victory in 1928Landslide victory in 1928 Conservative RepublicanConservative Republican ““General ProsperityGeneral Prosperity”” Keep tariffs highKeep tariffs high Pay down govt. debtPay down govt. debt Balance the budgetBalance the budget Keep inflation lowKeep inflation low Keep govt. out of economyKeep govt. out of economy

Herbert HooverHerbert Hoover’’s s ““hands offhands off”” policies caused the GD?policies caused the GD?

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Herbert HooverHerbert Hoover’’s s ““hands offhands off”” policies Caused the GD?policies Caused the GD?

Not completely trueNot completely true Hoover encouraged businesses to Hoover encouraged businesses to

keep wages highkeep wages high Agriculture Marketing Act (1929) Agriculture Marketing Act (1929)

created Federal Farm Boardcreated Federal Farm Board Reconstruction Finance Corp (1932) Reconstruction Finance Corp (1932)

for railroads and banksfor railroads and banks Relief and Reconstruction Act (1932) Relief and Reconstruction Act (1932)

for public works ($1.5 billion) – but for public works ($1.5 billion) – but credit went to FDRcredit went to FDR

Herbert HooverHerbert Hoover’’s s ““hands offhands off”” policies Caused the GD?policies Caused the GD?

Kept promising recovery is Kept promising recovery is here!here!

Believed in hands-off govtBelieved in hands-off govt But did more than any But did more than any

previous presidentprevious president Too little, too late!Too little, too late!

Hoovervilles and Hoover BlanketsHoovervilles and Hoover Blankets

2 million migrants and 2 million migrants and ““hoboshobos”” 13 million out of work by 193313 million out of work by 1933

Bonus Army to DC in 1932Bonus Army to DC in 1932 aka Bonus Expeditionary Force aka Bonus Expeditionary Force Great War Vets ask for early bonusGreat War Vets ask for early bonus Hopeless, desperate familiesHopeless, desperate families Hoover sent in military killing a fewHoover sent in military killing a few

– General Douglas MacArthurGeneral Douglas MacArthur– Aide Dwight D. EisenhowerAide Dwight D. Eisenhower– Major George PattonMajor George Patton

Govt Policies: Fiscal (cont)Govt Policies: Fiscal (cont) Tariff made Recession worseTariff made Recession worse Smoot-Hawley Tariff (1930) raised Smoot-Hawley Tariff (1930) raised

import taxes up to 50 percentimport taxes up to 50 percent Farmers & consumers devastated!Farmers & consumers devastated!

Govt Policy: Fiscal Govt Policy: Fiscal

““ProtectProtect”” businesses and jobs businesses and jobs

Today we know this was a Today we know this was a Bad Idea!Bad Idea!

Why Were Tariff Rates Raised?Why Were Tariff Rates Raised?

Measuring Economic GrowthMeasuring Economic Growth(See John Maynard Keynes)(See John Maynard Keynes)

Gross Domestic ProductGross Domestic Product GDP = C + I + G + ( x – m )GDP = C + I + G + ( x – m ) C = Consumer spendingC = Consumer spending I = Investment spendingI = Investment spending G = Government spendingG = Government spending x = exports, m = importsx = exports, m = imports C, I, G, and/or x go up = GROWTH!C, I, G, and/or x go up = GROWTH!

Impact of Smoot-Hawley (1930) Impact of Smoot-Hawley (1930) and and

Trade Agreements Act (1934)Trade Agreements Act (1934)

Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934

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International TradeInternational TradeSmoot-Hawley Tariff (1930)Smoot-Hawley Tariff (1930)Britain set Britain set ““imperial preferenceimperial preference””AustriaAustria’’s Credit Ansalt Bank failed s Credit Ansalt Bank failed

on May 11, 1931on May 11, 1931GermanyGermany’’s Danat Bank s Danat Bank

suspended operations on July 13, suspended operations on July 13, 19311931

Germany still paying Great War Germany still paying Great War reparations; Allies still paying reparations; Allies still paying debtdebt

International TradeInternational Trade1929 Global Trade at $36 billion1929 Global Trade at $36 billion1933 Global Trade at …..1933 Global Trade at …..

International TradeInternational Trade1929 Global Trade at $36 billion1929 Global Trade at $36 billion1933 Global Trade at $12 billion1933 Global Trade at $12 billion

Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934

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Government Policies: MonetaryGovernment Policies: Monetary

Federal Reserve System (1913)Federal Reserve System (1913)““Easy moneyEasy money”” policy in 1920s policy in 1920sLow interest ratesLow interest ratesAllowed Bank of United States to Allowed Bank of United States to

fail on Dec. 11, 1930:fail on Dec. 11, 1930:– Deposits of $268 million gone!Deposits of $268 million gone!

Maintain Gold StandardMaintain Gold Standard

Govt Policy: MonetaryGovt Policy: Monetary

Why maintain the Gold Standard?Why maintain the Gold Standard?Stable, but very restrictiveStable, but very restrictiveWhat did it mean?What did it mean?To maintain gold reserves, govt To maintain gold reserves, govt

had to RAISE interest rates and had to RAISE interest rates and CUT money supply – DISASTER!CUT money supply – DISASTER!

Great Depression NumbersGreat Depression Numbers 1929-1931 over 1.5 million mortgages 1929-1931 over 1.5 million mortgages

failedfailed

Great Depression NumbersGreat Depression Numbers 1929-1933 over 9,000 banks failed1929-1933 over 9,000 banks failed

Great Depression NumbersGreat Depression Numbers 1933 over 13 million out of work (over 25%)1933 over 13 million out of work (over 25%)

Great Depression NumbersGreat Depression Numbers 1929-1932 Stock Market lost 90%1929-1932 Stock Market lost 90%

Great Depression NumbersGreat Depression NumbersDow Jones Industrial AverageDow Jones Industrial Average

Sept 1929 – 381Sept 1929 – 381 July 1932 – 41July 1932 – 41 Dec 1954 finally reached 1929 level!Dec 1954 finally reached 1929 level!

Great Depression NumbersGreat Depression NumbersDJIA: Some perspectiveDJIA: Some perspective

May 1999 – above 11,000 for 1May 1999 – above 11,000 for 1stst time time 2003 – down to 7,0002003 – down to 7,000 Oct. 2007 – up to 14,100Oct. 2007 – up to 14,100 March 2009 – down to 6,500March 2009 – down to 6,500 Jan. 2011 – up to 11,891Jan. 2011 – up to 11,891 Oct. 2011 – down to 10,400Oct. 2011 – down to 10,400 Now – up to 12,660Now – up to 12,660 Unemployment 8.5 percent (Dec. 2011)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: Lesson #1: The government must respond to The government must respond to

an Economic Crisisan Economic CrisisBut How?But How?

John Maynard Keynes Milton Friedman

John Maynard KeynesJohn Maynard Keynes ““FatherFather”” of Macro Economics of Macro Economics The General Theory of Employment, The General Theory of Employment,

Interest and MoneyInterest and Money (1936) (1936) aka: Demand-Side economicsaka: Demand-Side economics Economic goals & measurement?Economic goals & measurement?

– Economic Growth (GDP)Economic Growth (GDP)– Employment (Unemp. Rate)Employment (Unemp. Rate)– Price Stability(Inflation Rate)Price Stability(Inflation Rate)

How to How to ““guideguide”” an economy? an economy?– Fiscal and Monetary PolicyFiscal and Monetary Policy– Stimulate Demand during recessionStimulate Demand during recession

Great Depression

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Lesson #2: from the 4 year oldLesson #2: from the 4 year old

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““we were we were ashamedashamed””

““save your save your money and donmoney and don’’t t

overextend overextend yourselfyourself””

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