Ben Isaacs, who lived in Chicago during the depression, described what happened to him: "I was in business for myself, selling clothes on credit. ... But ... banks closed down overnight. We lost everything. ... I couldn't pay the rent. ... I sold it [the car] for $15 in order to buy some food for the family. ... I would bend my head low [in the relief line] so nobody would recognize me. ..." (The quotations in this article are from Hard Times: An Oral History of the Great Depression

A stock market crash

HOW DO WE GO FROM THIS TO THIS…?

A Depression

A severe and prolonged downturn in economic activity A recession that lasts two or more years increases in unemployment, a drop in available credit,

businesses producing less, bankruptcies and loan defaults high, reduced trade and commerce, value currency unstable

WHAT IS A DEPRESSION?

Foreseeable/LT Issues Unstable bc of speculation, buying on margin, no government regulation

Depression People lose savingsBanks lose profits invested in market-people & businesses do not have $ to invest!People are afraid to invest in good companies Stock market cannot rebound bc people not buying stock!

STOCK MARKET – THE TRIGGER

BANKING CRISIS

Foreseeable/LT Issues No regulation of banks; invested people’s money in stock market; gave out too many loans/credit; defaults started BF stock market crash.

Depression People FEAR banks and start withdrawing money (run on banks)money lost & banks cannot recoverSavings lost when banks go under, so cannot spend $People cannot get loans & no credit, so cannot expand businesses or buy stuff

Businesses

“HERE WAS THE ONE FROM JONES AND CO., SAYING ‘ PLEASE SHIP FIFTY THOUSAND OF YOUR NEW MODEL.”

Foreseeable/LT Issues Businesses invested in the stock marketUneven distribution of wealth meant people could not keep spending

Depression Cannot get loans from banksPeople have less money to spend People afraid to spend money Businesses cannot grow & cannot stay open without customers

BUSINESSES GOING OUT OF BUSINESS

Foreseeable/LT Issues all of the above

Depressionno jobs = cannot spend money businesses, cannot invest money in stock market, less money in bankspeople cannot put money in bank if people do not have money bc u/e

25% unemployed by 1933; more underemployed1932, wage cuts averaged 18%Even if have a job, still not enough money to revive the economy

HIGH UNEMPLOYMENT

More trade with other nationsInstead we increase tariffs (Smoot-HawleyTariff

1930) Less foreign trade Retaliatory tariffs!

WHAT COULD HAVE HELPED US?

The Ripple Effect…People lose money in the market and become scaredNo money to invest or afraid so market cannot recoverBC some banks go under people withdraw money from banks

so then everyone loses money & banks cannot recoverBC people do not have money to buy stuff and afraid to buy

businesses go underBC businesses go under people are unemployed so even less

people have money to spend: Businesses cannot recover Stock market cannot recover Banks cannot recover

THE ECONOMIC RIPPLE EFFECT

Why was this foreseeable?

How will this lead to a widespread Depression?

Class Notes

Stock Market Declines

Banks Fail

Businesses Failed

High U/E

Why Leads to a Depression

Stock Market Declines

Unstable bc speculation & buying on margin (margin call)– companies inflated values – (no knowledge) lack gov reg’l ($$$)Fear bc hear about brokers jumping off of buildings

People lose all of their money (life savings)Banks invested in market – banks go under No one wants to invest in good companies bc afraid – market cannot rebound (less money to do it to)AS banks go under more businesses fail, stock price plummets

Banks Fail

No regulations on banks – loaned out tons of money (no guaranteed amount banks need to keep on hand)banks invested other people’s money in stock market based on assumption – market good & not all take out same timeloaned/credit a lot of money to people – could not pay back (lose house what bank do with it???)

During the 20s, there was an average of 70 banks (600?) failing each year nationally (west)the first 10 months of 1930, 744 banks failed – 10 times as many. In all, 9,000 banks failed during the decade of the 30s. By 1933, depositors saw $140 billion disappear through bank failures.Some banks fail – fear people withdraw not enough money on hand – more fail – more lose money – ripple effect /RUNcannot get loans, savings lost, no credit buy

Businesses Failed

Money invested in marketshare prices dropno one can afford to go to your business!Cannot get a loan if need moneyaverage person’s income not enough keep buying… uneven distri wealth – prod up 50% wages less

Less jobs available (less money to spend)people afraid to spend money (no new businesses) the total value of goods and services produced annually in the United States fell from about $104 billion to about $56 billion. In 1932, the number of business closings was almost a third higher than the 1929 level.

High U/E

Businesses failednew businesses couldn’t be createdPeople whose businesses (entrepeneur’s ran on credit – could not any more)

Cannot spend money do not havetake job – underemployed bc competition – cannot afford to spendIn 1925, about 3 percent of the nation's workers were unemployed. The unemployment rate reached about 9 percent in 1930 and about 25 percent -- or about 13 million persons -- in 1933In 1932, wage cuts averaged about 18 percentIn 1932, the New York City Police Department estimated that 7,000 persons over the age of 17 shined shoes for a living. A popular song of the 1930's called "Brother, Can You Spare a Dime?"