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An Overview of the Great Depression
NARROW FLAPPER ANKLE PENCIL JIVE MINI MAXI RAHRAH MICRO KNEE MAXI
What makes a Depression Great?
• Recession: When your neighbor loses his or her job.
• Depression: When you lose your job.
Why study the Great Depression?
• Worst economic disaster of the 20th century.
• Cause or causes are still debated.
• A defining event, especially for the government’s involvement in the economy.
• Useful for learning important macroeconomic concepts.
• Led to the conditions that allowed Hitler to gain power in the economically desperate Deutschland.
Some Concepts
• Gross Domestic Product (GDP): Comprehensive measure of the nation’s output of final goods and services.
• Real GDP: GDP measured at a fixed price level (i.e., inflation adjusted).
• Nominal GDP: GDP measured at current prices.
• Recession: Sustained decline in real GDP (approximately two quarters).
• Depression: Very severe recession.
More Concepts
• Inflation: A sustained increase in the general price level (often calculated in terms of the Consumer Price Index (CPI)).
• Deflation: A sustained decrease in the general price level.
• Money Stock: The stock of assets that serve as media of exchange (e.g., coin, currency, checking accounts).
• Real Interest Rate: Measure of the cost of borrowing adjusted for inflation/deflation.
• Real output (GDP) fell 29% from 1929 to 1933.
• Unemployment increased to 25% of labor force.
• Consumer prices fell 25%; wholesale prices 32%.
• Some 7000 banks failed when people pulled their money out and companies went bankrupt and did not pay back loans.
How Great was the Great Depression?
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party
•YouTube - 1929 Wall Street Stock Market Crash
•YouTube - The Great Depression (Britannica.com)
•YouTube - The Great Dust Storms - a Ken Burns style video
•Bell Aliant Learning Centre GREAT DEPRESSION PTS 1 AND 2
Stock Market Boom and Bust
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Jan-21 Jan-23 Jan-25 Jan-27 Jan-29 Jan-31 Jan-33 Jan-35 Jan-37 Jan-39
Sept. 1929
July 1932
S&P Composite Index
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party: overinflated stock value bubble burst
• Collapse of world trade – globalization in reverse. Countries tried to protect their own industries and stopped trading with each other. This constriction of international trade made the depression worse. PROTECTIONISM
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party
• Collapse of world trade – globalization in reverse
• Monetary collapse- THE VALUE OF CURRENCY DECREASED (WORST CASE GERMANY)
Bank Failures
• 7000 U.S. banks failed -- many during “panics”
• Number of banks fell from 25,000 in 1929 to 15,000 by 1934
Possible Channels:
• Loss of deposits decline in expenditures
• Customer relationships broken harder to borrow
• Money supply contraction
Commercial Bank Failures, 1920-2004
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Banking Panics
• Bank depositors lost confidence bank runs
• Banks lost gold, currency and other reserve assets
• Loss of reserves caused banks to reduce loans and deposits (causing money stock to fall)
• Contracting money stock reduced spending
• Reduced spending led to lay-offs (increased unemployment), falling prices (deflation) and lower output.
THE U.S. Fed officials did not watch (or even measure) the money supply. But, why didn’t they respond to bank panics? Most failed banks were small, nonmember banks. Interest rates were falling and few banks borrowed at the discount window.
CANADA DID NOT HAVE THE BANK OF CANADA UNTIL AFTER THE DEPRESSION: BOTH KING AND LATER BENNETT were using Laissez Faire economic policies that are against government intervention in the economy. THIS CHANGED AFTER THIS EVENT FOREVER!
The Fed’s Monetary Policy
Nominal Interest Rate, 1922-33
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1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933
Percent
But Were Interest Rates Really Falling?
• Deflation caused the real interest rate (i.e., the real cost of borrowing) to rise sharply: Firms stopped investing in new buildings,
equipment, etc.
Bankruptcies increased as borrowers lacked the incomes to repay their debts.
Banks failed because borrowers defaulted on their loans.
Recovery
• Rapid money supply growth (end of banking panic, gold inflows)
rising price level
falling real interest rate
and increased spending (MAINLY DUE TO World War Two putting everyone back to work making weapons for fighting Hitler)
Recovery
• Rapid money supply growth (end of banking panics, gold inflows) rising price level, falling real interest rate and increased spending.
• FRANKLIN DELANO ROOSEVELT (FDR)FRANKLIN DELANO ROOSEVELT (FDR) and the New DealNew Deal– Restored confidence in banking system (FDIC)– Early years marked by regulation/reform, little new spending (alphabet
programs, e.g., NRA, WPA, PWA, CCC, etc.). All were forms of Keynesian Keynesian Economics where governments run deficits in bad times and pay them off Economics where governments run deficits in bad times and pay them off in good times to prevent total economic collapsein good times to prevent total economic collapse (this is why GM and Chrysler were bailed out of bankruptcy by Canada and U.S. governments in 2008 and why there are no more Saturns, Pontiacs or Oldsmobiles).
– Later years saw increased spending on huge GOVERNMENT projects that put people back to work like the Hoover Dam near Las Vegas and paid artists to create public art
– THE BEGINNING OF STIMULUS SPENDING BY GOVTS TO GET THEIR COUNTRY WORKING AGAIN. (2008-11 ECONOMIC ACTION PLAN)
– Another way to address a recession by government is called AUSTERITY MEASURES (EXTREME CUTS TO GOVT SPENDING-VERY HARSH)
Recovery
• Rapid money supply growth (end of banking panics, gold inflows) rising price level, falling real interest rate and increased spending.
• FDR and the New Deal?– Restored confidence in banking system (FDIC)– Early years marked by regulation/reform, little new
spending (alphabet programs, e.g., NRA, WPA, PWA, CCC, etc.)
– Later years saw increased spending
• World War II (when unemployment finally fell below 10% after a high of nearly 25% officially…but in some areas higher!)
• The Depression may not have been a failure of capitalism or markets as a whole, but rather a failure of the Federal Reserve in the U.S. and the non-interventionist policies of King and Bennett in Canada
• Monetary policy should maintain price stability – avoid deflation and inflation.
• The Fed and Bank of Canada should respond to financial crises that increase the demand for money or threaten to disrupt the payments system. They can raise or lower interest rates accordingly to speed up or slow down borrowing and spending.
• Canada under Chretien and Martin regulated the banks. Clinton and Bush let Wall Street have freedom that caused 2008 Meltdown. MUCH WORSE than CANADA. $39 DOLLAR ALBANY, NY HOTEL IN 2010
• 2009 GREAT RECESSION WAS CAUSED BY DEREGULATED BANKS IN THE USA
Could It Happen Again? It almost did in 2009
1929-1939• Stock market
crash
• Didn’t realize the effect it would have
• No money to replenish what was borrowed
Many found being broke humiliating.
The Roaring 20’s• The Jazz Age! Good
times!• The new concept of
“credit” • People were buying:
– Automobiles– Appliances– Clothes
• Fun times reigned– Dancing– Flappers– Drinking
Why was this bad?• Credit system
– People didn’t really have the money they were spending (like the housing crisis in U.S. in 2008)
• WWI– The U.S. was a major credit
loaner to other nations in need
– Many of these nations could not pay us back
The Stock Market• People bought stocks
on margins– If a stock is $100 you
can pay $10 now and the rest later when the stock rose
• Stocks fall– Now the person has
less than $100 and no money to pay back
And then….
• With people panicking about their money investors tried to sell their stocks– This leads to a huge decline
in stocks– Stocks were worthless now
• People who bought on “margins” now could not pay
• Investors were average people that were now broke
• Herbert Hoover was president at the start
• Philosophy: We’ll make it!
• What He Did: Nothing
• The poor were looking for help and no ideas on how to correct or help were coming
In CANADA…
• Both Prime Ministers William Lyon MacKenzie-King and R.B. Bennett did not intervene and felt the economy would correct itself…it didn’t.
• Farmers were already feeling the effects– Prices of crops went down– Many farms foreclosed
• People could not afford luxuries– Factories shut down– Businesses went out
• Banks could not pay out money• People could not pay their taxes
– Schools shut down due to lack of funds• Many families became homeless and had to live in
shantytowns. Some men went to work camps where Communist organizers saw success (like Slim Evans and the Trek from B.C. to Ottawa on trains).
• Starved people were found to have grass and rocks in their stomachs.
Many waited in unemployment lines hoping for a job.
People in cities would wait in line for bread to bring to their family.
Some families were forced to relocate because they had no money such as the Okies who went to California with all of their belongings piled on trucks looking to pick fruit for cash (“The Grapes of Wrath” by Steinbeck).and the Hobos who “rode the rails”35
• Critics' Picks - Critics' Picks: 'The Grapes of Wrath' -- NYTimes.com/Video – YouTube
• Bruce Springsteen - The Ghost of Tom Joad (Great Depression) - YouTube
“Hoovervilles”• Some families were
forced to live in shanty towns– A grouping of shacks
and tents in vacant lots
• They were referred to as “Hooverville” because of President Hoover’s lack of help during the depression.
“BENNETT BUGGIES”
A drought on the Prairies and in the South led to dust storms that
destroyed crops.
“The Dust Bowl”
• Crops turned to dust=No food to be sent out
• Homes buried
• Fields blown away
• South in state of emergency
• Dust Bowl the #1 weather crisis of the 20th century
Two Families During the Depression
A Farm Foreclosure
Some families tried to make money by selling useful crafts like baskets.
*FDR*• When he was
inaugurated unemployment had increased by 7 million.
• Poor sections (like Harlem) had 50% of the pop. unemployed
• Instated the “New Deal”
• Yea! Frankie!
• People everywhere were effected by the depression
• It wasn’t till President Roosevelt took over and tried to put the economy back together that people even saw a glimmer of hope
Major Historical Happenings...
• Jim Crow Laws
• Scottsboro Trials
• Recovering from the Great Depression
• Racial Injustice
• Poor South
Jim Crow Laws• After the American Civil War most
states in the South passed anti-African American legislation. These became known as Jim Crow laws.
• These laws included segregation in…– Schools -- Hospitals
– Theaters -- Water fountains
– Restaurants
– Hotels
– Public transportation
– Some states forbid inter-racial marriages
• These laws were instituted in 1896 and were not abolished till the late 1950’s (even then still not completely).
• 9 young African-American men (13-20) accused of raping 2 white girls in 1931
• Immediately sentenced to death
• Trials went on for nearly 15 years before all the men were dismissed
• Started on a train bound for Memphis
• Several white men boarded and picked a fight with the black men
• Whites were forced off train by the 12 black men. The white men reported the the black men had raped two white girls on the train to authorities
• They were immediately arrested and tried in front of an all-white jury.
The trials caused a huge uproar amongst the black community.
• Wrote To Kill a Mockingbird in 1960
• Based the story on her life growing up in Monroeville, Alabama
• TKAM was the only novel she ever wrote
• The character of “Dill,” Scout and Jem’s playmate in the novel was based upon Lee’s actual neighbor, Truman Capote
• Capote is famous for amongst other things, In Cold Blood and Breakfast at Tiffany’s.
• It has been said that he gave Lee Mockingbird as a gift.
• In 1962 the novel was turned into a film starring Gregory Peck.
• It received a humanitarian award and several Academy Award nominations
What really ended the Depression
RESULTS
• After the 1930s. an unregulated laisse-faire free market was seen to be too risky. After the 1940s, Keynesian Economics policies (run deficits in bad times, pay off in good times like 2009-2011) were followed: Government regulates the economy through the Bank of Canada and raises and lowers interest rate to stimulate (lower) or slow the economy (raise to fight inflation). Also stimulus spending by government during hard times create work and build needed infrastructure.
• Introduction of new polices like EI, Social Assistance (Welfare), Old Age pensions and, later, Medicare (1960s). THE BIRTH OF THE WELFARE STATE (or Nanny State as right wing detractors call it)
What are the main stock indexes?• Fun trivia: journalist Charles Dow created the first index more than 100 years
ago. In 1896, Dow averaged the stock prices of the top 12 publicly-traded companies. (He added their stock prices together and divided the total by the number of stocks.) By doing this, he found that he could trace the movement of the overall market, including the general (average) movement of stocks that weren’t included in the financial calculation.
• So what are the most popular market indexes? • The S&P 500 – This index tracks 500 large U.S. companies across a wide
span of industries and sectors. The stocks in the S&P 500 represent roughly 70 percent of all the stocks that are publicly traded. “S&P” stands for “Standards and Poor’s,” the name of a market research firm.
• Companies CAN be listed in more than one index. Some of the largest companies within the S&P 500 are also in the Dow Jones Industrial Average.
• The Dow Jones Industrial Average – Named after Charles Dow, this index tracks the 30 largest U.S. companies. This means it represents “large-cap” companies, which is the industry term for “very big companies” like Johnson & Johnson, McDonalds and Coca-Cola. Although the companies within the Dow Jones represent only about 25 percent of all stocks, the DJIA is widely accepted as the leading indicator of market health.
• NYSE Composite IndexThe NYSE Composite Index is designed to measure the performance of all common stocks listed on the NYSE, including ADRs, REITs and tracking stocks. In January 2003 the NYSE reintroduced the NYSE Composite Index under a new methodology that is fully transparent and rule-based. It is a measure of the changes in aggregate market value of all NYSE-listed common stocks, adjusted to eliminate the effects of capitalization changes, new listings and delistings.
• NYSE AMEX CompositeThe NYSE AMEX Composite is made up of stocks that represent the NYSE Amex equities market. The Index is a market capitalization weighted index, so the weight of each stock depends on the price of the shares and how many are outstanding. It was previously known as the American Stock Exchange (Amex) Composite Index.
• Dow Jones Industrial AverageThe Dow Jones Industrial Average is a price weighted index that represents large and well-known U.S. companies. The index covers all industries with the exception of Transportation and Utilities. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.
• S&P 500 IndexThe S&P 500 focuses on the large-cap sector of the market; however, since it includes a significant portion of the total value of the market, it also represents the market. Companies in the S&P 500 are considered leading companies in leading industries.
•ALSO, THE TSX, THE NIKKEI, FTSE
• (1/2) Canada Between Two World Wars - Part 1 – YouTube
• (2/2) Canada Between Two World Wars - Part 2 - YouTube
