Download Great Depression - Overview

Great Depression - Overview
The Great Depression
There are three main topics that are important when studying the Great
Depression, which lasted from 1929 to 1941. These topics include: (1) how the Great
Depression affected the U.S. standard of living, (2) how President Franklin D.
Roosevelt’s New Deal programs were intended to counteract the effects of the
Great Depression, and (3) how World War II brought an end to the Great Depression.
Once the Depression began, businesses closed down, leading to an increase in
unemployment, a drop in production, and a decrease in prices. About a fourth of all
workers in the United States were unemployed as a result of this economic downturn.
The overall U.S. standard of living declined drastically during the 1930s. Many people
lost their homes. Farmers had a particularly hard time during the Depression. Many
had gone into debt to buy farm equipment and had trouble making payments when
crop prices fell. To make matters worse, a severe drought hit the Great Plains states
from 1934 to 1937. Years of poor farming practices had exhausted the soil, leaving
the region vulnerable to erosion. Winds blew away much of the topsoil during the
drought, causing dust storms and making farmland unproductive. The region came
to be called the Dust Bowl. Many farmers were forced to leave their farms and head
to the West Coast to find work.
Franklin D. Roosevelt became president in 1933. He began to expand the federal
government's role in dealing with the Great Depression. His policies were collectively
called the New Deal. Among its many achievements that are still part of our
economic system today, the New Deal:
● supported the right of workers to form labor unions
● restricted the number of hours of work required of workers
● insured bank deposits to protect people’s savings
● aided farmers by stabilizing crop prices
● helped provide electricity for rural areas
● set rules to prevent abuses in the stock market
● created Social Security, a pension system for retired workers
Other New Deal programs put people to work on public-works projects such as
building bridges, fighting fires, and planting trees. Poor people were given financial
aid to pay for food and shelter.
While the New Deal programs brought some relief, it was World War II that finally
lifted the United States out of the Great Depression. The war created a strong
demand for weapons and supplies. Many factories that had previously made
consumer products began manufacturing weapons. Most eligible men joined the
military, but there remained a tremendous need for factory workers. Large numbers
of women entered the workforce to fill these factory jobs. The economic situation of
farmers also began to improve as the demand for food increased. Wartime research
also led to the development of important new technologies. These included radar,
jet engines, and synthetic fibers such as nylon. All these technologies had
commercial uses after the war. The war left the European economy in ruins. This
helped keep foreign demand for U.S. goods high and allowed U.S. businesses to
thrive throughout the 1950s.
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Modern Connections
Great Depression
Although the political cartoon above is from 2009, how does it reflect the concept of a bank run
or panic?
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Great Depression - Economics 101 - The Basics
Law of Supply and Demand
Supply = How much and how fast something can be provided.
Demand = How badly consumers want a product.
If Supply goes up and Demand does not = Prices Drop
If Demand goes up and Supply does not = Price Increase
They are supposed to balance each other out.
Say’s Law
Surplus = Having too much of a product that people do not show
a high demand for.
Surplus will eventually cease to exist since if the price of a
product drops low enough, consumers will eventually buy out
what is left over.
Business Cycle
The ups and downs of an economy are used to balance how
people earn and spend money. In down cycles (troughs),
unemployment goes up and spending goes down (contraction).
If down cycles last for a few cycles, they can become
recessions. If they last a long time, they can become
depressions (very high unemployment). When cycles go up,
they indicate a recovery (expansion) period with low
unemployment and high spending.
Stock Markets
Stocks = Purchasing a “piece” of a company.
When stocks go up, investors receive shared earnings. Investors
can also make money by selling their stock in a company.
When stocks go down, the value of the company goes down,
losing money for investors.
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Great Depression - Economics 101 - The Basics
Buying - Selling
When investors buy stocks, they should know whether or not a
company is worth investing in. If the company shows low profits,
most investors will stay away until something changes.
Sometimes people hold on to their stocks, hoping a bull market
allows them to make a greater profit. In a bear market, investors
will often sell off their shares in order to avoid losing more than
their initial investment. When people buy stocks without know
the condition of a company, it is called speculation.
Bull Markets
Bull markets are noted by a rise in stock value over time. While
bull markets tend to make investors happy and profitable,
sometimes they can lead to speculation and making companies
more valuable than they actually are. Bull markets sometimes
need to be corrected by a bear market.
Remember: A Bull’s Horns Will Lift You Up
Bear Markets
Bear markets are noted by a lowering in stock value over time.
Typically, increased selling of market shares is a trademark of a
bear market. Investors watch bear markets carefully in order to
avoid losing too much money. However, some hold on to their
shares and hope that things get better quickly by a bull market.
Remember: A Bear’s Claws Will Take You Down
Stock Market Crash
Crashes are noted by a dramatic, sudden sell off of stocks,
causing the values of multiple companies to drop. Crashes occur
for many different reasons including: over-speculation, conflict,
natural disasters, and panic.
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Great Depression - Economics 101 - The Basics
What It Is (Paraphrase and Give an Example)
Stock Markets
Business Cycle
Say’s Law
Law of Supply and Demand
Looks Like
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Great Depression - Economics 101 - The Basics
What It Is
Stock Market Crash
Bear Markets
Bull Markets
Buying-Selling
Looks Like
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Causes of the Market Crash (Most Popularly Cited Reasons)
Stocks were
Overpriced
Many people believe that stocks were overpriced and the crash
brought the share prices back to a normal level. However, some studies
using standard measures of stock value, such as Price/Earnings ratios
and Price/Dividend ratios, argue that the share prices were not too
high.
Massive Fraud and
Illegal Activity
A number of people believe that fraud and illegal activity was one of
the causes of the 1929 Crash. However, evidence revealed that there
was probably very little actual insider trading or illegal manipulation.
There are also suggestions of Ponzi schemes where people were tricked
into investing into fake companies, sometimes losing millions.
Margin Buying
Margin buying is another scapegoat for the cause of the Crash.
However, it is not the main reason because there was very little margin
outstanding relative to the value of the market (the margin averaged
less than five percent of the market value).
Federal Reserve
Policy
The new President of the Federal Reserve Board Adolph Miller tightened
the monetary policy and set out to lower the stock prices since he
perceived that speculation led stocks to be overpriced, causing
damage to the economy. Also, starting from the beginning of 1929, the
interest rate charged on broker loans rose tremendously. This policy
reduced the amount of broker loans that originated from banks and
lowered the liquidity of non- financial and other corporation that
financed brokers and dealers.
Public Officials'
Repeated
Statements
Many public officials commented that the stock prices were too high.
For example, the newly elected President of the United States, Herbert
Hoover, publicly stated that stocks were overvalued and that
speculation hurt the economy. Hoover's statement suggested to the
public the lengths he was willing to go to control the stock market.
These kinds of statements encouraged investors to believe that the
market would continue to be strong, which could be one of the causes
of the Crash.
Unequal
Distribution of
Wealth and
Income
Despite rising wages overall, income distribution was extremely
unequal. Gaps in income had actually increased since the 1890s. The
1% of the population at the very top of the pyramid had incomes 650%
greater than those 11% of Americans at the bottom of the pyramid. The
tremendous concentration of wealth in the hands of the few meant
that the American economy was dependent on high investment or
luxury spending of the rich.
Unequal
Distribution of
Corporate Power
From the late 1870s on, there had been an ongoing movement of
consolidations and mergers. During World War I, many would-be
competitors were merged into huge corporations like General Electric,
making competition nearly nonexistent. In 1929 two hundred of the
biggest corporations controlled 50% of the corporate wealth in
America. This concentration of wealth meant that if just a few
companies went under after the Crash, the whole economy would
suffer.
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Causes of the Market Crash (Other Factors)
Bad Banking
Structure
In the 1920s, banks were opening at the rate of 4-5 per day, but with
few federal restrictions to determine how much start-up capital a bank
needed or how much of its reserves it could lend. As a result, most of
these banks were highly insolvent; between 1923 and 1929, banks
closed at the rate of two a day. Until the stock market crash in 1929,
prosperity covered up the flaws in the banking system.
World War I had turned the U.S. from a debtor nation into a creditor
nation. The Republican administrations of the 1920s insisted on
payments in gold bullion, but the world's gold supply was limited and by
Foreign Balance of
the end of the 1920s, the United States itself controlled most of the
Payments
world's supply. Protectionism and high tariffs kept foreign goods out of
the U.S.. This protectionism produced a negative effect on U.S. exports:
if foreign countries couldn't pay their debts, they had no money to buy
American goods.
Limited or Poor
State of Economic
Intelligence
Most American economists and political leaders in 1929 still believed in
laissez-faire and the self- regulating economy. To help the economy
along in its self-adjustment, President Hoover asked businesses to
voluntarily hold down production and increase employment, but
businesses couldn't keep up high employment for long when they were
not selling goods.
The Gold Standard
Another problem with economic practices of the day was the
commitment of the Hoover administration to remain on the
international gold standard. Many suggested increasing the money
supply and devaluing the dollar by printing paper money not backed
by gold, but Hoover refused. Going off the gold standard was one of
the first actions of new President Roosevelt in 1933.
Decrease in the
Money Supply
The decline in money supply between 1929 and 1933 dampened
economic developments. It led to a sharp contraction in output and
nominal income, and a extraordinary climb in unemployment. If the
Federal Reserve had increased the money supply, the fall in the
economic activity could have been moderated considerably.
International
Factors
The Depression was a global event. The international monetary system
of the time (the gold exchange standard) was a fixed-rate system. As
long as the rules were observed, economic conditions in various
countries would be closely related. Thus, problems in one
large economy would be passed on to others, and ultimately, could
transmitted back to the country of origin
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Great Depression - Economics 101 - The Basics
Bull Market
30
22.5
15
7.5
0
January
Bear Market
April
July
October
April
July
October
April
July
October
30
22.5
15
7.5
0
January
Crash
40
30
20
10
0
January
Depression
8
6
4
2
0
Year 1 Year 3 Year 5 Year 7 Year 9
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Business Cycles of The United States (1920-1940) - Visual A
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Business Cycles of The United States (1920-1940) - Visual B
Wikimedia Commons
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Causes of the Great Depression
Manufacturing Increased in the 1920’s Causing...
Consumers Saw Businesses Making Money So They Decided...
The Bull Market inspired more people to...
Speculation and Buying on the Margin Caused...
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Causes of the Great Depression
The Great Depression
Federal Reserve Policies
Stock Market Speculation
Stock Market Crash
Bank Failures
World-Wide Tariffs
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1929
At this time, nearly one in four
Americans was unemployed.
More than 13 million
Americans had lost their jobs
since 1929.
Roughly 10,000 banks had
failed since 1929.
About $2 billion in deposits
were lost since 1929.
Per capita income fell from
$681 in 1929 to $495 in 1933.
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