Download Long-term Causes of the Great Depression

Long-term Causes of the
Great Depression
1. Distribution of Wealth
• Return to our discussion: Income Inequality.
• What does a suffering middle class do to the
economy?
2. Protectionist Trade Policies
• What have been the historical, economic
purposes of a tariff?
– “If ever there was a time when Americans had
anything to fear from foreign competition, that
time has passed.”- Wilson
2. Protectionist Trade Policies
Smoot-Hawley Act of 1930
• What would be the ramifications of a tariff (tax) of
60% on a product?
– Europe would not be able to export as much to U.S.
• Inability to make debt payments from WWI
• Retaliatory policies (i.e. their own tariffs?)
• Inability to buy American products because of a reduction in
American $$ flowing into Europe (i.e. farmers need European
market)
2. Protectionist Trade Policies
Smoot-Hawley Act of 1930
• What would be the ramifications of a tariff (tax) of
60% on a product?
– American consumers and farmers would be hurt
• Tariff benefits industry owners (distribution of wealth?)
• Consumers pay higher prices but are not given higher wages
• Farmers have a smaller market (No Europe!)
3. Farm Failures
• What was the state of the
farming industry during WWI?
– High prices for wheat and other
products (Food Administration)
– Innovations in technology =
efficiency = more production
– Farmers take out loans to expand
and buy more equipment
3. Farm Failures
• What happened to farming after WWI?
– Markets for products decrease (i.e. Europe)
– Prices drop significantly  less income
– Coolidge didn’t help (“farmers never made $$”)
• Farmers negatively affected:
– Have less $ = Spend less $- hurts entire economy
• Income gap = similar problem
– Can not pay off loans- foreclosure
– Banks fail b/c loans are not collected
• Auction farms to regain $- not enough
4. Buying on Credit
• Return to “Superficial Prosperity”- How did
consumers get what they wanted in the
1920s?
– Buying assets on credit (i.e. houses)
• Remember: 80% of Americans did NOT have savings
– Initially, this “inflated” the market (seemed like
demand was real and HIGH)
– Led to overproduction
4. Buying on Credit
• More consumption = more production
– More efficient production = more consumption at
the beginning of the 1920s
• top 1% experienced 75% increased income through
1920s; 9% increase for America as a whole
• BUT, wages did NOT match inflation of prices caused by
“demand”
– Debt pile-up = spending SLOWS
– Overproduction = Loss of $ by building companies
• i.e. More houses were built than were needed
4. Buying on Credit
Fast-forward to post-Black Tuesday
• When SM crashed, consumers and banks lost
investments
• When banks failed, consumers lost savings
• Consumers didn’t have $ to pay loans on what they
purchased
– This was cyclical- No payments to banks = banks fail =
foreclosure
– Banks foreclosed homes and now “owned” houses- tried
to resell but no one had the money to buy!
– Housing Bubble- 2007/8 and the Credit Crisis
Short-term Causes of the
Great Depression
1. Stock Market Crash
• Return to “Superficial Prosperity” (again)How did consumers get what they wanted in
the 1920s?
– Buying stocks on margin
• Everyone wanted piece of ever-growing Wall Street
– Demand for stocks went up (get rich quick!) = rising prices
– companies therefore are being valued higher than their worth
– “Speculation”– will return to this later
• Took out loans to buy stocks (bought portion of stock)
• When value of stocks plummeted, buyers owned a
stock that was worth less than the loan they had taken
out
1. Stock Market Crash
Timeline- 1929
• Early September- Prices rise, then drop
• Sept- Oct: People lose confidence, sell stocks
• October 29: Black Tuesday
– 16 million stocks sold
– Value declines- no one wants them
– Many stuck with stocks with little value
• By November, investors lost $30 billion
• ONLY 3% of POPULATION
“Day of Wrath”
2. Bank Failures
• What caused almost half of the nation’s
commercial banks to fail (11,000) by 1933?
– Return to reading: Why don’t banks “hold” your
deposits?
• Little interest = no monetary incentive
• Loans + investing = profit
– Banks, too, invest in the stock market
2. Bank Failures
• What happened after Stock Market Crash?
– People lost faith in banks- wanted to withdraw cash
• Banks hold minimal amount of CASH to begin with
• Lost $$ in stock market crash
• People were unable to make loan payments
– Return to buying on credit (i.e. houses)
• Banks didn’t have it to pay customers back!!
– Only “member” banks of Fed could borrow
• Fed kept discount rate low to promote borrowing- helped
member banks
– What else could Fed have done? (reading)
2. Bank Failures
• As a result, banks:
– Failed (ramifications on next slide), or
– Recalled loans from other consumers
• This also “declined money stock”, aka reduced $ people
had to spend on other things
• Less spending = economy is hurt (i.e. businesses don’t
make as much and have to downsize.. MAIN STREET IS
CRUSHED and people’s income reduced or gone)
– These people then can’t pay their loans! Yikes.
2. Bank Failures
• Bank failures = declining “money stock” ($
available to consumers)
– People couldn’t borrow money- less purchasing
power  spending LESS
– Less purchase  less $$ for businesses
– Business lower prices to make buying easier
– Lower prices (deflation)  they need to reduce
costs
– Costs = Money spent producing goods
• Paying employees counts!  People are laid off or
their wages are reduced
After-Effects
• GDP (Gross Domestic Product) DECLINES
– Amount of goods and services country produces
– Today: ~$16 trillion
– GDP = GD Income
• CPI (Consumer Price Index) DECLINES
– Average cost of “market basket”
– Down = deflation = people HOLD ON TO $ because
“tomorrow” it’ll be cheaper
– No spending = Economy HURT
• Unemployment RISES to 25%
After Effects
• GDP drops as businesses are bankrupt
– Railroads, Automobiles
– People lose their jobs
– “Product” (output resulting from people working)
DECREASES
GDP; CPI; Unemployment (circa 1930s)