Download Presentation

Causes of
the Great Depression &
Hoover’s Response
Myths and Misconceptions
• Many people believe that the crash of the stock market was the
cause of the Depression. Not so, it was only a symptom.
• Many people also believe that Herbert Hoover’s laissez-fair
economic philosophy prevented the federal government from
taking steps to prevent the crisis. Hoover was proactive in trying to
ease the impact of the depression, it was too little, too late.
• Many people think that the Great Depression was the only major
economic crisis in U.S. history. Nope, but it was the worst.
• Many people do not realize that the Depression was global and
affected almost every capitalist economy on earth
• Some believe that FDR and the New Deal ended the Depression.
Wrong again, WWII ended he Depression
The Facts
• In September of 1929 the U.S. economy began showing signs of
contraction (decline from the growth of the 1920’s)
• August 1929, recession begins, GDP falls by and unemployment
rises.
• Automobile sales fall 30% in 1929.
• By 1929 farm incomes fall more than 50%
• September 1929 stock prices begin to fall, the market crash on
Black Tuesday October 29th losing 90% of its value by 1932.
• By 1932 US GDP fell 30%
• 1929-1932 US factory production fell 46%
• 1929-1932 US wholesale prices fell 32%
• 1929-1932 US exports fell 70%
• 1929-1932 US unemployment will reach 25% (33% in some
regions)
US Unemployment 1910-1960
Abstract of the US Department of Labor
US Industrial Production
US Stock Market 1928-1932
US Bureau of Labor Statistics
Overproduction
Banking Practices
& Fed Policies
Causes of the Great Depression
Stock Market
Political Decisions
1. Over-production
Overproduction
• The “roaring twenties” was an era of great economic
growth.
• Manufacturing and corporate profits rose 62%.
• The availability of so many consumer goods, such as
electric appliances, radios and automobiles, offered an
easier life, on CREDIT.
• This led to a high demand for such goods.
• Mass advertising fed mass consumption to satisfy the
needs of mass production.
• Eventually business produced more than consumers could
purchase. You can only own so many radios, cars, and
appliances.
So…
• Over production of consumer goods and
agricultural goods means…
• Supply was greater than demand.
• A surplus of goods in the market begins
to drive prices down.
• Declining prices means declining profits
• Declining profits means stock values
(for corporations) begin to fall.
• Oh my!!!
2. Banking & Money Policies
Consumer Credit
• The concept of “buying now and paying later”
caught on quickly.
• By the end of the 1920s, 60% of the cars and 80% of the
radios were bought on installment credit.
• Consumerism in the New Era saw a change in US buying
behavior. Thrift, saving, and frugality were replaced with
consumption, and keeping up with the Jones’
The Federal Reserve Board
• The Federal Reserve Board was created by Congress in 1917 in
response to the Banking Crisis of 1907.
• The Fed was created as the US central bank with two primary
functions:
– 1) Regulate and inspect the nations commercial banks,
by assuring banks had sufficient cash reserves
– 2) Regulate the amount of money circulating in the
economy. Known as Monetary Policy
• To stimulate growth the Fed increases money in circulation by
lowering interest rates for member banks, and decrease in the
amount of money banks are required to keep in reserve
3. STOCK MARKET ACTIONS
The Stock Market
• As an investment the goal is to buy low and sell high.
• The value of stocks soared in the 1920’s as corporate
profits rose, fueled by mass consumption. (Fueled by
credit, shhhhhh!!!)
• Once a rich man’s game, everyone was “in the market” in
the 20’s
• Optimism was high, and speculation was rampant
Stock Market: Buying on
Margin
• Buying on the margin means that you can purchase
shares with a down payment.
• The Margin Requirement in 1926 was 10%. So a $100
share of stock could be yours with only a $10 down
payment
• Speculators expect the value of the stock to go up in price
enough (at least 90% to break even) covering the
balance.
• Buying on the margin encouraged thousands of small
time, new (inexperienced) investors to purchase stocks
• As long as corporations were selling goods and turning a
profit stock prices rose and buying on the margin was
safe.
• As long as…
Stock Market: Banks &
Margins
• In 1927 banks did two stupid, greedy things
– 1) Banks began letting customers borrow money to buy
stocks and used the customers stock holdings as
collateral for the loan.
They gave money to people with no money to gamble
– 2) Banks started to use depositors money to speculate in the
stock market. Normally banks pay you interest for savings.
Then they loan it to businesses or families that were good
risks to buy homes or start companies etc.
Not speculate in the market!
• By 1929, banks had made billions of dollars in risky loans
with little collateral to back them up if borrowers defaulted.
So…
• Banks made risky loans to borrowers to
buy stocks on the margin.
• Banks used depositors money to
speculate in the market
• When panic shook the market, the
banks were left holding the bag
• Oh my…
4. Bad Fed Banking Policies
• With the loss of confidence in stocks, people began to
lose confidence in the security of their money being held
in banks.
• Customers raced to their banks to withdraw their savings.
(k.a. bank run)
• Customers closed accounts and banks were left without
cash reserves putting them on the brink of failure.
So…
• The Fed fails to manage the bank and
currency crisis.
• Depositors now hide their money at
home and banks have no money to lend
• Banks close and large amounts of
money disappear from the economy
4. Bad Political Decisions:
“The sole function of the
government is to bring about
a condition of affairs
favorable to the beneficial
development of private
enterprise.”
~Herbert Hoover (1930)
“The Fed will stand by as the
market works itself out:
Liquidate labor, liquidate
stocks, liquidate real estate…
values will be adjusted, and
enterprising people will pick
up the wreck from lesscompetent people."
~ Andrew Mellon (1930)
Hoover’s Political Decisions
• Contrary to popular history
Hoover’s commitment to laissez
fair made the Depression worse
• Hoover initiated several
programs to help the economy
recover but it was too little, too
late
• Hoover favored volunteerism, or
cooperation between business
and government over coercive
policy
Hoover’s Political Decisions
• Rising unemployment led to
homeowners defaulting on
mortgages and renters being
evicted from apartments.
• The homeless settled in
shanty towns called
Hoovervilles.
Hoover’s Three Biggest
Mistakes
• Signing the Smoot-Hawley Tariff
• Revenue Act of 1932
• Balancing the budget
Billions of Nominal Dollars
Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934
7
6
5
4
Exports
Imports
3
2
1
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
Let’s Review
•
•
•
•
•
•
Overproduction
Stagnant wages
Federal monetary policy
Banking practices Stock market
Political decisions