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Causes of the Depression 1. Collapse of the Stock Market 2. Lack of Control / Regulation over the Stock Market Insider Manipulation, Price Inflation 3. Decrease in taxation in 1921 4. Lack of Diversity in the Economy 5. Uneven Distribution of Purchasing Power 6. Decline in Exports 7. Credit Structure of the Economy 8. International Debt Structure 9. Agricultural Depression 10. Govt. Policy from 1929-1932 (Coolidge, Hoover): Restrictive Monetary Policy, Large tax increase, Increase in Tariffs There had been depressions before - 1893, 1907.. Depressions are a normal feature of Economic life in a Capitalist society But the Depression that started in 1929 was more severe / deeper, affected more people, and lasted longer than previous Depressions Why was there a depression in 1929 and why was it so deep, so severe? 1. Collapse of the Stock Market Trading on the Stock Market escalated from 2m to 5m shares a day on average in 1928 and 1929 (on exceptional days up to 10 or 12 million). (Bull market) There was a widespread speculative fever that grew steadily more intense. The prices of stocks soared, and had ceased to bear any relation to the earning power of the corporations that were issuing them. Speculating on the Stock Market had become a national obsession, attracting the attention not only of the wealthy but of millions of people of modest means Overall, though, only a small % of the population actually invested (0.5% ?)…..but that small percentage of the population invested a lot of money Why was there more interest in the Stock Market in 1928 and 1929? 1. It could provide quick and easy wealth: between May 1928 and Sept 1929, the average price of stocks rose over 40%. Some stocks doubled in value; eg. Hershey Chocolate shares increased by over 100%: Banks only paid 7% annually, compared to the dramatic returns of the Stock Market. 2. Credit was very easy to obtain. You had to put down very little - usually only 5% - the rest you borrowed from the stockbroker - called buying on margin. Brokers received 20% interest on the loans, but you stood to gain thousands for only a very modest actual investment. But, in the fall of 1929 (from October), the Stock Market began to fall apart (“the bottom fell out) Why? 1. A general spontaneous feeling emerged that prices were inflated…that the stock market was saturated - too many shares, prices too high…people began to sell-off.. Suddenly for the first time in years there were more sellers than buyers, causing stock prices to drop. The success of the Stock Market depended on the influx of new buyers / customers and of new money. 2. Stockbrokers, who had lent over $6b in margin loans to their customers, began to call in the margins (“margin calling”). Investors who could not pay off the loans, were forced to sell off their stock….affecting the market even more, pushed down the price of stock even further. There was a brief recovery on Oct 22 - but on Oct 23 there was an even more alarming decline in stock prices. On this occasion J.P. Morgan and other big bankers managed to stave off disaster for a while by buying up stocks to restore public confidence But on Oct 24 (Black Thursday) and then Oct 29, (Black Tuesday), there was a huge panic, with 16m shares traded…..Crash Stocks in many companies became virtually worthless. In the weeks that followed the market continued to decline, with losses in Oct - Nov totaling $40b in two months The market remained deeply depressed for more than 4 yrs and did not fully recover for more than a decade. Example of fall in stock / share values during the Great Crash of 1929. AT and T GEC Hershey IBM Sept 1929 $304 $396 $128 $241 Nov 1929 $222 $201 $68 $129 Popular folklore has established the Stock Market Crash as the beginning, and even the cause of the Great Depression. There is some truth in this As the Stock Market rose in the 20s business optimism soared - investment and consumption was high. In contrast, as stock prices plummeted investment and consumer demand fell. As a result, unemployment rose, leading to a further decrease in consumer demand. Over the next 3 yrs, the crisis grew steadily worse. The US GNP plummeted from over $104 billion in 1929 to $76.4 billion in 1932 - a 25% decline in 3 yrs. The Stock Market Crash affected banking, and the supply of money / credit…huge impact on the Economy in this way But although Oct. 1929 might have been the first visible signs of the crisis, and one cause, the Depression had earlier beginnings and more important causes. The Stock Market Crash was one factor in causing the Depression but not the most important or the only one Basically it helped trigger a chain of events that exposed a large number of weaknesses that had long existed in the US Economy. 2. Lack of Regulation of the Stock Market: Insider Manipulation (see Documentary) Shareholders / investors often conspired (with each other, media) to inflate the value of their stock and then sell it off at huge profits to unsuspecting buyers Companies over valued their stock and sold too many shares at inflated prices The Federal Reserve, which could have intervened, did not regulate to prevent saturation / over investment, or fraud 3. Government Policies: debt, deficit and taxation During war years, the national debt had risen from $1.2b in 1914 to $24b in 1921. The government decided to cut back on spending to reduce the budget, but it also decided to cut back on the burdensome taxes of the war years The feeling was that high taxes not only discouraged business but brought a smaller net return to the Treasury than moderate taxes. In 1921, Mellon repealed excess profits tax, reduced excise taxes, the surtax, income tax, and estate taxes. His intention was to spare the rich and shift much of the tax burden from the wealthy to the middle income groups. Critics argued that he should have taken advantage of the prosperity of the 20s to cut deeper into the deficit, by at least maintaining taxation levels of the upper classes, if not increasing them They also charged that he indirectly encouraged over speculation in the stock market. If he had absorbed more of the national income of the wealthy in taxes, there would have been less money left for frenzied speculation. Also, by maintaining tax rates for middle and lower income groups and not reducing them as he had the taxes of the rich, he deprived those who needed goods of spending power 4. Lack of Diversification in the Economy In the 20s, prosperity depended excessively on a few basic industries, notably Construction and Automobiles (mining and textiles had declined). In the late 20s these industries had reached their peak and began to decline Expenditure on Construction fell from $11b to under $9b between 1926 and 1929. By 1929 many corporations had expanded their capital facilities to the limit - factories, warehouses, heavy equipment - as much as needed. Automobile sales fell by a third in the first half of 1929 As a result there were layoffs in both of these industries: other workers experienced salary reductions This led to consumer purchasing power being diminished No new industries were emerging to compensate for these two declining industries – a few increased marginally - petroleum, chemicals, plastics - but were not yet developed enough to cancel out the decline in these other sectors 5. The Uneven Distribution of Purchasing Power 25% of the national income was going to 1% of the population. Prosperity would not last once this wealthy 1% no longer spent money on industrial good, especially on luxury consumer items, and were no longer willing to invest money in the economy or stock market The proportion of the National Income going to farmers, workers, and other potential consumers was too small to create an adequate market for the huge amount of goods the economy was producing. Demand was not keeping up with supply. Even in 1929 after a decade of Economic growth, between a half and two thirds of the population lived on the edge of or below the estimated minimum subsistence level - too poor to share in the great consumer booms of the 20s, too poor to buy the houses, cars, and other goods the industrial economy was producing. Consumer buying power was not strong enough or widespread enough to devour the huge amount of goods being mass produced. 6. Decline in Exports Exports formed a significant part of the Economy of the 20s. But even from 1928, European demand for US goods began to decline In some European countries industry and agriculture were becoming more productive, meaning less demand for US goods Other countries like Germany suffered from financial crises before 1929 and could not afford to buy goods from overseas 7. The Credit Structure of the Economy Much of the Economic boom was based on the credit system. 85% of furniture, 80% of phonographs, 75% of washing machines and radios, 70% of refrigerators were bought on credit, with installment payments With unemployment and lower wages after 1929, debtors could not meet these payments. Banks suffered from defaults on loans. .some went bankrupt Others raised interest rates and cut back on loans…meant less money was borrowed by the business sector and consumers Over 9,000 banks went bankrupt between 1930 and 1933. Depositors who were not in debt, whose money was in these banks, lost their hard earned savings: depositors lost over $2.5b in deposits. Banks had also invested money from savings deposits in the Stock Market – this money was lost forever The Stock Market Crash, Margin Calling, Defaulting on Loans….all led to the collapse of the Banking System The banking system (like the Stock Market) as a whole was only very loosely regulated by the Federal Reserve System The Federal Reserve had the power to regulate but did not – allow the banks to invest in the Stock Market, and to give out too many risky loans to consumers, failing to maintain enough operating capital 8. The International Debt Structure Allied countries owed huge sums of money to the US – loans during WW1 and after – depended on German reparations and more US loans to repay the US. Under the Dawes Plan the US loaned $200m to Germany But their economies were shattered from the World Depression – Germany was unable to continue reparations payments…the US became unable to make new loans after 1929 European countries were unable to repay the US. 9. Agricultural Depression, Drought, Dust.. Farm prices, already depressed in the 20s, fell even more dramatically with the Depression. Between 1929 and 1932, farm income declined by approx 60%. Tenant farmers were the first to suffer, then small farmers, then larger ones An estimated one third of all American farmers lost their land through mortgage foreclosures and evictions. Conditions were even worse in a large part of the South and Midwest known as the Dust Bowl. (Wyoming, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota). Here there was a catastrophic natural disaster; one of the worst droughts in the history of the nation. Beginning in about 1930 this large area began to experience a steady decline in rainfall and an accompanying increase in heat. Summer temps averaged over 100 degrees….dust storms destroyed entire crop of many farmers, as well as cattle In addition in some areas were devastated by swarms of grasshoppers These conditions continued for a full decade, turning what had once been fertile farm regions into virtual deserts. Led to evictions, land auctions... Farmers still as a group overproduced though – were their own worst enemies, as in the past / Populist Era 10. Govt. Response; Coolidge and Hoover – policies towards Money Supply, Taxation, and Tariffs In 1931 the Federal Reserve adopted a restrictive monetary policy, increasing the prime lending rate, at which banks borrowed This discouraged banks from borrowing, thereby reducing the money supply The total money supply fell by 27% between 1930 – 1933, leading to a decrease in credit…..to a decrease in consumer spending power, decrease in investment capital The supply of money left in circulation was not large enough to allow the economy to bounce back after the stock market bubble burst Many Economists argue that a severe depression could have been avoided if the Federal Reserve had increased the money supply. Keynesian Economics supports a decreased interest rate to increase the money supply to help increase consumer and capital spending to overcome periods of depression …….Deficit Spending In the midst of the severe recession the govt. made a bad situation worse by increasing taxation (decreased at wrong time, increased at wrong time) The Hoover administration in 1932 passed the largest peacetime tax rate increase in the history of the US up to that point At the bottom of the income scale, marginal tax rates were raised from 1.5% to 4%. At the top of the scale, tax rates were raised from 25% to 63%. Higher tax rates are considered counter productive in times of recession - decrease disposable income and reduce consumer demand even further, which had already fallen sharply due to monetary contraction. In 1922 the Fordney-McCumber Tariff increased the rate to an average of 38.5%. – up from 27% of Underwood Simmons Harding and Coolidge authorized 32 more items to be added to the list under the Act In June 1930 - Hoover introduced the highest peacetime Tariff in US History - the Hawley Smoot Tariff, raising tariffs from the 38.5% to 60%,. These tariff increases backfired for the US -led to a chain reaction – European countries could not sell in US, slowed European Recovery…inability to pay off debts to US, and also European countries could not buy US manufactured goods. And Europeans retaliated by increasing tariffs on US goods - contributed to US being unable to sell exports . And, US hopes of raising additional income from tariffs to help balance the budget did not materialize - tariff revenue decreased from $602m to $328m in 1932. Causes of the Depression 1. Collapse of the Stock Market 2. Lack of Control / Regulation over the Stock Market Insider Manipulation, Price Inflation 3. Decrease in taxation in 1921 4. Lack of Diversity in the Economy 5. Uneven Distribution of Purchasing Power 6. Decline in Exports 7. Credit Structure of the Economy 8. International Debt Structure 9. Agricultural Depression 10. Govt. Policy from 1929-1932 (Coolidge, Hoover): Restrictive Monetary Policy, Large tax increase, Increase in Tariffs The impact of the Great Depression on US society Impact of the Depression Families Women Children African Americans Businessmen Laborers Farmers Mexican Americans Read packet and take notes on each group Consider material and psychological impact With notes, see slides in other presentation