The Crash &

Great Depression

1929- 1941

APUSH

The “Spark” in the US: Fall of the Market

• Economic slowdown, summer of ’29…

• The Crash…– Black Tuesday:

October 29th, 1929

• Huge losses– Nov ‘29 = $30 billion ↓

• Stock Market recovered, but…

Above: The NYSEBelow: A run on a bank

Short Term Causes: How we went from a Crash to a Depression

• Loss of easy way to raise $$$

• 9,000 banks close ‘30-’33 (shrinks money supply)

• Deflation and low consumer spending

↓

Businesses lower prices, production and workers

Long Term Causes• Overexpansion & Overproduction

– Companies expanded too fast– Built up surplus cutbacks in

production & workers– Automation faster production

less workers needed• Insufficient Investment

– Investment was based on profits– When profits ↓ so did investment

• Poor distribution of US income– Really wealthy & really poor– Economy dependent on luxury

spending• Bad Corporate Structure

– Some companies focused on profit & dividends, not reinvestment

• Bad Banking Structure– Unlinked system runs & closures

• World Economic slump– High US tariffs cuts off trade– Europe defaults on US loans

• Federal Reserve – Refused to lower interest rates to

inflate the economy…

Above: Broken windows at GM during the Flint, Michigan sit-down strike of 1936-37. Below: Relief line in San Antonio, TX 1939.

Monetary Policy in a Nutshell• Oct 1929- Sept 1931: money supply ↓ by 10%• Oct 1931- Jan 1932: discount rate ↑

– Money supply ↓ another 12%– Meant to defend US$ & prevent outflow of gold– Believed the money supply was sufficient so banks

held onto excess reserves• Feb 1932- Jan 1933: Money supply mildly ↑

– Banks wanted reserves rather than lend money• Jan 1933- Mar 1933: Federal Reserve ↑ discount rate • From 1933- 1940: Monetary supply never expansionary• Like Fiscal Policy, aggressive Monetary Policy was never tried

– At best, passive monetary policy attempted (no cut backs or expansion)– The money supply was allowed to ↓ 30% from 1929-1933– The Fed did back up some banks, but allowed ½ to falter

• Underlying Beliefs– No central coordination– Belief in the Gold Standard– Belief that excess reserves signaled sufficient liquidity– But it wasn’t sufficient & led to ↑ interest rates & ↓ of private investments

An (other) Economist’s

Way of Looking at It

• Initial Stock Market Crash sets in motion a multiplier effect– National Income, or Y = C + I + G + (X – M)

• C & I (Consumption & Investment)– C & I drops due to Stock Market crash– Overall impact of just 2% of the economy– Credit and Deflation

• 1920s spending based on credit• People stop borrowing to pay back debts

• X & M (Exports & Imports)– Smoot Hawley Tariff & retaliation

• G (Gov’t spending): The Keynesian Fiscal Solution?– Decrease taxes– Large and intentional increases in G– Never tried due to:

• Balanced budget mentality• Idea that gov’t would misallocate resources• Idea that G would crowd out I• Idea that gov’t shouldn’t be a relief agency• Which are true and which are false?

Consequences of the Depression’s Severity

• GNP - 25% decline• Capital investment down

– (16.2 billion to 333 million)• Global Depression

– Other countries couldn’t purchase American Products

• Farm prices & incomes down

• Industrial unemployment up to 33%– Unprecedented duration

• Government did little– Laissez Faire mentality

Depression in Urban America• Dire situation in cities

– Cleveland 50%– Akron, 60%– Toledo 80%

• Poverty seen as sign of personal failure– 20,000 suicides

• Public charities overrun• Immigration & birth

rates ↓

A line of men waiting for work

Depression in Rural America

• The “Dust Bowl”– TX, OK, KS, NE, CO, NM

• Causes:– Act of God: Insects, high temps,

draught, wind…– Man-made Disaster: Over

cropping, over grazing & improper farming methods

• “Okies” migrate West– The Grapes of Wrath

• Not everyone went– 7 of 10 people stayed it out

• Gov’t policies ineffective

Reflection Questions: First discuss with your table partner before writing your answers

1. In what ways was the economic downturn of the 1930s similar to the current downturn? How was it different? Explain.

2. Explain how the Stock Market Crash marked the beginning of the Great Depression but that it was not the cause of it.

3. List two things that you learned that were interesting &/or that you will remember easily a month from now.