The Economics of the The Economics of the Great DepressionGreat Depression

Mr. BachMr. Bach

United States HistoryUnited States History

What is a Depression?What is a Depression?

A severe economic A severe economic downturn.downturn.–High UnemploymentHigh Unemployment–Low GDP (Gross Low GDP (Gross Domestic Product).Domestic Product).

What is GDP?What is GDP?

Gross Domestic Product Gross Domestic Product is a measurement of the is a measurement of the total value of goods and total value of goods and services produced by a services produced by a nation.nation.

What is GDP?What is GDP? It includesIt includes

–Consumer SpendingConsumer Spending–Investment SpendingInvestment Spending–Government SpendingGovernment Spending–Net Exports (Goods Sent Net Exports (Goods Sent to Other Nations)to Other Nations)

The Reality of the The Reality of the Great DepressionGreat Depression Hundreds of banks close which Hundreds of banks close which

wipes out billions in savings.wipes out billions in savings. In 1933In 1933

– 364,000 farms went bankrupt364,000 farms went bankrupt– GDP had decreased by 40%.GDP had decreased by 40%.– Unemployment Rate = 25%Unemployment Rate = 25%

Cause #1: Stock Market Cause #1: Stock Market CrashCrash Many investors were buying on marginMany investors were buying on margin

– Paying for only part of the stock and Paying for only part of the stock and borrowing the rest from the borrowing the rest from the stockbroker.stockbroker.

– If the stock goes up, you make $ and If the stock goes up, you make $ and can pay back the loan.can pay back the loan.

– But if the stock goes down you will But if the stock goes down you will lose $ and may not be able to pay lose $ and may not be able to pay back the loan.back the loan.

Also called speculation.Also called speculation.

Cause #1: Stock Market CrashCause #1: Stock Market Crash As more speculators entered As more speculators entered

the market, stocks became the market, stocks became over-valued.over-valued.

When the economy slowed, When the economy slowed, big investors started to pull big investors started to pull their money out of the their money out of the market.market.

This caused a panic (a sudden This caused a panic (a sudden massive sell off of stocks).massive sell off of stocks).

Cause #1: Stock Market CrashCause #1: Stock Market Crash

On Black Tuesday (October On Black Tuesday (October 29, 1929), the Dow fell by 29, 1929), the Dow fell by 40% and $30 billion was lost.40% and $30 billion was lost.

Many investors went Many investors went bankrupt.bankrupt.–Some committed suicide.Some committed suicide.

This is the official start of the This is the official start of the Great Depression.Great Depression.

The Big CrashThe Big Crash

Cause #2: Economic Cause #2: Economic Overconfidence Overconfidence

Business Cycle: Business Cycle: periodic regular up periodic regular up and down movement and down movement in the economy.in the economy.

The Business CycleThe Business Cycle

Great Depression Business Great Depression Business CycleCycle

Cause #2: Economic Cause #2: Economic OverconfidenceOverconfidence

The government and The government and individuals defied the individuals defied the business cycle in the business cycle in the 1920s – many thought the 1920s – many thought the economy would continue economy would continue to go up.to go up.

Cause #3: Wealth Cause #3: Wealth DistributionDistribution In 1929,In 1929,

– The top 5% of the U.S. The top 5% of the U.S. received 70% of the nation’s received 70% of the nation’s income.income.

– Thus, little money trickled-Thus, little money trickled-down to the common laborers down to the common laborers in the form of higher wages or in the form of higher wages or lower prices for products.lower prices for products.

Cause #3: Wealth Cause #3: Wealth DistributionDistribution

The rich can only buy so The rich can only buy so many cars, houses, etc.many cars, houses, etc.

Lower consumer spending Lower consumer spending led to less need for labor.led to less need for labor.

The rich put their excess The rich put their excess money into the stock money into the stock market, causing market, causing overvaluation.overvaluation.

Cause #4: Credit Cause #4: Credit SpendingSpending

Too many consumers were Too many consumers were buying products on credit.buying products on credit.

As bankruptcies rose, As bankruptcies rose, fewer businesses extended fewer businesses extended credit.credit.

This led to less consumer This led to less consumer spending = fewer products spending = fewer products bought = fewer jobs.bought = fewer jobs.

UnemploymentUnemployment

Cause #5: Industrial Cause #5: Industrial OverproductionOverproduction

Products such as cars Products such as cars and ovens are durable and ovens are durable goods (they last a long goods (they last a long time).time).

As factories started to As factories started to have a surplus of have a surplus of products, they started to products, they started to lay off workers.lay off workers.

Cause #6: Agricultural Cause #6: Agricultural OverproductionOverproduction

Farmers had huge surpluses of Farmers had huge surpluses of crops, and they would take a loss crops, and they would take a loss if they sold them on the private if they sold them on the private market.market.

Government (laissez-faire) would Government (laissez-faire) would not buy their surplus crops.not buy their surplus crops.

Farmers lost huge amounts of Farmers lost huge amounts of money and some even burned money and some even burned their crops in protest.their crops in protest.

Cause #7: Bank Cause #7: Bank FailuresFailures Banks make money by loaning out Banks make money by loaning out

the money of their depositors.the money of their depositors. Banks were making risky Banks were making risky

investments as well (stock investments as well (stock market).market).

Bank Runs – panicked investors Bank Runs – panicked investors try to withdraw their money from try to withdraw their money from banks, but the banks do not have banks, but the banks do not have enough money left.enough money left.

A Depression Era Bank A Depression Era Bank RunRun

Cause #8: Federal Cause #8: Federal ReserveReserve

The Federal Reserve is the The Federal Reserve is the Central Bank of the United Central Bank of the United States.States.

It is an independent It is an independent government agency government agency –Its chairman is appointed Its chairman is appointed by the President.by the President.

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Federal Reserve ClevelandCleveland

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Monetary Federal Reserve Monetary Policy:Policy:– Reserve Requirement – the Reserve Requirement – the

amount of money banks must amount of money banks must keep in reserve to satisfy keep in reserve to satisfy withdrawals (not lend out).withdrawals (not lend out).Member banks could not Member banks could not satisfy the withdrawal needs satisfy the withdrawal needs of bank runs.of bank runs.

Cause #8: Federal Cause #8: Federal ReserveReserve

Federal Reserve Monetary Policy:Federal Reserve Monetary Policy:– Discount Rate: the amount of Discount Rate: the amount of

interest the Fed charges banks for interest the Fed charges banks for borrowing money from them.borrowing money from them.Influences interest rates for Influences interest rates for other loans across the nation.other loans across the nation.

In the early 1930s, the Fed In the early 1930s, the Fed would not adjust the discount would not adjust the discount rate and allowed banks to fail in rate and allowed banks to fail in mass.mass.