The Great Depression 1930The Great Depression 1930

BY Abhishek Richa Disha

Neha

BY Abhishek Richa Disha

Neha

“The Great Depression Is To Economics Is What The Big-bang Is To Physics.”“The Great Depression is The Holy Grail Of Macroeconomics “‘With The Birth Of Modern Macroeconomics, and It Continues To Haunt Successive Generations Of Economics’

WHAT IS IT ? Great Depression was a severe worldwide 

economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it

started in 1930 and lasted until the late 1930s or

middle 1940s It was the longest, most widespread, and deepest

depression of the 20th century The depression originated in the U.S., after the fall

in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash 

of October 29, 1929

RELEVANCE TO ECONOMICS• The timing and severity of the Great Depression varied

substantially across countries .The Depression was particularly long and severe in the United States and Europe; it was milder in Japan and much of Latin America.

• Declines in consumer demand, financial panics, and misguided government policies caused economic output to fall in the United States.

• The gold standard, which linked nearly all the countries of the world in a network of fixed currency exchange rates, played a key role in transmitting the American downturn to other countries.

• The Great Depression brought about fundamental changes in economic institutions, macroeconomic policy, and economic theory

Overview EconomyAs the 1920s advanced, serious problems

threatened the economy whileImportant industries struggled, including:• Agriculture• Railroads• Textiles• Steel• Mining• Lumber• Automobiles• Housing• Consumer goods

Background To Great Depression The 20’s had major prosperity, both to the economy

and to how Americans lived their lives. It gave people a newfound freedom. Although they were very expensive, they became very popular. This dramatic increase was key to the “roaring twenties”.

By the late 1920s, American consumers were buying less

Rising prices, stagnant wages and overbuying on credit were to blame

Most people did not have the money to buy the flood of goods factories produced

The wealthiest 1% saw their income rise 75% The rest of the population saw an increase of only 9% More than 70% of American families earned less than

$2500 per year

Factors Which Led To Great Depression

Stock Market Crash of 1929

Bank Failures

Reduction in Purchasing

Across the Board American Economic Policy with Europe

Drought Conditions(Dust Bowl)

Buying on Credit increased

personal debt.

Higher interest rates caused

LESS DEMAND for goods.

STOCK MARKET CRASH of October 29, 1929

• Stock prices had risen more than fourfold from the low in 1921 to the peak reached in 1929. In 1928 and 1929, the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices. These higher interest rates depressed interest-sensitive spending in areas such as construction and automobile purchases, which in turn reduced production

• By the fall of 1929, U.S. stock prices had reached levels that could not be justified by reasonable anticipations of future earnings. As a result, when a variety of minor events led to gradual price declines in October 1929, investors lost confidence and the stock market bubble burst. Panic selling began on “Black Thursday,” October 24, 1929

• The stock market crash reduced American aggregate demand substantially. Consumer purchases of durable goods and business investment fell sharply after the crash

The Trading Floor Of The New York Stock Exchange Just After The Crash Of 1929. On Black Tuesday, October 29,

The Market Collapsed. In A Single Day, 60 Million Shares Were Traded--a Record--and 30Billion Dollars Vanished Into Thin Air.

The "Era Of Get Rich Quick" Was Over. Jack Dempsey, America's First Millionaire Athlete, Lost $3 Million.

Cynical New York Hotel Clerks Asked Incoming Guests, "You Want A Room For Sleeping Or Jumping?"

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.

So that led to bank failure

BANK FAILURE A banking panic arises when many depositors lose confidence in the solvency

of banks and simultaneously demand their deposits be paid to them in cash. Banks, which typically hold only a fraction of deposits as cash reserves, must liquidate loans in order to raise the required cash. This process of hasty liquidation can cause even a previously solvent bank to fail.

The United States experienced widespread banking panics in the fall of 1930, the spring of 1931, the fall of 1931, and the fall of 1932. The final

wave of panics continued through the winter of 1933 and culminated with the national “bank holiday” declared by President Franklin Roosevelt on March 6, 1933

The panics caused a dramatic rise in the amount of currency people wished to hold relative to their bank deposits. This rise in the currency-to-deposit ratio was a key reason why the money supply in the United States declined 31

percent between 1929 and 1933.

Declines in the money supply caused by Federal Reserve decisions had a severe contra dictionary effect on output

Bank Failure Factories making Too Much, Farms growing too much

BANKS Have NO $$

PEOPLE LOST SAVINGS & JOBS

NO ONE TO HELP!

Factories Fire Workers (Don’t need them) Farm Prices fall (Farmers can’t make$$)

Farmers & Factory Workers can’t pay

back loans to Banks: DEFAULT!!

Banks Close because they have no money: Loans have not been paid back, can’t give people their savings

Police stand guard outside the entrance to New York's closed World Exchange Bank, March 20, 1931. Not only did bank failures wipe out

people's savings, they also undermined the ideology of thrift

REDUCTION IN PURCHASING Actual price declines and the rapid decline in the money

supply, consumers and business people came to expect deflation – that is, they expected wages and prices to be lower in the future.

As a result, even though nominal interest rates were very low, people did not want to borrow because they feared that future wages and profits would be inadequate to cover the loan payments

This hesitancy, in turn, led to severe reductions in both consumer spending and business investment spending.

The failure of so many banks disrupted lending, thereby reducing the funds available to finance investment and hence Great Depression.

Consumer purchases fell somewhat, governments' purchases did not fall at all compared with 1929 but there was a catastrophic collapse of

investment purchases. Exports fell but imports fell as well so that there was not much of a change in net exports. It is investment purchases,

the purchases of new equipment and buildings and inventory

The problem in the early 1930's was that the rate of inflation was negative; i.e., there was deflation instead of inflation. This meant that borrowers would have to pay back more valuable dollars than the ones they borrowed.

The high real interest rates which came as a result of deflation could have been a major factor in the collapse of investment which was the immediate cause of the Depression. Once excess capacity and expectations of decreased sales develop the level of investment drops to zero. After excess capacity develops investment purchases will not rise even if the real interest rate drops. Nonzero investment in such circumstance is maintained only from the emergence of new products, for which there is no existing capacity, and the finishing up of investment projects that are already started

The Federal Reserve Banking System (the Fed) was created to stabilize the financial system and control the money supply. The Fed however probably did not know the money supply was decreasing. The Fed saw only the statistics on the monetary base, the currency in circulation plus the funds held as reserves by the banks with the twelve Federal Reserve Banks

The problem was what was happening to the money multiplier. The Fed in the late 1920's was trying to end the speculative bubble in the stock market. The Fed managers applied more restrictive monetary policy than they realized

The chain of causes of the Great Depression thus leads back to the restrictive monetary policies of the Federal Reserve System

Gold Standard

GOLD STANDARD

• Under the gold standard, imbalances in trade or asset flows gave rise to international gold flows.

• For example, in the mid-1920s intense international demand for American assets such as stocks and bonds brought large inflows of gold to the United States To stem the gold outflow, the Bank of England raised interest rates substantially. High interest rates depressed British spending and led to high unemployment in Great Britain throughout the second half of the 1920s

• Maintaining the international gold standard, in essence, required a massive monetary contraction throughout the world to match the one occurring in the United States. The result was a decline in output and prices in countries throughout the world that also nearly matched the downturn in the United States

• Foreign lending to Germany and Latin America had expanded greatly in the mid-1920s. U.S. lending abroad then fell in 1928 and 1929 as a result of high interest rates and the booming stock market in the United States. This reduction in foreign lending may have led to further credit contractions and declines in output in borrower countries

• The effects of reduced foreign lending may explain why the economies of Germany, Argentina, and Brazil turned down before the Great Depression began in the United State

• The 1930 enactment of the Smoot-Hawley tariff in the United States and the worldwide rise in protectionist trade policies created other complications. The Smoot-Hawley tariff was meant to boost farm incomes by reducing foreign competition in agricultural products. But other countries followed suit, both in retaliation and in an attempt to force a correction of trade imbalances

A drought in the South lead to dust storms that destroyed crops.

Natural Disaster “The DUST BOWL”

Great Plains suffers a huge Drought (1931) Causes: a) Drought . . .no rain b) - New technology, tractors and steel plows tear-up

extra sod that was holding onto soil, drought turns open soil into sand box

- Huge Dust storms cover ‘Great Plains

Results a) Can’t pay banks- Banks take Farms b) Many Great Plains farmers move to California,

1. Try to get jobs on large farms 2. Treated poorly in Calif. -

*‘Oakies’ & ‘Arkies’-Not wanted in West

Great Depression

Causes

• Overproduction• Bank Closings

Spark

• Stock Market Crash

Results

• Unemployment• Life savings cost

EFFECTS OF THE DEPRESSION A. JOBLESS / HOMELESS

1. 1930-1932 – JOBLESS GOES FROM 4 TO 12 MILLION2. HOUSES ARE LOST, PEOPLE BECOME HOMELESS3. PEOPLE ARE DESPERATE

B. HATRED FOR PRESIDENT HOOVER

C. BONUS ARMY1. WWI Veterans Who Were Promised A $ Bonus In 1945, * Veterans Want It Now (1932)2. Veterans Go To Washington And “Camp Out”3. Hoover Sends In Army (Eisenhower, Macarthur), Used Tear Gas, Machine Guns, And Burned The Camp Down

HOOVER WINS 1928 ELECTION

• Republican Herbert Hoover ran against Democrat Alfred E. Smith in the 1928 election

• Hoover emphasized years of prosperity under Republican administrations

• Hoover won an overwhelming victory

Herbert Hoover was president at the start

Philosophy: We’ll make it!What He Did: NothingThe poor were looking for help and no ideas on how to correct or help were coming

• The most obvious economic impact of the Great Depression was human suffering. In a short period of time world output and standards of living dropped precipitously.

• As much as one- fourth of the labour force in industrialized countries was unable to find work in the early 1930s. While conditions began to improve by the mid-1930s, total recovery was not accomplished until the end of the decade

• The Great Depression hastened, if not caused, the end of the international gold standard. Although a system of fixed currency exchange rates was reinstated after World War II under the

• Bretton Woods system, the economies of the world never embraced that system with the conviction and fervour they had brought to the gold standard. By 1973, fixed exchange rates were abandoned in favour of floating rates.

ECONOMIC IMPACT

In many countries, government regulation of the economy, especially of financial markets, increased substantially during the Great Depression.

The Depression also played a crucial role in the development of macroeconomic policies intended to temper economic downturns and upturns. The central role of reduced spending and monetary contraction in the Depression led British economist John Maynard Keynes to develop the ideas in his General Theory of Employment, Interest, and Money(1936).

The Depression changed the family in dramatic ways. Many couples delayed marriage - the divorce rate dropped sharply and birth rates dropped below the replacement level for the first time in American history

On the other hand, women found their status enhanced by their new roles. Black women especially found it easier to obtain work than their husbands, working as domestic servants, clerks, textiles workers and other occupations.

This employment increased their status and power in the home, gaining them a new voice in domestic decisions.

Monetarists View Monetarists highlight the importance of a fall in the money supply. They point out that between 1929 and 1932, the Federal reserve allowed the money supply (Measured by M2) to fall by a third. In particular, Monetarists such as Friedman criticise the decisions of the Fed not to save banks going bankrupt. They say that because the money supply fell so much an ordinary recession turned into a major deflationary depression.

Austrian ViewAustrian school of Economists such as Hayek and Ludwig Von Mises place much of the blame on an unsustainable credit boom in the 1920s. In particular, they point to the decision to inflate the US economy to try and help the UK remain on the Gold standard at a rate which was too high. They argue after this unsustainable credit boom a recession became inevitable. The Austrian school doesn't accept the Friedman analysis that falling money supply was the main problem. They argue it was the loss of confidence in the banking system which caused the most damage.

Different Views Of The Great Depression

Keynesian View

Keynes emphasised the importance of a fundamental disequilibrium in real output. He saw the Great Depression as evidence that the classical models of economics were flawed.Classical economics assumed Real Output would automatically return to equilibrium (full employment levels); but the great depression showed this to be not true.Keynes said the problem was lack of aggregate demand. Keynes argued passionately that governments should intervene in the economy to stimulate demand through public works scheme - higher spending and borrowing.Keynes heavily criticised the UK government's decision to try balance the budget in 1930 through higher taxes and lower benefits. He said this only worsened the situation.Keynes also pointed to the paradox of thrift

A. Fixing Banks!!!1. Declared a banking crisis a. Closed ALL banks/ 4 day “Bank

Holiday” b. Emergency Banking Relief Act-

Passed by Congress, allowed only sound banks to reopen, the rest remained closed

2. Fireside Chat- told Americans by radio that the good banks were safer than $$ in a mattress

Fixing the Depression "New Deal”

C. A NEW DEAL!!!1. People Happy, Roosevelt sends bills to

Congress2. NEW DEAL BEGINS- 3 Goals: a. Relief for Unemployed b. Plans for Recovery

c. Reforms to Prevent more Depressions3. Major New Deal Programs a. Unemployment

*CCC- Civilian Conservation Corp*PWA- Public Works Administration*TVA- Tennessee Valley Authority

b. Recovery Plans*NRA- National Recovery Act*AAA- Agricultural Adjustment Admin.

c. Prevention Reforms *FDIC- Federal Deposit Insurance Corporation

(Have you seen this?) *SEC- Securities and Exchange Commission

Sources Of Recovery: Policies

FollowedMonetary Policies

recovery

• Given the key roles of monetary contraction and the gold standard in causing the Great Depression, it is not surprising that currency devaluations and monetary expansion became the leading sources of recovery throughout the world

Devaluation, however, did not increase output directly. Rather, it allowed countries to expand their money supplies without concern about gold movements and exchange rates. Countries that took greater advantage of this freedom saw greater recovery

The monetary expansion that began in the United States in early 1933 was particularly dramatic. The American money supply increased nearly 42 percent between 1933 and 1937. This monetary expansion stemmed largely from a substantial gold inflow to the United States, caused in part by the rising political tensions in Europe that eventually led to World War II

• Worldwide monetary expansion stimulated spending by lowering interest rates and making credit more widely available

• It also created expectations of inflation, rather than deflation, and so made potential borrowers more confident that their wages and profits would be sufficient to cover their loan payments if they chose to borrow

• One sign that monetary expansion stimulated recovery in the United States by encouraging borrowing was that consumer and business spending on interest-sensitive items such as cars, trucks, and machinery rose well before consumer spending on services.

FISCAL POLICIES

• Fiscal policy played a relatively small role in stimulating recovery in the United States

• Indeed, the Revenue Act of 1932 increased American tax rates greatly in an attempt to balance the federal budget, and by doing so dealt another contractionary blow to the economy by further discouraging spending

• Actual increases in government spending and the government budget deficit were small relative to the size of the economy. This is especially apparent when state government budget deficits are included, because those deficits actually declined at the same time that the federal deficit rose.

How It Ended ? As a result, the new spending programs initiated by the New Deal had

little direct expansionary effect on the economy. Whether they may nevertheless have had positive effects on consumer and business sentiment remains an open question. United States military spending related to World War II was not large enough to appreciably affect total spending and output until 1941

The role of fiscal policy in generating recovery varied substantially across other countries. Great Britain, like the United States, did not use fiscal expansion to a noticeable extent early in its recovery. It did, however, increase military spending substantially after 1937.

France raised taxes in the mid-1930s in an effort to defend the gold standard, but then ran large budget deficits starting in 1936. The expansionary effect of these deficits, however, was counteracted somewhat by a legislated reduction in the French workweek from 46 to 40 hours—a change that raised costs and depressed production. Fiscal policy was used more successfully in Germany and Japan.

Finally To Conclude the

Crux of matter

Thank You