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Unit 5 - Causes of the Great Depression

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Harriet Rogers

on 28 May 2013

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Transcript of Unit 5 - Causes of the Great Depression

The Causes of the Great Depression Main factors of this topic are:
Declining industries
Agricultural decline (^ could link with declining Industries)
Uneven distribution of wealth
Unstable Get Rich Quick schemes
International issues
Weak banking system
Wall Street - desperation factor Declining Industries Restoration of European production and exports meant competition with new fuels such as oil severely affected the coal mining industry - coal prices fell dramatically
Textile Industry took a severe hit - changes in women's fashions made a huge change to the quantity of material needed - i.e. shorter skirts
The new technology of production far outstripped the demand - there could only have been a certain amount of absorption in a free market economy
Consumer durables such as cars, radios or lightweight electric vacuum cleaners only had a limited boom duration; more or less by 1927, the majority of those who could have bought these goods had done so, therefore demand began to slowly reduce
Automobile industry - between 1929 and 1932 combined sales shrank by over 2/3 - growing unemployment; by 1931 Ford had let go of approximately 70% of its workforce, but profits remained low
People had no money to replace electrical appliances if they malfunctioned
Decline in Construction industry - contracts in 1929 were worth $6.6 billion, by 1932 this had fallen to $1.3 billion - job losses for those employed in the timber industry, architecture, civil engineering and iron and steel workers
Growing unemployment in weakened industries add to the problem - threw others out of work e.g. 1931, 15.9% of the Urban workforce had lost their jobs - reduction of 32% of what the unemployed could buy Agricultural weakness Prohibition reduced demand for grain, growth of synthetic fibers reduced demand for cotton etc., increased use of vehicles meant less demand for animal food for horses, new advances such as improved fertilizers meant that farmers were producing too much
66% farms operating at a loss
1929 - average American farmers wage was $273 in comparison to national average: $750
Investment in new equipment had accumulated a lot of debt amongst the farming population (particularly common on cotton and tobacco industry); the debt level rose by $5 billion between 1910 and 1920 and interest payments alone totaled around $575 million
Smaller farmers could not compete with European competition/larger operators (<--more significantly) who had been able to invest in incredibly advanced technology
1919 cost per bushel was over $2, by 1922 it was $0.90 - overproduction depreciated value
Agricultural economy had severe climatic disadvantages, particularly in the Mid-West where heavy bouts of drought or natural disasters took place OR Mississippi flood of 1927 devastated many farmers; 3,500 foreclosures of farms out of 5,280 farms
Between 1920 and 1929, the value of farmland dropped by 30% Uneven Distribution of Wealth North East and Far West enjoyed the highest per capita incomes; in 1929 they averaged at around $900, in comparison this rate was an average of $365
Around 60% of American families were living on an annual income of less than $2,000
Textile mills of the South were employing cheap labour, therefore the mills in the North (where, for the most part, a much higher wage was enjoyed) could not compete
New Industries such as the motor industries and the car industry were very concentrated in North Eastern or Mid Western regions where the availability of coal was high, there were many immigrant/mobile labour forces, well-established transport connections and where big cities e.g. Philedalphia and New York are situated - other regions (mostly West and South) had very little industrial development
Women did not enjoy improved career opportunities, expected to be homemakers - tended to occupy low paid menial jobs; 700,000 women were umployed as domestic servants around this time, earned less money than men, only 150 female dentists and less than 100 female accountants, college education for females dropped by 5%
Native Americans still lived on infertile reservations whilst African Americans made up 10% of the population but 85% lived in the South, kept unskilled due to lack of skilled job opportunities, 14% of farmers were African Americans International problems 1922 Congress created the Debt Funding Commission - set the maximum deadline for repayment at 1947, at an interest rate of 4.25% - most countries managed to negotiate a more realistic deal
Most European countries could not afford to repay debts due to war and U.S's protectionist Tariffs
Dawes Plan 1924 offered scaled down reparations to Germany and lent it $250 million to help stabilize its currency - Germany used money to repay allied European countries, who in turn, repaid their debts to the U.S. and with the scaling down of debts made by the Dawes and Young Plans, allies were paying less money back to the U.S.A
Banks encouraged investments into European ventures with the hope that the movement of U.S. money would help the European countries repay their loans - massive over investments took place; a Bavarian village asked for $125,000 for the construction of a swimming pool, but an investor lent them $3 million with the hope of getting rich quick - unrealistic ventures
Countries retaliated to high import duties, making it harder for American companies/farmers to sell surpluses - in 1929 world trade had been worth $36 billion, but by 1932 it was worth $12 billion Weak Banking System The majority of banks were small rural banks that lacked the sufficient reserves to cope with pressure
Before 1933 there was no federal insurance system to provide security and the majority of state banks operated completely independently -- used depositors' money for speculation
1929 saw 659 banks close, but this was no abnormal figure
in 1929, there were around 25,000 banks, operating under 52 different bodies of regulation
Banks bought over many Government bonds to ensure the availability of The Federal Reserve was in charge of varying interest rates to control the amount of money in circulation and curb speculation - it normally favoured low interest rates but in 1931 it made a transition to high interest rates which meant that money was very difficult to borrow; caused a liquidity crisis (shortage of cash) - by the end of the year 2,294 banks collapsed; depositors lost their money and companies could not borrow; people were now keeping money under their mattresses. Wall Street Crash 'Normal people' invested 'on the margin' - the stock breaker pays for the stock and then shares the profit between the buyer and himself - banks charged up to 12% interest of the cost of the original price - worked so long as stock prices were on the rise vast amount of speculation was unregulated, investors were running up huge debts which they assumed that they could repay once their stock shares increased in value, but the price of stock shares was growing far quicker than real economic growth. Once this latter problem was realised, a bout of panic selling began as investors were anxious to minimise losses as fast as possible - caused a huge depletion in stock value (Between September and November of 1929, 50% fall)
The Big Bull Market (a market where there are more buyers than sellers) began to seriously slip on October the 24th - 'Black Thursday' when panic hit the market and the index fell by 20% in one day of trade
Crisis meeting held at JP Morgan HQ -- in order to restore confidence into the market, many bankers purchased shares e.g. Richard Whitney purchased 10,000 shares in US Steel and then bought over other stocks -- only temporary
The Federal Reserve were deeply divided and failed to come to a solution
Main crisis on Monday 28th October; 9 million shares changed hands, 14% drop in stock market, 14 billion dollars wiped off share values
Dried up American credit; Stockholders had lost over $40 billion
At the absolute least, 98% of the population did not own stock shares during this period - the crash itself had very little direct economic impact on the American individual
By 1930, share values were developed and bank failures had lessened - SHOWS THAT WSB HAD A VERY SHORT IMPACT
This said, those most affected by the crash ran up huge debts and cut spending severely - in 1930, spending on consumer goods fell by 20% (affected car industry) -- PROBABLY DUE MORE TO OTHER FACTORS!! 'Get Rich Quick Schemes' Easy Credit enabled very unstable Get Rich Quick Schemes
Charles Ponzi conned thousands of innocent people into investing into his ventures, promising a 50% shares within 90 days, few saw a return
Florida Land Boom - the fact that wealthy industrialists were building hotels in Florida, coupled with the improvement of motor industries meant that a lot of interest began to grow in the 'Sunshine State'; People began to invest (paying with credit) in unseen ventures in the hope to make a quick profit because of success stories (e.g. investing $25 for a plot of land and selling it off for $150,000 25 years later) - only worked if there were more buyers than sellers but investment decreased in 1926 (due to news of scandals - i.e the fictional 'prosperous town of Nettles and 1926 hurricanes which killed thousands). Left thousands of people bankrupted
Florida Land Boom didn't put people off - between 1927 and 1929 people were going Wall Street Crazy and weren't investing in business for interest but for speculation; big corporations such as Bethlehem Steel were investing as much as $157 million in the market , if stock prices fell, they would go bankrupt. WHY DID THE DEPRESSION LAST SO LONG? MAIN FACTORS ARE:
Foreign Economic Crisis
Nature of American Business
Inadequate Government Intervention
Monetary Policy
Hoover's role Foreign Economic Crisis Hoover always blamed the foreign economies for the depression
Foreign economies had a lack of purchasing power - e.g. war debts that France and GB owed to Washington meant that they had very little purchasing power
Germany, which had been the most important economic power in Europe, was damaged beyond repair - 1929 the U.S. loans dried up, forcing Germany into a recession
Prior to 1914, the Pound Sterling currency related to a fixed amount of gold so that other currencies could relate to it but by 1929, GB dropped the pound sterling as it could no longer afford to keep the world economy afloat - devalued the pound (imports from the U.S. were now even more expensive to buy)
1931 the whole European banking system was on the brink of collapse and the gold standard imploded - Kreditanstalt bank in Austria collapsed and brought down several other banks down across central Europe Nature of American Industry U.S. operated a Free Market economy
Industries were often monopolized/bought over by trusts e.g. in 1904 4% of American companies produced 57% of all industry in the U.S -- although it seemed as though the system was competitive, the reality was that certain markets were being dominated by a major corporation which limited competition - small businesses could not survive
The problem of excess production played a huge role - see 'declining Industries' slide
Absence of employment into newer industries e.g. during a time of prosperity, it is customary for old industries (i.e. coal) to contract, and for newer companies to expand as a result and provide employment to the disbanded workforce - BUT New industries (e.g. car industry) were also vulnerable and therefore could not accommodate these workers - 24% unemployment in 1933 Pre-Hoover Government 8% of families earned 42% of the general wealth, while 60% owned a mere 23% - the unregulated economy could not maintain a stable balance between the ability to buy goods and the level of wages
The way to solve this issue economically would have been to increase the taxation on the rich to increase revenue and invest more money into state employment - did not do this Tight Monetary Policy In order to counteract a depression, monetarists argue that a 3% to 5% yearly increase in the amount of money in circulation is necessary to encourage economic growth - however between 1929-1933 there was a 33% decrease in liquidity
The Federal reserve restricted the amount of money available in the economy by increasing the re-discount rate by 2%
Meant that less people had less money to spend, thus keeping demand for products low Hoover's role
introduced the RFC (Reconstruction Finance Corporation) in 1932 which made $2 billion available to rescue banks, trusts, credit unions and other institutions -- most aid went to larger banks and companies
Strongly believed in inter-community Voluntarism; Companies,individuals, charities, churches (etc) give relief and public funding order to encourage their economic development - problems were too great for this to be effective - also went against nature of American economy
The National Credit Corporation was set up in 1931 with the task of helping failing banks survive; was given $500 million but spent only $10 million by the end of 1931, bankers valued their own self interests much more than that of the masses
Agricultural Marketing Act 1929 - federal board with funds of $500 million created stabilisation corporations that bought farm surpluses and re-sold/disposed of them - corporations payed artificially high prices (e.g. Grain Stabilization Corporation in Chicago bought wheat per bushel at 20 cents higher than the average)- encouraged farmers to produce more rather than less
Pressure began to build up within Congress -- Senator La Follette urged large scale public spending & direct federal grants for unemployment relief; whilst Hoover did support proposals for $1.5 billion to be given to States to fincance public works (such as the Bolder Dam project in California which provided hydro-electric power, better flood control and therefore better irrigation), he did not swallow the whole pill and therefore this was no where near enough to solve the issue.
1932 introduced the biggest peacetime taxation in history
Hawley Smoot Tarriff of 1930 pushed export duties up to 40% on exported industrial and agricultural goods - European countries abandoned free trade and meant that even fewer American products were being exported - Hoover did not veto the bill
Introdruced the Moratorium - U.S.A postponed collection of debt repayments for 18 months in order to prevent a potential war breaking out in Europe as a result of Germany's inability to repay their reparations
Refused to give direct Government relief as he didn't want to create a Government-dependant class; gave $500 million for unemployment relief but this was far from being sufficient. Even during the severe drought of 1930-31, Hoover was reluctant to give relief; Congress ended up loaning $47 million to the drought which was much too small
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