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Copy of Chapter 22: The Great Depression Begins


Thanh Thanh Nguyen

on 11 February 2013

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Transcript of Copy of Chapter 22: The Great Depression Begins

The Great Depression Begins The Great Depression Begins http://prezi.com/tm-kuhexxdkc/images-of-the-great-depression/ Impact today:
Hoover's model of business government cooperation is still influential
John Steinbeck's novel The Grapes of Wrath and Grant Wood's painting American Gothic are permanent artistic legacies. 1929 1930 1932 October 29:
Stocks fall during Black Thursday
Stock market crashes on Black Tuesday Grant Wood paints American Gothic Hawley-Smoot Tariff passed Drought sweeps Great Plains
Reconstruction Finance Corporation created
Bonus Marchers forced out of Washington, D.C.
Congress passes Emergency Relief and Construction Act Herbert Hoover 1929 - 1933 1928 1934 Dust storms destroy 300 million acres 1937 1939 Walt Disney releases Snow White and the Seven Dwarfs Popular musical The Wizard of Oz released Recession 2008 : Comparison with
The Great Depression In economics, a recession is a business cycle contraction, a general slowdown in economic activity.

During recessions, many macroeconomic indicators vary in a similar way.

Production, employment, investment spending, capacity utilization, household incomes and business profits all fall.

Bankruptcies and the unemployment rate rise. What is Recession ? The Recession of 1973–75 in the United States could be considered a U-shaped recession. U-shaped recession The Recession of 1953 in the United States is a classic V-shape. V-shaped recession Types of Recession L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990. L-shaped recession The early 1980s recession n the United States is an example of a W-shaped recession. W-shaped recession RECESSION 2008 : Causes Dollar Devaluation Sky-High Price of Crude Oil and Refined Product The Sub-prime Mortgage Fiasco The Housing Bubble Burst RECESSION 2008 : Causes The Housing Bubble Burst As prices declined, more homeowners were at risk of default and foreclosure. Overbuilding of houses led to decline in prices and refinancing became difficult. People even under the NINJA category were given housing loans. Lending institutions and mortgage firms wanted to give loans to as many potential customers as possible. Home Loans became cheap and demand increased. In US, a boom in the housing sector was driving the economy to a new level.  Record supply availability, falling prices, higher insurance costs and restricted credit were prevalent. Various institutions that hold the poorly performing debt obligations were forced to 'write down' the value of these assets. Incentive is to sell the property quickly Continuous Monetary Inflation suckered individuals into low-down-payment/low-interest adjustable mortgages. The Subprime Mortgage Fiasco. High Costs of Production. Increasing energy prices. Increase in demand (especially from China). World-wide speculative Middle East war fears . Sky-High Price of Crude Oil and Refined Product. Prevents the Federal Reserve from pushing US interest rates much lower. Investments such as US Treasury bills and bonds become less attractive. The bulk of crude oil purchases takes place in dollars. Caused by Iraq blunder and the Federal Reserve–generated oversupply of dollars. Dollar Devaluation Worse hit are the poorest countries.

The 15-country Euro zone were defined as a shrinking economy for two consecutive quarters.

Decreased demand for exports and remittances slowed down the Asia-Pacific economy.

Fall in house prices and increase in unemployment in the UK economy .

India recovered early as there was very little exposure to foreign assets and their derivative products. EFFECT ON THE WORLD The Great Depression The American economy went from unprecedented prosperity in the 1920s to unprecedented misery in the 1930s . Price deflation, financial crises and bank failures are also common elements Characterized by abnormally large increases in unemployment, falls in the availability of credit and large number of bankruptcies Considered, by some economists, a rare and extreme form of recession What is Depression? A depression is a sustained, long-term downturn in economic activity in one or more economies. Reduction in Purchasing Across the Board American Economic Policy with Europe Drought Conditions Bank Failures Stock Market Crash 1929 THE GREAT DEPRESSION : CAUSES Flood of sell orders provided stock prices to traders. Result of mass panic selling of stocks, causing prices to plummet . Dow Jones industrial average dropped over 12%. By the end of 1930, America truly entered what is called the Great Depression. Stockholders lost more than $40 billion dollars. Black Tuesday, October 29, 1929. Stock Market Crash 1929 Unemployment rate rose above 25%. Unemployed were unable to pay installments on their items, which were ultimately repossessed. Reduced Production leading to reduction in Workforce. Individuals from all classes stopped purchasing items. People who had their life savings in the banks – lost their money. Throughout the 1930s over 9,000 banks failed. Reduction in Purchasing Bank Failures The area was nicknamed "The Dust Bowl." Forced to sell their farms for no profit to themselves. People could not even pay their taxes or other debts . Drought occurred in the Mississippi Valley in 1930. Drought Conditions Charged a high tax for imports thereby leading to less trade between America and foreign countries. Government created the Smoot-Hawley Tariff in 1930. American Economic Policy By 1942, increasing aggregate demand had pushed real GDP beyond potential output. It ended the Great Depression. The U.S. entry into World War II led to much sharper increases in government purchases. Expansionary fiscal policies forced by the war had brought output back to potential by 1941. KEYNESIAN APPROACH
(1933-1942) Comparison between Recession 2008 & The Great Depression 1929 GDP AND LENGTH OF RECESSION AND DEPRESSION UNEMPLOYMENT PRICES,INFLATION AND DEFLATION Click on the Image to see this video Rapid money supply growth (end of banking panics, gold inflows)  rising price level, falling real interest rate and increased spending.
FDR and the New Deal?
Restored confidence in banking system (FDIC)
Early years marked by regulation/reform, little new spending (alphabet programs, e.g., NRA, WPA, PWA, CCC, etc.)
Later years saw increased spending Recovery Money (M2) and Output Growth, 1929-41 Money and the Price Level Rapid money supply growth (end of banking panic, gold inflows)
 rising price level
 falling real interest rate
 and increased spending. Recovery Deflation caused the real interest rate (i.e., the real cost of borrowing) to rise sharply:
i(nominal) – inflation rate = i(real)
e.g., 2% - (-10%) = 2% + 10% = 12%
 Firms stopped investing in new buildings, equipment, etc.
 Bankruptcies increased as borrowers lacked the incomes to repay their debts.
 Banks failed because borrowers defaulted on their loans. But Were Interest Rates Really Falling? The Fed’s Monetary Policy
Fed officials did not watch (or even measure) the money supply. But, why didn’t they respond to bank panics?
Most failed banks were small, nonmember banks.
Interest rates were falling and few banks borrowed at the discount window.
Bank depositors lost confidence  bank runs
Banks lost gold, currency and other reserve assets
Loss of reserves caused banks to reduce loans and deposits (causing money stock to fall)
Contracting money stock reduced spending
Reduced spending led to lay-offs (increased unemployment), falling prices (deflation) and lower output. Banking Panics Commercial Bank Failures, 1920-2004 Worst economic disaster of the 20th century.
Cause or causes are still debated.
A defining event, especially for the government’s involvement in the economy.
Useful for learning important macroeconomic concepts. Why study the Great Depression? Recession: When your neighbor loses his or her job.

Depression: When you lose your job. What makes a Depression Great? Could It Happen Again? The Depression was not a failure of capitalism or markets, but rather a failure of the Federal Reserve.
Monetary policy should maintain price stability – avoid deflation and inflation.
The Fed should respond to financial crises that increase the demand for money or threaten to disrupt the payments system. Rapid money supply growth (end of banking panics, gold inflows)  rising price level, falling real interest rate and increased spending.
FDR and the New Deal?
Restored confidence in banking system (FDIC)
Early years marked by regulation/reform, little new spending (alphabet programs, e.g., NRA, WPA, PWA, CCC, etc.)
Later years saw increased spending
World War II (when unemployment finally fell below 10%) Recovery Percent Nominal Interest Rate, 1922-33 7000 banks failed -- many during “panics”
Number of banks fell from 25,000 in 1929 to 15,000 by 1934
Possible Channels:
Loss of deposits  decline in expenditures
Customer relationships broken  harder to borrow
Money supply contraction Bank Failures The stock market crash – end of the party
Collapse of world trade – globalization in reverse
Monetary collapse Why Did It Happen? Some Suggested Causes An Overview of the Great Depression Treasury bill yield minus inflation rate Business Investment, Billions of Dollars; Annual Data The Real Interest Rate and Business Investment Real Nominal Percent Nominal and Real Interest Rates, 1922-33 1920 advertisements: electric washer (above) and Columbia Grafonola (left) · Installment buying increased the demand for goods, while consumer debt increased. New Goods for Sale · In the 1920’s, people began to purchase items they couldn’t afford through the use of installment buying, or buying on credit. Stocks Surge · Millions of Americans invested in the bull market, becoming rich as stock prices rose. 1929 Stock Market Crash (2:33) · Some people began to buy stocks on margin, which is similar to installment buying. * Unquestioned faith in the bull market helped lead to the Great Depression! Advertising · In the 1920’s businesses used advertising to convince consumers that they would be happier if they bought their product. No, problem! Just give me $100 and you can owe me the rest! stock broker investor Buying Stocks on Margin: Scenario A I don’t care what you do as long as you pay me back! stock broker investor Buying Stocks on Margin: Scenario B Too bad, hotshot! You still owe me $900! stock broker investor Buying Stocks on Margin: Scenario B No problemo! It was a pleasure doing business with you! stock broker investor Buying Stocks on Margin: Scenario A Well, Ford stock costs $10 per share. You want to
buy 100 shares?
Figure it out yourself, smart guy! stock broker investor Buying Stocks on Margin: Scenario A (left) Los Angeles, at night, 1920. (right) Telephone operator at booth, new quotation system, New York Stock Exchange, New York City. (c. 1928) (above) John Iringle, fourteen years old, with well equipped radio outfit, which he constructed, Chicago, Ill. . (c.1922) Objective: To examine the methods used to increase the economic boom in America. But I’m broke! What am I going to do! stock broker investor Buying Stocks on Margin: Scenario B That’s great! Now pay me the $900 you owe me! stock broker investor Buying Stocks on Margin: Scenario A Oh, well. I only have $100. I can’t afford 100 shares. = $1,000.00 Ummm…
x $10 per share stock broker investor Buying Stocks on Margin: Scenario A Hello, sir. I would like to
purchase 100 shares of stock in the Ford Motor
Company. How much is it going to cost me? stock broker investor Buying Stocks on Margin: Scenario A $1,000 net profit - $100 initial investment $1,100 profit $2,000 net worth - $900 owed Now let’s figure out how much money I made! investor Buying Stocks on Margin: Scenario A Alright, it’s a deal!! = $900 owed $1,000 worth of stock - $100 paid Like, how much
would that be? Let me think… stock broker investor Buying Stocks on Margin: Scenario A $100 100 shares x $1 per share My 100 shares are now worth... Six months later, Ford stock decreases to $1 per share. stock broker investor Buying Stocks on Margin: Scenario B $2,000 100 shares x $20 per share My 100 shares are now worth... Six months later, Ford stock doubles to $20 per share. stock broker investor Buying Stocks on Margin: Scenario A $400.00 net loss - $500.00 initial investment $100.00 stock value How much money have you lost? $100.00 How much are your 100 shares of stock now worth? x $1 per share 100 shares of stock stock decreases to $1 per share Scenario #2 $500.00 How much money have you invested? x $5.00 per share You buy 100 shares of stock of How does the stock market work? $1,500.00 net profit - $500.00 initial investment $2,000.00 stock value How much profit have you made? $2,000.00 How much are your 100 shares of stock now worth? x $20.00 per share 100 shares of stock stock increases to $20 per share Scenario #1 $500.00 How much money have you invested? x $5.00 per share You buy 100 shares of stock of How does the stock market work? http://www.npr.org/2008/11/15/96654742/a-depression-era-anthem-for-our-times songs images Bank failures

Unemployment rate

Economic decline

Biggest decline in Dow Jones industrial average

Change in prices

Emergency spending programs

States’ response

Increase in money supply by Federal Reserve 9,096 – 50% of banks
(Jan. 1930 – March 1933) 57 – 0.6% of banks
(Dec. 2007 – May 2009) 25% 8.5% -26.5%
(1929 - 1933) -3.3%
(Second quarter 2008 - first quarter 2009) -89.2%
(Sept. 3, 1929 – July 8,1932) -53.8%
(Oct. 9, 2007- March 9, 2009) -25%
(1929 – 1933) +0.5%
(Dec. 2007-March 2009) 1.5% of GDP for 1 year
(Increase in 1934 budget deficit) 2.5% of GDP for 2 years2
(2009 American Reinvestment and Recovery Act) Raise taxes, cut spending Federal stimulus plan gives fiscal relief to states to lessen impact of tax increases 17%
(1933) 125%
(September 2008 – May 2009) Section 1 I. The Election of 1928 A. The 1928 election placed former head of Food Administration and secretary of commerce, Herbert Hoover, on the Republican ticket against Democratic candidate, Alfred E. Smith, a four-time governor of New York and the first Roman Catholic to be nominated for president. B. The issue of Prohibition played a major role in the campaign. Hoover (dry) favored a ban on liquor sales. Smith (wet) opposed the ban. C. Religious differences between the candidates had a major effect on the campaign. The Catholic issue led to a smear campaign against Smith. D. The Republicans took full credit for the prosperity of the 1920's and Herbert Hoover easily won the 1928 election by a landslide. II. The Long Bull Market A. The Stock Market was established as a system for buying and selling shares of companies. A long period of rising stock prices is known as a bull market. Prosperous times during the 1920's caused many Americans to invest heavily in the stock market. B. As the bull market continued to go up, many investors bought stocks on Margin, making a small cash down payment. This was considered safe as long as stock prices continued to rise. If the stock began to fall, the broker could issue a Margin call demanding that the investor repay the loan immediately. C. In the late 1920s, new investor bid prices up without looking at a company's earnings and profits. Speculation occurred when investors bet on the market climbing and sold whatever stock they had in an effort to make a quick profit. III. The Great Crash
A. By late 1929, a lack of new investors in the stock market caused stocks prices to drop and the bull market to end. B. As stockbrokers advised their customers of margin calls, customers responded by placing their stocks up for sale, causing the stocks market to plummet further. Stock prices fell drastically on October 29, 1929, Black Tuesday, resulting in a $10 to $15 billion loss in value. While this did not cause the Great Depression, it did undermine the economy's ability to hold out against its other weaknesses. C. The stock market crash weakened the nation's. Banks lost money on their investments, and speculators defaulted on loans. Because the government did not insure bank deposits, customers lost their money if a bank closed. Bank runs resulted as many bank customers withdrew their money at the same time, causing the bank to collapse. IV. The Roots of the Great Depression A. Efficient machinery led to overproduction, and Americans could not afford to buy all the goods production B. The uneven distribution of wealth in the United States added to the country's economic problems. In 1929 the top 5 percent of American households earned 30 percent of the country's income. More than two-thirds of the nation's families earned less than $2,500 a year. C. Low consumption added to the economic problems, Worker's wages did not increase fast enough to keep up with the quick production of goods. As sales decreased, workers were laid off, resulting in a chain reaction that further hurt the economy. D. Many Americans bought on the Installments plan, making a down payment and paying the rest in monthly installments. Paying off installment debts left little money to purchase other goods. E. The Hawley-Smoot Tariff intensified the Depression by raising the tax on imports. Americans purchased less from abroad because of the high cost. In return, foreign countries raised their tariffs on American products, causing fewer to be sold overseas. F. Instead of raising interest rate to stop speculation, the Federal Reserve Board made the mistake of lowering the rates. This encouraged banks to make risky loans and misled business owners into thinking the economy was still expanding. Section 2 I. The Depression Worsens
A. By 1933 thousands of banks had closed and millions of American workers were unemployed. Unemployed workers often stood at bread lines to receive free food or at Soup Kitchens where private charities gave a free meal to the poor. B. Americans unable to pay their mortgage or rent lost their homes. Those unable or unwilling to move had a court-ordered eviction notice delivered by a court officer or bailiff who forced nonpaying tenants out onto the street. a person who performs certain actions under legal authority C. Many of the homeless built shacks in shantytowns, which the referred to as "Hoovervilles" because they blamed the president for their financial trouble. Hobos, or homeless Americans who wandered around hitching rides on railroads cars, searched for work and a better life. a shantytown built by unemployed and destitute people during the Depression of the early 1930s. D. As crop prices dropped in the 1920's, many American farmers left their fields uncultivated. A terrible drought in the Great Plains, beginning in 1932, caused the region to become a "Dust Bowl." E. Many Midwestern farmers and Great Plains farmers lost their farmers. Many families moved west to California hoping to find a better life, but most still faced poverty and homelessness. II. Escaping the Depression
A. Americans escaped the hardships of the Depression by going to the movies and listening to radio broadcasts. Stories tended to be about overcoming hardships and achieving success. B. Walt Disney produced the first feature-length animated film, Snow White and the Seven Dwarfs, in 1937. Other films, the The Wizard of Oz, Mr. Smith goes to Washington, and Gone with the Wind, contained stories of triumph over adversity and visions of a better life. C. Families gathered around the radio daily to hear news of listen to comedy shows like George Burns or a dramatic series like the Lone Ranger. Melodramas, called soap operas, became very popular with housewives. Soap Operas received their name because makers of laundry soaps often sponsored them. III. The Depression in Art
A. Homeless and unemployed Americans were the subjects of art and literature during the 1930s. Artists and writers tried to capture the real life drama of the Depression. Thomas Hart Benton and Grant Wood emphasized traditional American values in their art. B. John Steinbeck's 1939 novel The Grapes of Wrath told the story of an Oklahoma family fleeing the Dust Bowl to find a new like in California. Steinbeck, like many writers of this time, wrote of poverty, misfortune, and social injustice. C. Novelist William Faulkner's literary technique, stream of consciousness, revealed character's thoughts and feelings before they spoke - thoughts they dared not reveal. In his novels, he exposed hidden attitudes of Southern whites and African Americans in a fictional Mississippi county. The End Take from Think Quest Economic History Site
http://library.thinkquest.org/C005121/data/germany.htm Living on the streets Taken from Bergen County Technical Schools, Teaching American History Grant, Funded by U.S. Department of Education http://www.bergen.org/ourstory/resources/great_depression/index.htm Homeless Beggar Taken from American Life Histories, manuscripts from the Federal Writers’ Project, 1936-1940. Manuscript Division Library of Congress http://rs6.loc.gov/ammem/wpaintro/wpahome.html USA Work Program Taken from Pensito Review http://www.pensitoreview.com/2005/07/page/2/ Jobless Men unable to care for their families Take from Eleanor Roosevelt National Historic Site http://www.nps.gov/archive/elro/glossary/great-depression.htm
Also shown on National Park Service, U.S. Department of the Interior http://www.nps.gov/ Roosevelt Library Photo Taken from Minnesota Historical Society http://shop.mnhs.org/pages.cfm?id=57 Why can’t you give my dad a job? Taken from http://home.millsaps.edu/mcelvrs/Depression_2001_1.html
Photograph by Dorothea Lang Classic Photo Photos of the Great Depression
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