Transcript An Overview of the Great Depression

An Overview of the Great Depression
NARROW FLAPPER ANKLE
PENCIL
JIVE
MINI
MAXI
RAHRAH MICRO
KNEE
MAXI
What makes a Depression Great?
• Recession: When your neighbor loses
his or her job.
• Depression: When you lose your job.
Why study the Great Depression?
• 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.
• Led to the conditions that allowed Hitler to gain power
in the economically desperate Deutschland.
Some Concepts
• Gross Domestic Product (GDP): Comprehensive
measure of the nation’s output of final goods and
services.
• Real GDP: GDP measured at a fixed price level
(i.e., inflation adjusted).
• Nominal GDP: GDP measured at current prices.
• Recession: Sustained decline in real GDP
(approximately two quarters).
• Depression: Very severe recession.
More Concepts
• Inflation: A sustained increase in the general price
level (often calculated in terms of the Consumer
Price Index (CPI)).
• Deflation: A sustained decrease in the general
price level.
• Money Stock: The stock of assets that serve as
media of exchange (e.g., coin, currency, checking
accounts).
• Real Interest Rate: Measure of the cost of
borrowing adjusted for inflation/deflation.
How Great was the Great Depression?
• Real
output (GDP) fell 29% from
1929 to 1933.
• Unemployment increased to 25%
of labor force.
• Consumer prices fell 25%;
wholesale prices 32%.
• Some 7000 banks failed when
people pulled their money out and
companies went bankrupt and did
not pay back loans.
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party
•YouTube - 1929 Wall Street Stock Market
Crash
•YouTube - The Great Depression
(Britannica.com)
•YouTube - The Great Dust Storms - a Ken
Burns style video
•Bell Aliant Learning Centre GREAT
DEPRESSION PTS 1 AND 2
Stock Market Boom and Bust
S&P Composite Index
35
Sept. 1929
30
25
20
15
10
5
July 1932
0
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
Jan-35
Jan-37
Jan-39
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party: overinflated
stock value bubble burst
• Collapse of world trade – globalization in reverse.
Countries tried to protect their own industries and stopped
trading with each other. This constriction of international
trade made the depression worse. PROTECTIONISM
Why Did It Happen? Some Suggested Causes
• The stock market crash – end of the party
• Collapse of world trade – globalization in
reverse
• Monetary collapse- THE VALUE OF
CURRENCY DECREASED (WORST CASE
GERMANY)
Bank Failures
• 7000 U.S. 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
Commercial Bank Failures, 1920-2004
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1000
500
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25
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30
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0
Banking Panics
• 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.
The Fed’s Monetary Policy
THE U.S. 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.
CANADA DID NOT HAVE THE BANK OF
CANADA UNTIL AFTER THE
DEPRESSION: BOTH KING AND LATER
BENNETT were using Laissez Faire
economic policies that are against
government intervention in the economy.
THIS CHANGED AFTER THIS EVENT FOREVER!
Nominal Interest Rate, 1922-33
Percent
5
4
3
2
1
0
1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933
But Were Interest Rates Really Falling?
• Deflation caused the real interest rate (i.e.,
the real cost of borrowing) to rise sharply:
 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.
Recovery
• Rapid money supply growth (end of banking
panic, gold inflows)
 rising price level
 falling real interest rate
 and increased spending (MAINLY DUE
TO World War Two putting everyone back to
work making weapons for fighting Hitler)
Recovery
•
Rapid money supply growth (end of banking panics, gold inflows)  rising price level,
falling real interest rate and increased spending.
•
FRANKLIN DELANO ROOSEVELT (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.). All were forms of Keynesian
Economics where governments run deficits in bad times and pay them off
in good times to prevent total economic collapse (this is why GM and
Chrysler were bailed out of bankruptcy by Canada and U.S. governments in
2008 and why there are no more Saturns, Pontiacs or Oldsmobiles).
– Later years saw increased spending on huge GOVERNMENT projects that put
people back to work like the Hoover Dam near Las Vegas and paid artists to
create public art
– THE BEGINNING OF STIMULUS SPENDING BY GOVTS TO GET THEIR
COUNTRY WORKING AGAIN. (2008-11 ECONOMIC ACTION PLAN)
– Another way to address a recession by government is called AUSTERITY
MEASURES (EXTREME CUTS TO GOVT SPENDING-VERY HARSH)
Recovery
• 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% after a high of nearly 25%
officially…but in some areas higher!)
Could It Happen Again? It almost did in
2009
• The Depression may not have been a failure of capitalism or markets
as a whole, but rather a failure of the Federal Reserve in the U.S. and
the non-interventionist policies of King and Bennett in Canada
• Monetary policy should maintain price stability – avoid deflation and
inflation.
• The Fed and Bank of Canada should respond to financial crises that
increase the demand for money or threaten to disrupt the payments
system. They can raise or lower interest rates accordingly to speed up
or slow down borrowing and spending.
• Canada under Chretien and Martin regulated the banks. Clinton and
Bush let Wall Street have freedom that caused 2008 Meltdown.
MUCH WORSE than CANADA. $39 DOLLAR ALBANY, NY
HOTEL IN 2010
• 2009 GREAT RECESSION WAS CAUSED BY DEREGULATED
BANKS IN THE USA
1929-1939
• Stock market
crash
• Didn’t realize
the effect it
would have
• No money to
replenish what
was borrowed
Many found being broke
humiliating.
The Roaring 20’s
• The Jazz Age! Good
times!
• The new concept of
“credit”
• People were buying:
– Automobiles
– Appliances
– Clothes
• Fun times reigned
– Dancing
– Flappers
– Drinking
Why was this bad?
• Credit system
– People didn’t really have the
money they were spending
(like the housing crisis in U.S.
in 2008)
• WWI
– The U.S. was a major credit
loaner to other nations in
need
– Many of these nations could
not pay us back
The Stock Market
• People bought stocks
on margins
– If a stock is $100 you
can pay $10 now and
the rest later when the
stock rose
• Stocks fall
– Now the person has
less than $100 and no
money to pay back
And then….
• With people panicking
about their money
investors tried to sell
their stocks
– This leads to a huge decline
in stocks
– Stocks were worthless now
• People who bought on
“margins” now could not
pay
• Investors were average
people that were now broke
• Herbert Hoover was
president at the start
• Philosophy: We’ll
make it!
• What He Did: Nothing
• The poor were looking
for help and no ideas
on how to correct or
help were coming
In CANADA…
• Both Prime Ministers William Lyon
MacKenzie-King and R.B. Bennett did not
intervene and felt the economy would correct
itself…it didn’t.
• Farmers were already feeling the effects
– Prices of crops went down
– Many farms foreclosed
• People could not afford luxuries
– Factories shut down
– Businesses went out
• Banks could not pay out money
• People could not pay their taxes
– Schools shut down due to lack of funds
• Many families became homeless and had to live in
shantytowns. Some men went to work camps where
Communist organizers saw success (like Slim Evans and
the Trek from B.C. to Ottawa on trains).
• Starved people were found to have grass and rocks in
their stomachs.
Many waited in unemployment
lines hoping for a job.
People in cities would wait in line for
bread to bring to their family.
Some families were forced to relocate
because they had no money such as the
Okies who went to California with all of
their belongings piled on trucks looking to
pick fruit for cash (“The Grapes of Wrath”
by Steinbeck).and the Hobos who
“rode the rails”35
• Critics' Picks - Critics' Picks: 'The Grapes of
Wrath' -- NYTimes.com/Video – YouTube
• Bruce Springsteen - The Ghost of Tom Joad
(Great Depression) - YouTube
“Hoovervilles”
• Some families were
forced to live in
shanty towns
– A grouping of shacks
and tents in vacant
lots
• They were referred to
as “Hooverville”
because of President
Hoover’s lack of help
during the depression.
“BENNETT BUGGIES”
A drought on the Prairies and in
the South led to dust storms that
destroyed crops.
“The Dust Bowl”
• Crops turned to dust=No food to
be sent out
• Homes buried
• Fields blown away
• South in state of emergency
• Dust Bowl the #1 weather crisis
of the 20th century
Two Families During
the Depression
A Farm Foreclosure
Some families tried to make money by
selling useful crafts like baskets.
*FDR*
• When he was
inaugurated
unemployment had
increased by 7
million.
• Poor sections (like
Harlem) had 50% of
the pop. unemployed
• Instated the “New
Deal”
• Yea! Frankie!
• People everywhere were
effected by the depression
• It wasn’t till President
Roosevelt took over and tried
to put the economy back
together that people even saw
a glimmer of hope
Major Historical Happenings...
• Jim Crow Laws
• Scottsboro
Trials
• Recovering
from the Great
Depression
• Racial Injustice
• Poor South
Jim Crow Laws
• After the American Civil War most
states in the South passed anti-African
American legislation. These became
known as Jim Crow laws.
• These laws included segregation in…
– Schools
-- Hospitals
– Theaters
-- Water fountains
– Restaurants
– Hotels
– Public transportation
– Some states forbid inter-racial marriages
• These laws were instituted in 1896 and
were not abolished till the late 1950’s
(even then still not completely).
• 9 young AfricanAmerican men (1320) accused of
raping 2 white girls
in 1931
• Immediately
sentenced to death
• Trials went on for
nearly 15 years
before all the men
were dismissed
• Started on a train bound for
Memphis
• Several white men boarded and
picked a fight with the black men
• Whites were forced off train by the
12 black men. The white men
reported the the black men had
raped two white girls on the train to
authorities
• They were immediately arrested and
tried in front of an all-white jury.
The trials caused a huge uproar
amongst the black community.
• Wrote To Kill a
Mockingbird in
1960
• Based the story on
her life growing
up in Monroeville,
Alabama
• TKAM was the
only novel she ever
wrote
• The character of
“Dill,” Scout and Jem’s
playmate in the novel
was based upon Lee’s
actual neighbor,
Truman Capote
• Capote is famous for
amongst other things,
In Cold Blood and
Breakfast at Tiffany’s.
• It has been said that he
gave Lee Mockingbird
as a gift.
• In 1962 the novel
was turned into a
film starring
Gregory Peck.
• It received a
humanitarian
award and several
Academy Award
nominations
What really ended the Depression
RESULTS
• After the 1930s. an unregulated laisse-faire free market
was seen to be too risky. After the 1940s, Keynesian
Economics policies (run deficits in bad times, pay off in
good times like 2009-2011) were followed: Government
regulates the economy through the Bank of Canada and
raises and lowers interest rate to stimulate (lower) or slow
the economy (raise to fight inflation). Also stimulus
spending by government during hard times create work
and build needed infrastructure.
• Introduction of new polices like EI, Social Assistance
(Welfare), Old Age pensions and, later, Medicare (1960s).
THE BIRTH OF THE WELFARE STATE (or Nanny State
as right wing detractors call it)
What are the main stock indexes?
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Fun trivia: journalist Charles Dow created the first index more than 100 years
ago. In 1896, Dow averaged the stock prices of the top 12 publicly-traded
companies. (He added their stock prices together and divided the total by the
number of stocks.) By doing this, he found that he could trace the movement
of the overall market, including the general (average) movement of stocks that
weren’t included in the financial calculation.
So what are the most popular market indexes?
The S&P 500 – This index tracks 500 large U.S. companies across a wide
span of industries and sectors. The stocks in the S&P 500 represent roughly 70
percent of all the stocks that are publicly traded. “S&P” stands for “Standards
and Poor’s,” the name of a market research firm.
Companies CAN be listed in more than one index. Some of the largest
companies within the S&P 500 are also in the Dow Jones Industrial Average.
The Dow Jones Industrial Average – Named after Charles Dow, this index
tracks the 30 largest U.S. companies. This means it represents “large-cap”
companies, which is the industry term for “very big companies” like Johnson
& Johnson, McDonalds and Coca-Cola. Although the companies within the
Dow Jones represent only about 25 percent of all stocks, the DJIA is widely
accepted as the leading indicator of market health.
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NYSE Composite Index
The NYSE Composite Index is designed to measure the performance of all common
stocks listed on the NYSE, including ADRs, REITs and tracking stocks. In January 2003
the NYSE reintroduced the NYSE Composite Index under a new methodology that is
fully transparent and rule-based. It is a measure of the changes in aggregate market
value of all NYSE-listed common stocks, adjusted to eliminate the effects of
capitalization changes, new listings and delistings.
NYSE AMEX Composite
The NYSE AMEX Composite is made up of stocks that represent the NYSE Amex
equities market. The Index is a market capitalization weighted index, so the weight of
each stock depends on the price of the shares and how many are outstanding. It was
previously known as the American Stock Exchange (Amex) Composite Index.
Dow Jones Industrial Average
The Dow Jones Industrial Average is a price weighted index that represents large and
well-known U.S. companies. The index covers all industries with the exception of
Transportation and Utilities. While stock selection is not governed by quantitative rules,
a stock typically is added only if the company has an excellent reputation, demonstrates
sustained growth and is of interest to a large number of investors.
S&P 500 Index
The S&P 500 focuses on the large-cap sector of the market; however, since it includes a
significant portion of the total value of the market, it also represents the market.
Companies in the S&P 500 are considered leading companies in leading industries.
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ALSO, THE TSX, THE NIKKEI, FTSE
• (1/2) Canada Between Two World Wars Part 1 – YouTube
• (2/2) Canada Between Two World Wars Part 2 - YouTube