Transcript WHATDUNIT? The Great Depression Mystery

WHATDUNIT?
The Great Depression Mystery
• The American Economy went from
unprecedented prosperity in the 1920’s to
unprecedented misery in the 1930’s
• Why?
The Business Cycle: The Ups &
DOWNs of the Economy
The Business Cycle
• BOOM/Prosperity/Peak
• High Demand--> desire for more
profits/higher confidence-->greater
investment --> more production -->higher
employment -->more demand --> higher
prices (inflation)
The Business Cycle
• Contraction/Slowdown
• Inflation/Overproduction -->less production
-->lay offs -->less spending -->lower
confidence -->less investment -->less
machinery purchased -->higher
unemployment
• Until surpluses are used up
Peak
Prosperity
Recession
Expansion
Boom
Contraction
Recovery
Bust
Trough
Depression
Troughs
• Recession= Two successive 1/4’s (3 month
periods) of declining Gross Domestic
Product ($ of government,consumer and
business spending)
• Depression= Unemployment > 12%
Business Cycle
• Expansion/Recovery
• Higher demand -->surplus reduction ->more production -->recall of workers ->more purchasing -->greater confidence ->increased investments -->economic growth
The Great Depression
1930-1941
• Note: a nation does not go directly from
prosperity to a depression
• A nation must first experience a recession
Causes of the Great Depression
• Agricultural
Overproduction
• Industrial
Overproduction
• Overspeculation
• Easy Money (credit)
• Poor Monetary Policy
• Poor Fiscal Policy
• High Tariffs
Agricultural Overproduction
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Increased Technology-farm more land
Good Growing Conditions
European Nations no longer need help
Surplus Food
Supply Outstripping Demand
Industrial Overproduction
• Wages not keeping up with inflation
– Thus fewer people able to buy expensive goods
• Supply outstripping Demand
– Surplus housing, autos, etc.
Overspeculation
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Get rich quick syndrome
Margin buying (10% down)
Lack of government regulation
Panic selling
1929 Stock Market crash
Easy Money (credit)
• Interest rates on loans were too low--> too
much borrowing
• Interest rates on savings were too low ->too much spending -->inflation
• Excessive real estate construction -->
oversupply of housing
Poor Monetary Policy
• Federal Reserve Increased Interest Rates
which made money/borrowing more
expensive and saving more attractive
instead of ….
• Lowering interest rates to give economy a
jump start
Poor Fiscal Policy
• Hoover Administration & Congress cut
spending & raised taxes to balance the
budget instead of…
• Increasing spending & cutting taxes to
“jump start” the economy i.e….
• Temporarily Deficit Spending
High Tariffs
• Taxed Foreign Imports to protect our
products
• Foreign Nations taxed imports from the
United States in retaliation
• Higher prices fed under-consumption
• Nations stopped paying WWI debt to US
Money in Circulation
(Currency +bank deposits)
Year
Money in Circulation
(Billions)
1929
1930
1931
1932
1933
$26.2
$25.1
$23.5
$20.2
$19.2
•Source: US Bureau of the Census, Historical Statistics of the United States, US Government Printing Office, Washington D.C.,
1960
Number of U.S. Bank Closing
Temporarily or Permanently, 1920-1933
Year
Number of Bank Closings
1920
168
1921
505
1922
367
1923
646
1924
775
1925
618
1926
976
1927
669
1928
499
1929
659
1930
1352
1931
2294
1932
1456
1933
4004
Source: US Bureau of the Census, Historical Statistics of the United States, US Government Printing Office, Washington D.C., 1960
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