Transcript 6 The Great Depression

The Great Depression
1929 - 1939
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Economic Depression
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In economics, a depression is a term commonly used
for a sustained downturn in the economy. It is more
severe than a recession (which is seen as a normal
downturn in the business cycle). Considered a rare but
extreme form of recession, the start of a depression is
characterized by unusual increases in unemployment,
restriction of credit, shrinking output and investment,
price deflation or hyperinflation, numerous
bankruptcies, reduced amounts of trade and commerce,
as well as violent currency devaluations.
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History of Depressions
Panic of 1797
Depression of 1807
Panic 1819
Panic 1837
Panic 1857
Panic 1873
Panic of 1907
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Causes of the Great Depression
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Historians still argue over the specific long term
and short term causes of the Great Depression.
Theories or schools of thought have developed
on the causes of the Great Depression.
Some of these theories are politically motivated.
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Prime Causes
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Credit Inflation
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Artificially Low Interest Rates by the Federal
Reserve and the Bank of England
High Tariffs
Hurt other economies and made it hard to pay the
US back for WWI debts.
 Retaliatory tariffs limit US markets
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Some Facts
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The Great Depression was the longest in
modern US history
It affected millions of people
It affected the entire industrial world
It led to the New Deal
Its impact can still be felt today
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The 1920s
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After WWI, the US turned inward and away
from international issues
US banks made huge loans to the Europeans
American’s attitudes/values about consumption
and saving changed
Advertising influenced Americans
American farmers were already in a depression
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Modernization kept farmers in perpetual debt
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Economic Collapse
(1929-1933)
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Credit had been exhausted
Money was used to pay past debts
Unsold inventories were rising
Buying “on margin”
Great Bull Market . . . speculative bubble
scheme
In late October 1929, the market began to
fall
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Black Tuesday
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October 29, 1929 … a date that will live in
infamy…
Stock values dropped by 10 – 15 billion dollars
in just one day
Farm prices dropped even further , after being
low during the 1920s
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New York Stock Market
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United States’ Industrial
Production from 1928-1939
data source: http://research.stlouisfed.org/fred2/data/INDPRO.txt
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Farm Prices
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Unemployment
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Reactions to the Crash
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"The decline is in paper values, not in tangible
goods and services . . . America is now in the
eighth year of prosperity as commercially
defined. The former great periods of prosperity
in America averaged eleven years. On this basis
we now have three more years to go before the
tailspin."
- Stuart Chase (American economist and
author), NY Herald Tribune, November 1, 1929
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More Reactions
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"The end of the decline of the Stock Market will
probably not be long, only a few more days at
most."
- Irving Fisher, Professor of Economics at Yale
University, November 14, 1929
"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston
Churchill, November 15, 1929
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Other thoughts…
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January 20, 1931
"The country is not in good condition." - Calvin
Coolidge.
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Initial Reaction to the Depression
President Hebert Hoover was
slow to respond, believing that
the normal ebb and flow of business
would quickly return.
 Hoover believed a balanced budget would help.
 Hoover also believed that direct federal relief
payment would destroy the “individual’s” selfesteem.
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Bonus March
World War I veterans marched on Washington in June
1932.
 They demanded their promised
war bonuses.
 The government refused and
forcibly evicted the men and their families.
 General MacArthur, Major Dwight Eisenhower
and Major George Patton led the attack.
 This turned many against Hoover.
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BUT
He did increase the role
of the US government,
more than any other
president to date.
 He was an engineer
and a social engineer
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SUPER PROGRESSIVE
ENGINEER
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Social Engineers could take and mold societies
and humans and create a new and more perfect
society. Take control of nature.
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A top Progressive writer, Thorsten Veblem
Theory of the Leisure Class, 1899
 The Engineers and the Price System, 1921
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The Engineer was SUPERMAN
Dams, Hydroelectric plants, Highways,
Buildings
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Hoover, like FDR, was a Corporatist
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The state, businesses, unions, and public bodies
should work together to make life better for all.
Capitalists, left-wing Republicans, non-socialist
intellectuals, most Democrats, and academics
agreed.
USA’s response to Mussolini and European
movements
Hoover was not a socialists or fascist, though
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Response to 1929
He had the Fed resume credit inflation (add $300
million after crash in 1929)
 Asked companies to not cut workers’ wages
 Cut taxes
 Increased Government Spending
 Deliberately ran a big deficit
 Increase government’s share of GNP from
16.4% in 1930 to 21.5% in 1931
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% of GNP
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No Direct Aid - Unconstitutional
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Agricultural Marketing Act $600M to farmers.
Reconstruction Finance Corporation (9 point
program) December 1931: $3.8B by 1932
More major work projects in Hoover’s four
years than in the 30 previous years.
San Francisco Bay Bridge, Los Angeles
Aqueduct, Hoover Dam, etc.
Emergency Relief and Construction Act $3.9B
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New Deal planner, Rexford Tugwell
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“ We didn’t admit it at the time, but practically
the whole New Deal was extrapolated from
programs that Hoover started.”
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1930: Democrats take
control of Congress
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Hoover & Democrats pass the 1932 Revenue
Act - the largest tax increase in US history in
peacetime.
Highest rates jumped from 25% to 63%
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International Ramifications
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Hawley-Smoot Tariff, 1930
Established highest average tariff in US history
Other nations responded with their own tariffs.
Between 1929-1932, international trade declined
by half
This helped push the rest of the world into
Depression.
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Hoover claimed he was a NonInterventionist
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His own rhetoric hurt the economy.
He was seen as pro-labor and anti-business
because he kept wages so high.
He weakened bankruptcy laws and encouraged
states to stop auctions.
Businesses and banks had no confidence they
would be protected and would not invest.
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Roosevelt: New Deal and
the First 100 Days
“the only thing we have to fear is fear itself”
 Congress called into special session and passed:
Federal Emergency Relief Adm., CCC,
Reconstruction Finance Corp., TVA, Federal
Trade Commission, Agricultural Adjustment
Act, National Industrial Recovery Act, mortgage
relief, etc.
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Roosevelt: New Deal and
the First 100 Days, con’t.
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New Deal tried to pump large amounts of
money into the economy by providing jobs
He hoped this would result in increased demand
of goods and services
Roosevelt attempted to balance the budget
Roosevelt never fully embraced the concept of
deficit spending
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Life During the Depression
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Physically and psychologically devastating for
many people
Malnutrition was rampant, which resulted in
greater illnesses
Self blame, self-doubt and self-worth became
serious issues
Men suffered more psychologically
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Life During the Depression
Women
 The number of employed women grew slightly
 Women were less likely to lose their jobs
 So-called women’s work, like clerical, teaching,
and social-service, actually increased
 When the men left, women became
head of the household
 Feminist consciousness began to develop
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Life During the Depression
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Children
Many children left school early.
Children took on more responsibilities.
More teenagers worked.
This generation became more self reliant.
They learned to make more out of less.
Many children were malnourished and sickly.
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Life During the Depression
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Families
Families were dramatically affected
At one time, nearly one fourth of all workers were
unemployed
Family incomes fell approximately 40 %
Birthrates fell
Divorces fell
Desertions soared
Families broke up
As many as 200,000 children became vagrants
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Life During the Depression
Minorities
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African Americans were already living in a
Depression.
By 1932, African American unemployment was
almost 50%.
In theory, the New Deal programs did not
discriminate.
African Americans switched to the Democratic
party.
Mexican Americans suffered at least as much and
usually more than African Americans.
The Indian Reorganization Act tried to help native
tribes regain their heritage.
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Life During the Depression
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Mother Nature
From 1930 to 1936, the plains of the Midwest
experience drought.
This, coupled with poor soil conversation
and high winds, causes tremendous dust
storms.
Storms left the lands useless and force
people to leave or migrate.
Many went west to California.
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Dust Bowl Images
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Causes of the Great Depression
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Recently, several “schools of thought” have
emerged concerning the causes of the
Depression.
Currently, scholars are debating the causes of
the Depression.
Roosevelt’s actions have also come under close
scrutiny and criticism.
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Keynesian School
John Maynard Keynes, British economist
The General Theory of Employment, Interest and Money,
1936
 Keynes argued that the normal self-correcting
mechanisms were not sufficient in preventing
severe recessions or Depressions.
 Traditionally, noninterventionist policy would
allow for the normal economic cycles to rectify
down-turns in the economy.
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Classical Economics
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During a recession, consumption falls due to a
lack of savings/money
This in turn forces interest rates to drop
Lower interest rates leads to increased
investment spending and demand should remain
constant
Businesses invest when they believe there is a
potential for demand and potential for profits
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Keynes’ View
After 1929, businesses were less optimistic
and did not invest.
 Keynes believed that the government
needs to step in and create demand.
 This encourages deficit spending and
unbalanced budgets.
 Keynesian view was very influential and
revolutionary.
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Monetarist View
“A Monetary History of the United States,18671960.” Milton Friedman and Anna Schwartz,
1963.
 The “Great Contraction” of the money supply
 Between 1929-1932, the supply of money fell by
1/3.
 Federal Reserve did not prevent banks from
going bankrupt.
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Austrian School
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Austrian economists Friedrich Hayek and Murray
Rothbard wrote “America’s Great Depression,” 1963.
Expansion of money during the 1920s led to an
unsustainable credit-driven boom.
The Federal Reserve move to tighten the money supply
in 1928 was too late.
Government interference, both by Hoover and
Roosevelt, only worsened and extended the Great
Depression
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Legacy of the Depression
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Federal government grew.
Public debt increased.
Social security programs put in place.
Rise of labor unions.
Conservatives viewed much of the New Deal as
socialism.
Many believed that the Free Market needed to
be regulated.
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References
Secular Stagnation and Great Depression, R. L. Norman, Jr.
Dorfman, Joseph. Economic Mind in American Civilization (1959) vol 4 and 5 cover the ideas of all
American economists of 1918-1933.
Friedman, Milton and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960
(1963)
Keynes, John Maynard, The General Theory of Employment, Interest and Money (1936) Atlantic
Publishers & Distributors, 2007
Keen, Steve 2001. Debunking Economics Pluto Press Australia Limited Sydney, Australia
Meltzer, Allan H. 2003 A History of the Federal Reserve Volume I: 1913-1951 Chicago University
Press, Chicago, IL
Rothbard, Murray N. 1963 America's Great Depression D. Van Nostrand Company, Princeton, NJ
Rothbard, Murray N. A History of Money and Banking in the United States: The Colonial Era to
World War II (2002)
White, Eugene N. "The Stock Market Boom and Crash of 1929 Revisited" Journal of Economic
Perspectives, Vol. 4, No. 2 (Spring, 1990)
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