Transcript Causes of the Depression.

Causes of the Depression
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1. Collapse of the Stock Market
2. Lack of Control / Regulation over the Stock Market Insider Manipulation, Price Inflation
3. Decrease in taxation in 1921
4. Lack of Diversity in the Economy
5. Uneven Distribution of Purchasing Power
6. Decline in Exports
7. Credit Structure of the Economy
8. International Debt Structure
9. Agricultural Depression
10. Govt. Policy from 1929-1932 (Coolidge, Hoover):
Restrictive Monetary Policy, Large tax increase, Increase
in Tariffs
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There had been depressions before - 1893, 1907.. Depressions are a normal feature of Economic life in a
Capitalist society
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But the Depression that started in 1929 was more severe
/ deeper, affected more people, and lasted longer than
previous Depressions
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Why was there a depression in 1929 and why was it so
deep, so severe?
1. Collapse of the Stock Market
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Trading on the Stock Market escalated from 2m to 5m
shares a day on average in 1928 and 1929 (on
exceptional days up to 10 or 12 million). (Bull market)
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There was a widespread speculative fever that grew
steadily more intense.
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The prices of stocks soared, and had ceased to bear any
relation to the earning power of the corporations that
were issuing them.
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Speculating on the Stock Market had become a
national obsession, attracting the attention not only of
the wealthy but of millions of people of modest means
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Overall, though, only a small % of the population
actually invested (0.5% ?)…..but that small
percentage of the population invested a lot of money
Why was there more interest in the Stock Market in
1928 and 1929?
1.
It could provide quick and easy wealth: between May
1928 and Sept 1929, the average price of stocks rose
over 40%. Some stocks doubled in value; eg. Hershey
Chocolate shares increased by over 100%: Banks only
paid 7% annually, compared to the dramatic returns of
the Stock Market.
2. Credit was very easy to obtain. You had to put down
very little - usually only 5% - the rest you borrowed
from the stockbroker - called buying on margin.
Brokers received 20% interest on the loans, but you
stood to gain thousands for only a very modest actual
investment.
But, in the fall of 1929 (from October), the Stock
Market began to fall apart (“the bottom fell out)
Why?
1. A general spontaneous feeling emerged that prices
were inflated…that the stock market was saturated - too
many shares, prices too high…people began to sell-off..
Suddenly for the first time in years there were more
sellers than buyers, causing stock prices to drop. The
success of the Stock Market depended on the influx of
new buyers / customers and of new money.
2. Stockbrokers, who had lent over $6b in margin loans
to their customers, began to call in the margins (“margin
calling”). Investors who could not pay off the loans, were
forced to sell off their stock….affecting the market even
more, pushed down the price of stock even further.
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There was a brief recovery on Oct 22 - but on Oct 23
there was an even more alarming decline in stock prices.
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On this occasion J.P. Morgan and other big bankers
managed to stave off disaster for a while by buying up
stocks to restore public confidence
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But on Oct 24 (Black Thursday) and then Oct 29,
(Black Tuesday), there was a huge panic, with 16m
shares traded…..Crash
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Stocks in many companies became virtually worthless.
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In the weeks that followed the market continued to
decline, with losses in Oct - Nov totaling $40b in two
months
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The market remained deeply depressed for more than 4
yrs and did not fully recover for more than a decade.
Example of fall in stock / share values during
the Great Crash of 1929.
AT and T
GEC
Hershey
IBM
Sept 1929
$304
$396
$128
$241
Nov 1929
$222
$201
$68
$129
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Popular folklore has established the Stock Market Crash
as the beginning, and even the cause of the Great
Depression. There is some truth in this
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As the Stock Market rose in the 20s business optimism
soared - investment and consumption was high. In
contrast, as stock prices plummeted investment and
consumer demand fell. As a result, unemployment rose,
leading to a further decrease in consumer demand.
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Over the next 3 yrs, the crisis grew steadily worse. The
US GNP plummeted from over $104 billion in 1929 to
$76.4 billion in 1932 - a 25% decline in 3 yrs.
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The Stock Market Crash affected banking, and the
supply of money / credit…huge impact on the Economy
in this way
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But although Oct. 1929 might have been the first visible
signs of the crisis, and one cause, the Depression had
earlier beginnings and more important causes.
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The Stock Market Crash was one factor in causing the
Depression but not the most important or the only one
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Basically it helped trigger a chain of events that exposed
a large number of weaknesses that had long existed in
the US Economy.
2. Lack of Regulation of the Stock Market:
Insider Manipulation (see Documentary)
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Shareholders / investors often conspired (with each
other, media) to inflate the value of their stock and
then sell it off at huge profits to unsuspecting buyers
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Companies over valued their stock and sold too many
shares at inflated prices
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The Federal Reserve, which could have intervened, did
not regulate to prevent saturation / over investment, or
fraud
3. Government Policies: debt, deficit and
taxation
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During war years, the national debt had risen from $1.2b
in 1914 to $24b in 1921.
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The government decided to cut back on spending to
reduce the budget, but it also decided to cut back on the
burdensome taxes of the war years
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The feeling was that high taxes not only discouraged
business but brought a smaller net return to the Treasury
than moderate taxes.
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In 1921, Mellon repealed excess profits tax, reduced
excise taxes, the surtax, income tax, and estate taxes.
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His intention was to spare the rich and shift much of the
tax burden from the wealthy to the middle income
groups.
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Critics argued that he should have taken advantage of
the prosperity of the 20s to cut deeper into the deficit, by
at least maintaining taxation levels of the upper classes,
if not increasing them
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They also charged that he indirectly encouraged over
speculation in the stock market. If he had absorbed more
of the national income of the wealthy in taxes, there
would have been less money left for frenzied
speculation.
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Also, by maintaining tax rates for middle and lower
income groups and not reducing them as he had the taxes
of the rich, he deprived those who needed goods of
spending power
4. Lack of Diversification in the Economy
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In the 20s, prosperity depended excessively on a few
basic industries, notably Construction and Automobiles
(mining and textiles had declined).
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In the late 20s these industries had reached their peak
and began to decline
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Expenditure on Construction fell from $11b to under
$9b between 1926 and 1929. By 1929 many
corporations had expanded their capital facilities to the
limit - factories, warehouses, heavy equipment - as
much as needed.
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Automobile sales fell by a third in the first half of 1929
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As a result there were layoffs in both of these industries:
other workers experienced salary reductions
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This led to consumer purchasing power being diminished
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No new industries were emerging to compensate for
these two declining industries – a few increased
marginally - petroleum, chemicals, plastics - but were
not yet developed enough to cancel out the decline in
these other sectors
5. The Uneven Distribution of Purchasing
Power
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25% of the national income was going to 1% of the
population. Prosperity would not last once this wealthy
1% no longer spent money on industrial good, especially
on luxury consumer items, and were no longer willing to
invest money in the economy or stock market
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The proportion of the National Income going to farmers,
workers, and other potential consumers was too small to
create an adequate market for the huge amount of goods
the economy was producing.
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Demand was not keeping up with supply.
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Even in 1929 after a decade of Economic growth,
between a half and two thirds of the population lived on
the edge of or below the estimated minimum subsistence
level - too poor to share in the great consumer booms of
the 20s, too poor to buy the houses, cars, and other goods
the industrial economy was producing.
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Consumer buying power was not strong enough or
widespread enough to devour the huge amount of goods
being mass produced.
6. Decline in Exports
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Exports formed a significant part of the Economy of the
20s.
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But even from 1928, European demand for US goods
began to decline
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In some European countries industry and agriculture
were becoming more productive, meaning less demand
for US goods
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Other countries like Germany suffered from financial
crises before 1929 and could not afford to buy goods
from overseas
7. The Credit Structure of the Economy
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Much of the Economic boom was based on the credit
system.
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85% of furniture, 80% of phonographs, 75% of washing
machines and radios, 70% of refrigerators were bought
on credit, with installment payments
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With unemployment and lower wages after 1929, debtors
could not meet these payments.
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Banks suffered from defaults on loans. .some went
bankrupt
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Others raised interest rates and cut back on
loans…meant less money was borrowed by the business
sector and consumers
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Over 9,000 banks went bankrupt between 1930 and
1933.
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Depositors who were not in debt, whose money was in
these banks, lost their hard earned savings: depositors
lost over $2.5b in deposits.
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Banks had also invested money from savings deposits
in the Stock Market – this money was lost forever
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The Stock Market Crash, Margin Calling, Defaulting on
Loans….all led to the collapse of the Banking System
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The banking system (like the Stock Market) as a whole
was only very loosely regulated by the Federal Reserve
System
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The Federal Reserve had the power to regulate but did
not – allow the banks to invest in the Stock Market, and
to give out too many risky loans to consumers, failing to
maintain enough operating capital
8. The International Debt Structure
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Allied countries owed huge sums of money to the US –
loans during WW1 and after – depended on German
reparations and more US loans to repay the US.
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Under the Dawes Plan the US loaned $200m to Germany
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But their economies were shattered from the World
Depression – Germany was unable to continue
reparations payments…the US became unable to make
new loans after 1929
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European countries were unable to repay the US.
9. Agricultural Depression, Drought, Dust..
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Farm prices, already depressed in the 20s, fell even
more dramatically with the Depression.
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Between 1929 and 1932, farm income declined by
approx 60%.
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Tenant farmers were the first to suffer, then small
farmers, then larger ones
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An estimated one third of all American farmers lost
their land through mortgage foreclosures and evictions.
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Conditions were even worse in a large part of the South
and Midwest known as the Dust Bowl. (Wyoming,
Colorado, New Mexico, Texas, Oklahoma, Kansas,
Nebraska, South Dakota).
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Here there was a catastrophic natural disaster; one of the
worst droughts in the history of the nation. Beginning in
about 1930 this large area began to experience a steady
decline in rainfall and an accompanying increase in heat.
Summer temps averaged over 100 degrees….dust storms
destroyed entire crop of many farmers, as well as cattle
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In addition in some areas were devastated by swarms of
grasshoppers
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These conditions continued for a full decade, turning
what had once been fertile farm regions into virtual
deserts.
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Led to evictions, land auctions...
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Farmers still as a group overproduced though – were
their own worst enemies, as in the past / Populist Era
10. Govt. Response; Coolidge and Hoover –
policies towards Money Supply, Taxation, and
Tariffs
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In 1931 the Federal Reserve adopted a restrictive
monetary policy, increasing the prime lending rate, at
which banks borrowed
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This discouraged banks from borrowing, thereby
reducing the money supply
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The total money supply fell by 27% between 1930 –
1933, leading to a decrease in credit…..to a decrease in
consumer spending power, decrease in investment
capital
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The supply of money left in circulation was not large
enough to allow the economy to bounce back after the
stock market bubble burst
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Many Economists argue that a severe depression could
have been avoided if the Federal Reserve had
increased the money supply.
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Keynesian Economics supports a decreased interest
rate to increase the money supply to help increase
consumer and capital spending to overcome periods of
depression …….Deficit Spending
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In the midst of the severe recession the govt. made a bad
situation worse by increasing taxation (decreased at
wrong time, increased at wrong time)
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The Hoover administration in 1932 passed the largest
peacetime tax rate increase in the history of the US up to
that point
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At the bottom of the income scale, marginal tax rates
were raised from 1.5% to 4%. At the top of the scale, tax
rates were raised from 25% to 63%.
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Higher tax rates are considered counter productive in
times of recession - decrease disposable income and
reduce consumer demand even further, which had already
fallen sharply due to monetary contraction.
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In 1922 the Fordney-McCumber Tariff increased the
rate to an average of 38.5%. – up from 27% of
Underwood Simmons
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Harding and Coolidge authorized 32 more items to be
added to the list under the Act
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In June 1930 - Hoover introduced the highest peacetime
Tariff in US History - the Hawley Smoot Tariff, raising
tariffs from the 38.5% to 60%,.
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These tariff increases backfired for the US -led to a
chain reaction – European countries could not sell in
US, slowed European Recovery…inability to pay off
debts to US, and also European countries could not buy
US manufactured goods.
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And Europeans retaliated by increasing tariffs on US
goods - contributed to US being unable to sell exports .
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And, US hopes of raising additional income from tariffs
to help balance the budget did not materialize - tariff
revenue decreased from $602m to $328m in 1932.
Causes of the Depression
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1. Collapse of the Stock Market
2. Lack of Control / Regulation over the Stock Market Insider Manipulation, Price Inflation
3. Decrease in taxation in 1921
4. Lack of Diversity in the Economy
5. Uneven Distribution of Purchasing Power
6. Decline in Exports
7. Credit Structure of the Economy
8. International Debt Structure
9. Agricultural Depression
10. Govt. Policy from 1929-1932 (Coolidge, Hoover):
Restrictive Monetary Policy, Large tax increase, Increase
in Tariffs
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The impact of the Great
Depression on US society
Impact of the Depression
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Families
Women
Children
African Americans
Businessmen
Laborers
Farmers
Mexican Americans
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Read packet and take notes on each group
Consider material and psychological impact
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With notes, see slides in other presentation
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