Transcript Causes of Great Depression and Hoover*s Response

1929-1932
The Facts
• In September of 1929 the U.S. economy began showing signs of
contraction (decline from the growth of the 1920’s)
• August 1929, recession begins, GDP falls by and unemployment
rises.
• Automobile sales fall 30% in 1929.
• By 1929 farm incomes fall more than 50%
• September 1929 stock prices begin to fall, the market crash on
Black Tuesday October 29th losing 90% of its value by 1932.
• By 1932 US GDP fell 30%
• 1929-1932 US factory production fell 46%
• 1929-1932 US wholesale prices fell 32%
• 1929-1932 US exports fell 70%
• 1929-1932 US unemployment will reach 25% (33% in some
regions)
Overproduction
Banking Practices
& Fed Policies
Causes of the Great Depression
Stock Market
Political Decisions
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availability of so many consumer goods
This led to a high demand for such goods,
so companies began to produce more and
more, in order to meet that demand.
Mass advertising fed mass consumption to
satisfy the needs of mass production
Eventually business produced more than
consumers could purchase. You can only own
so many radios, cars, and appliances
Surplus—prices decrease
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Consumer Credit
“buying now and paying later”
By the end of the 1920s, 60% of the cars and
80% of the radios were bought on installment
credit.
Consumerism in the New Era saw a change in
US buying behavior. Thrift, saving, and
frugality were replaced with consumption,
and keeping up with the Jones’
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In the 1920’s, the Fed encouraged buying on
credit by lowering interest rates (discount rate)
By 1929 the Fed decided to slow the rapid
(runaway?) growth by increasing interest rates.
Raising interest rates means that it cost more to
borrow and raises the price of existing debt.
So. People borrowed less and purchased fewer
goods.
They also started using available cash to pay off
debt and therefore purchased fewer goods.
Less demand = surplus goods = deflation =
declining profits = declining stock prices = rising
unemployment
In its regulatory role, the Federal Reserve was also
established to prevent bank closings.
 It was suppose to serve as the lender of last resort
to banks on the verge of collapsing.
However,
 The Fed lowered the reserve requirement for banks,
so the banks did not have the cash to cover
customer withdrawals. And the Fed did not provide
short term loans to banks to cover the loses.
 1930 the Fed cuts interest rates from 6% to 4% in
attempt to increase the money supply
So…
 Banks started to close, increasing the panic.
 1930, 60 banks fail every month, by 1933 over
9,000 banks fail (40% of the 1929 total)
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it is only and index of the value of corporate
stocks based primarily on the market demand
for a particular stock
The value of stocks soared in the 1920’s as
corporate profits rose, fueled by mass
consumption. (Fueled by credit)
Once a rich man’s game, everyone was “in the
market” in the 20’s
Stock Market: Buying on
Margin
• Buying on the margin means that you can purchase
shares with a don payment.
• The Margin Requirement in 1926 was 10%. So a $100
share of stock could be yours with only a $10 down
payment
• Speculators expect the value of the stock to go up in price
enough (at least 90% to break even) covering the
balance.
• Buying on the margin encouraged thousands of small
time, new (inexperienced) investors to purchase stocks
• As long as corporations were selling goods and turning a
profit stock prices rose and buying on the margin was
safe.
• As long as…
Stock Market: Banks &
Margins
• In 1927 banks did two stupid, greedy things
– 1) Banks began letting customers borrow money to buy
stocks and used the customers stock holdings as
collateral for the loan.
They gave money to people with no money to gamble
– 2) Banks started to use depositors money to speculate in the
stock market. Normally banks pay you interest for savings.
Then they loan it to businesses or families that were good
risks to buy homes or start companies etc.
Not speculate in the market!
• By 1929, banks had made billions of dollars in risky loans
with little collateral to back them up if borrowers defaulted.
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Black Tuesday, October 29th 1929.
The market bubble bursts with a panic sell off of 16 million
shares of stock.
Investors lose 26 billion dollars (312 billion in 2010 dollars)
The crash was not a one day event, stocks falling in
September. Wealthy investors stepped in a bought up shares
at bargain prices.
Those who bought on margin, however, panicked.
It is impossible to know exactly what caused the initial panic
but the market crash exposed the other problems in the
economy setting into motion a deep lack of confidence in the
economy.
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Less money = less consumption = less
production
Businesses go bankrupt
People get laid off
Thus the economy begins an
irreversible downward spiral.
Banks close and large amounts of
money disappear from the economy
By 1931, GNP falls by 18%,
unemployment reaches 16%(8 million)
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The severity of the Depression could have been
lessened if policy makers would have been open to
new ideas
Conservative economic policy
◦ Laissez fair, let the market right itself without
government intervention
◦ Balance the budget, do not spend more than collected
in tax revenue
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Prevailing belief that private charities, churches,
state and local governments provide relief and
assistance to the poor, not the Federal Government
◦ Most of these were ill equipped to deal with the number
of people in need
“The sole function of the
government is to bring
about a condition of
affairs favorable to the
beneficial development of
private enterprise.”
~Herbert Hoover
(1930)
“The Fed will stand by as
the market works itself
out: Liquidate labor,
liquidate stocks, liquidate
real estate… values will be
adjusted, and enterprising
people will pick up the
wreck from lesscompetent people."
~ Andrew Mellon
(1930)
Hoover’s Political Decisions
• Contrary to popular history
Hoover’ commitment to laissez
fair made the Depression worse
• Hoover initiated several
programs to help the economy
recover but it was too little, too
late
• Hoover favored volunteerism, or
cooperation between business
and government over coercive
policy
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Hoover promoted volunteerism to prop up failing
banks.
National Credit Corporation / Reconstruction
Finance Corporation (RFC)
1931, Hoover urged the larger (East Coast) banks to
provide low interest loans to struggling rural banks
Large banks were unwilling to offer loans without
holding the smaller banks most valuable collateral.
RFC failed to help the smaller banks.
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Rising unemployment led
to homeowners defaulting
on mortgages and renters
being evicted from
apartments.
The homeless settled in
shanty towns called
Hoovervilles
1932, Federal Home Loan
Bank Act, was passed to
spur new home
construction, and reduce
foreclosures.
Foreclosures dropped
briefly in late 1932.
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The Revenue Act of 1932 reversed the Mellon tax
cuts. Increase taxes on struggling corporations and
the wealthy = more money in the federal treasury to
fund aid without deficit spending
Emergency Relief and Construction Act of 1932.
federal money funneled to states to start public
works projects (roads, drainage, schools) to put
people back to work
◦ Problem, it is not that easy to spend large amounts of
money quickly on shovel-ready projects
◦ Federal money trickled into states as the problem of
unemployment grew exponentially
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Signing the Smoot-Hawley Tariff
Revenue Act of 1932
Balancing the budget
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The Smoot-Hawley Tariff was signed (reluctantly) by
Hoover in 1932
It came on top of the Fordney-McCumber Tariff of
1922, which had already put American agriculture
into a tailspin.
Smoot-Hawley raised tariffs by 50%
Congress believed the tariff would make imports too
expensive and Americans would buy American
goods, increasing demand
European countries retaliated with their own tariffs
and U.S. exports fell by almost 70%
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The trade war cost American farmers 1/3 of their
market causing agricultural prices to fall and putting
more farmers into bankruptcy.
Tariffs damaged an already shaky economy in
Germany.
Germany begins to default on reparations payments
to England and France required by the Versailles
Treaty
◦ France and England fall behind in their payments on
loans from U.S. banks (used to buy weapons during
WWI)
◦ Weakening large U.S. banks
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Concern over growing deficits Congress passes and
Hoover signs the Revenue Act of 1932
The act reversed Mellon’s tax cuts.
◦ Raising business taxes from 12% to 13.75%
◦ Raised taxes on every bracket
◦ Lower income brackets increases form 1% to 4%
◦ Raised taxes on the wealthy from 24% to 64%
The problem with raising taxes is that it takes money out
of the economy.
Business facing lower profits had to now pay more taxes.
To cut cost they laid off workers
Since nothing seemed to help the economy, Hoover and
Congress decided to balance the Federal budget.
◦ Cut spending (ex. veteran’s benefits)
This shrunk the money supply even more
 Overproduction
 Stagnant
wages
 Federal monetary policy
 Banking practices  Stock market
 Political decisions
Next. The FDR Mystique