despair sadness gloominess misery

huge immense enormous vast grand

Why study the Great Depression? Worst economic catastrophe of the 20 th century Involved every part of economy Involved every region of country Changed the role of the federal government dramatically

Terms to Know Inflation General upward movement in price of goods and services During inflation, if prices increase faster than wages, people aren’t able to buy as many goods and services

Deflation General downward movement in the prices of goods and services Accompanied by falling wages and increasing unemployment If you owe money, loan payments stay the same, even though wages drop

Inflation Deflation Decreased purchasing power Discourages saving Reduces value of savings People spend money before prices increase Increased purchasing power People postpone spending Workers laid off Unemployment rises Wages fall Difficult to make decisions for future spending, affects spending behavior

Consumer Price Index Measures the changes in prices as experienced by people in their daily purchases. It is a way to compare the purchasing power of people over time

Consumer Price Index,

Consumer Price Index,

Unemployment Rate The number of unemployed people in the work force Civilians 16 yrs of age or older if they don’t have jobs, have looked for work in the last 4 weeks and are available for work.

Civilian Unemployment Rate,

Depression A period of severely declining economic activity across the economy A decline in income, employment, production, credit and loss of overall confidence in the economy

Why did the Roaring Twenties “Roar”? New technological improvements were changing life in the U.S. Home were updated with electricity Radios, refrigerators, telephones and electric appliances were becoming part of the American way of life Cars were affordable for the middle class Many felt that the good times were here to stay

Ford Motor Company closed its Model T plant in 1927 for six months. The plant was closed to plan, design and retool to build the Model A. How might this affect the economy?

How were mortgage payments a burden on people who lost their jobs?

A “tariff” is a tax on imported goods. The tax raises the price of imported goods and services, while keeping the price of domestic made goods low. Did tariffs help the economy?

Tariffs do not help the economy. They weaken international trade. Other countries retaliate by putting tariffs on U.S. products Fewer goods and services are demanded

How did raising taxes affect the economy?

Raising taxes means consumers and businesses have less money to spend since taxes were higher. Demand is reduced Since there was decreased demand for goods, there was reduced demand for workers.

What happened to the stock market?

How did the crash affect the economy?

Why did farms fail?

U.S. farmers saw increased demand for crops during WWI. Many took out loans to expand farms Once the war ended, prices dropped, since European farmers reentered the markets Many couldn’t pay their bills, and lost their farms

Budget Worksheet In 1933, when your income decreased, why did the percentage of your income spent on other items decrease? Did you spend the same amount on food in 1928 as you did in 1933? What tradeoffs did you make in order to fed yourself and/or your family? How would these decisions affect the economy?

Although you retained your job, one in every four (or 25%) of the workforce was unemployed. What effect did this have on spending? If you were unemployed, what choices might you have had to make? If you had additional family members come to live with you in 1933, what happened to the income per person (per capita income) for your family?

Cycle of the Great Depression Investors lose millions Businesses lose profits Workers laid off Consumer spending drops Business cuts investment and production Which leads to

Businesses and workers can’t repay loans Banks run out of money Bank runs occur Savings accounts are wiped out U.S. investors have little to invest U.S. investment in Germany declines German war debt payments stops Europeans can’t afford U.S. goods Overall U.S. production drops Allies can’t pay debts to U.S. Which leads to

Bank Reserves The amount of deposits not loaned out by banks. Calculated by subtracting a bank’s total loans from its total deposits.

The U.S. has a fractional banking system Banks take in deposits and lend most of the money that they take in The banks only keep a fraction of deposits on reserve

People who borrow money from banks use the money to buy houses, cars or other things They also use it to start businesses, remodel homes, go to college, etc. Money that is lent out is spent almost immediately

Since banks only keep a small fraction of their deposits on hand, not everyone can get all of their money out of the bank on the same day Normally this isn’t a problem, unless….

Bank Failures Occur when banks are unable to meet depositor’s demands for their money Customers lose confidence

Bank run Bank panic Bank failure When many depositors run into a bank at the same time to get their money out When a bank run begins at one bank and spreads to other banks, causing a loss of confidence Bank panics cause more bank failures

People and businesses borrow less People buy fewer goods and services Businesses sell less since people are spending less Prices drop Business profits drop Businesses buy fewer supplies and pay workers less Workers who are paid less or laid off buy less More banks fail, the money supply shrinks, causes a decrease in wages and increase in unemployment

Bank suspensions include all banks closed to the public due to financial difficulties The % of the labor force that is willing to work, but doesn’t have a job and is looking for one. Average income per person The total value of all goods and services produced in one year

What if…? You were an American citizen during this period, would you be happy with the direction the economy was heading in? Would you be ready for a change in leadership? Would you vote for a new president?

Two Economic Theories Hoover’s Trickle Down Economics FDR’s Pump Priming

Franklin D. Roosevelt October 1932

FDR’s Inaugural Address The only thing we have to fear is fear itself. Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the government itself, treating the task as we would treat the emergency of war, but at the same time, through the employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources. Franklin D. Roosevelt’s 1933 Inaugural Address

Bank Holiday FDR’s first act as President was to deal with the nation’s banking crisis Critical to restore public confidence in nation’s banks FDR ordered all banks – including Federal Reserve Banks – to close He declared a bank holiday to make sure banks were financially sound

March 9, 1933 – Emergency Banking Act was passed Gave the government permission to inspect the financial health of all banks Banks could reopen as soon as examiners found them financially secure Within three days, 5,000 banks had reopened

Glass-Steagall Banking Act passed Gave the Federal Reserve Board tighter control over investment practices of banks FDIC (Federal Deposit Insurance Corporation) set up to insure all deposits in banks up to a certain amount Today the amount is $250,000 per account

Roosevelt’s policies restored confidence in the nation’s banks Money began to come back into the banks This increased spending and production Prices began to rise

Hundred Days Special session of Congress FDR pushed through many programs that became the basis of the New Deal Programs were an effort to decrease unemployment, increase production and push prices and wages up

Relief, Recovery & Reform Relief programs tried to employ people Projects that created jobs were visible to the public like art or road improvements Recovery programs involved laws to help prevent this from happening again Focused on banks, labor and labor unions Reform programs tried to help nonbank sectors of the economy recover Helping farmers and housing

Fireside Chats To set the public at ease and restore confidence, FDR used radio speeches Called “Fireside Chats” FDR explained his programs to the American public and asked for cooperation