Causes and Effects of the Great Depression Notes # _3____ 2/09/2010

Cause-Stock Market Crash  In the late 1920s, a lot of people were swept up in the wave of speculative enthusiasm for the stock market.  Americans thought there was no limit to how high stocks could go in this bull market.  People either spent their savings on the stock market or they bought stock on margin.  Easy borrowing encouraged speculation ( the making of risky investments). But overtime the over speculation led to the rise in stock prices.  Unfortunately the price of the stock didn’t reflect the actual value of the companies, only the hype created by investors.  Rising stock prices created a high-flying bull market without a solid foundation.

Stock Market cont.  When the market turned down, this borrowed-money house of cards collapsed.  As prices dropped creditors who had loaned money for buying stock on margin demanded that those loans be repaid.  Because of falling prices, most investors could not make enough selling their stock to repay the loan.  Stock market prices peaked on September 3, After that prices began dropping. At times it came in small increments, but other times like Tuesday October 29,1929-Black Tuesday, there were huge drops.  By the end of 1929, investors lost more than $30 billion in investments. This is more $ than the U.S. spent on WWI.

Effects on the Banks  The stock market crash hurt banks, triggering a crisis that unfolded over the next three years.  To understand how stock losses affected banks, you have to think about how banks operate.  In the 1920s, banks caught the same stock market fever that gripped the nation as a whole.  Usually banks loan money to businesses and farmers, but during the 1920s, they began to loan money to brokers and individual investors.  When the market took a nose dive, many investors couldn’t repay the money. With bad loans piling up banks stopped looking like a safe place to put money- they weren’t.  This led to bank runs and for some closure. Between , an appalling 3,800 banks failed.

Runs on the Bank

Cause- Too Much for Sale, Too Little To Spend- Overproduction.  Industry thrived in the 1920s because manufactures were able to make a lot of merchandise very quickly.  By the late 1920s, demand for consumer goods could not keep up with production.  People simply couldn’t afford to buy all that was being produced. This resulting glut of goods in the market combined with the stock market crash and the bank crisis caused the economy to collapse.

Underconsumption-Cause  By 1929, the buying spree was coming to an end. Many Americans found themselves deep in debt and were unwilling or unable to borrow more.  Even the wealthy, who could afford to buy whatever they wanted, were buying less because they had all the goods they needed.  The economy was showing signs of underconsumption-people were not buying as much as the economy was producing. This is basically the flip side of overproduction.  It started first with the farmers, then by the late 1920s, it had spread to industry.  Responding to the glut of products on the market, many manufactures began to cut back. Some companies lost so much they were forced to declare bankruptcy.  Whether businesses decreased production or went bankrupt, the result was the same for the worker- unemployment.  As industry declined, companies laid off many workers. Those who lost their jobs also lost the ability to buy products that industry produced. A vicious downward spiral ensued- Unemployment went from 4% to 25%.

Cause-Government Actions Make a Bad Situation WORSE!  Many economists blame the Federal Reserve for further weakening the economy in  The Fed manages the nation’s money supply. They decide how much money will be available to circulate among investors.  One way was by setting the discount rate. This is rate of interest at which banks that belong to the system can borrow money from the federal reserve banks.  Member banks use the discount rate to determine the interest rates they will charge borrowers.

The Federal Reserve Create More Problems  Before the crash, the Fed had kept interest rates low. Low interest rates made borrowing easier.  Unfortunately, The low interest rates had supported the excessive borrowing of the 1920s.  Following the crash, the Fed kept interest rates low. But by 1931, they decided to increase the discount rate. They did it to decrease the amount of money moving through the economy.  Higher interest rates further damaged the economy by depriving business of the money/capital that they needed to survive.  As the amount of money dwindled, the economy slowed down, like an animal going into hibernation.  The Fed allowed the money supply to drop by 1/3 between 1929 and This decline helped turn a nasty recession into an economic calamity.

Cause-Government Actions cont.- Tariffs Cause Trade Trouble.  Economists also blame Congress for making decisions further hurt the economy.  To understand why, one needs to look beyond the U.S.  Financial problems overseas, especially in Europe, also contributed to the onset of the Great Depression.  "In an effort to alleviate the effects of... anyone? The Great Depression... Congress passed the... anyone? The Hawley-Smoot Act. Did it work? Anyone? It did not work."

Tariffs cont.  WWI had left much of Europe in economic shambles. The Allies were having trouble paying back the money they borrowed from U.S. banks to finance the war.  The Germans were able to make their reparation payments to the Allies only by borrowing money they needed from the U.S.  In order to earn the dollars required to pay off these debts, these nations desperately needed to sell large amounts of goods in the U.S.  After the war, however, Congress enacted tariffs on many imported goods that made such sales difficult.  In 1930, Congress made a bad situation worse by passing the Hawley- Smoot Tariff. This law was meant to protect American businesses from foreign competition by raising tariffs still higher.  Instead it triggered a trade war as European countries raised their tariffs on goods imported from the U.S.  As a result, U.S. farmers and businesses were not able to cope with overproduction by selling their excess goods to other countries.  The record high tariffs on both side of the ocean stifled international trade. This, in turn, caused a slump in the world economy. Gradually the Great Depression spread around the globe.

Panics, Recessions, Depressions? What is what?  A recession is defined as losses in two consecutive quarters negative GDP ( Gross Domestic Product- the all the money that is spent in the U.S.)  A depression is defined as when you lose your job and you are depressed. That is really true. In economic terms there is no such thing as a depression. That is a psychological term. Depression is long term; Panic is short term—more acute.  The Great Depression of the 1930s was really 2 recessions that lasted from and ish. In this time the U.S. suffered the highest rates of unemployment, dispossession, business/bank failures than any other times. The Panic of 1819, 1873, 1893, 1907 etc. rivaled the Great Depression but because of the psychological toll it took on the people, it was deemed- “ The Great Depression”

These causes and effects led to…  Led to the Great Depression era that lasted from  The 1 st recession lasted from , the 2 nd recession lasted from  The longest depression was 65 months in length that began in  The depression era that we are studying is significant because it was one of the worst depression that we had suffered from.  Also the federal government begins to play more of a role in the lives of the average Americans.  Finally it is significant because this depression not only made an impact on America, but the world.

Great Crash Investors Businesses and Workers Investors lose millions. Businesses lose profits. Consumer spending drops. Workers are laid off. Businesses cut investment and production Some fail. Banks Businesses and workers cannot repay bank loans. Savings accounts are wiped out. Bank runs occur. Banks run out of money and fail. World Payments Overall U.S. production plummets. U.S. investors have little or no money to invest. U.S. investments in Germany decline. German war payments to Allies fall off. Europeans cannot afford American goods. Allies cannot pay debts to United States.

Effects of the Depression on Americans  Numerous social problems resulted from the economic problems  Unemployment and poverty  Soaring high school dropout rates (2 to 4 million)  Homelessness  Organized protests  Around the country, the homeless built settlements of cardboard and tar-paper shacks, called "Hoovervilles" in sardonic reference to President Hoover.  Farmers armed with guns and pitchforks marched on the local banks to prevent foreclosures.  "The Bonus Expeditionary Force." A group of WWI veterans who had been denied their pensions organized the first march on Washington in protest.

How the Federal Government Responded

Hoover’s Response  In the election of 1928, Hoover promised …“ A chicken in every pot and a car in every garage.”. This was a big promise in the tough times to come.  Americans were no longer dealing with “Panics” but with “Depressions”, they needed Hoover and the federal government to respond accordingly.  Hoover had solid ideas ( public works programs- Presidents Emergency Committee of Employment, cutting taxes to encourage spending and make loans to businesses that were threatened with collapse- Reconstruction Finance Corporation for recovery, which moved away from the laissez-faire philosophy that had been held by his recent predecessors.  But unfortunately, he relied on business owners and state/local governments to make these moves- not the federal government. He also opted to balance the budget instead of put money into the economy.

Election of Year of Roosevelt  Hoover said “ Prosperity is around the corner”, but Americans didn’t see it. They wanted change!  With America in a desperate state, they looked for new leadership.  They looked for some one who would do something, anything to make the situation better.  They turned to Franklin D. Roosevelt, the governor of New York.  He had proven himself in helping the New York’s needy and creating old-age pensions, unemployment insurance, and public power projects.  But probably his best quality- Roosevelt wasn’t Hoover!