Long-term Causes of the Great Depression

1. Distribution of Wealth Return to our discussion: Income Inequality. What does a suffering middle class do to the economy?

2. Protectionist Trade Policies What have been the historical, economic purposes of a tariff? – “If ever there was a time when Americans had anything to fear from foreign competition, that time has passed.”- Wilson

2. Protectionist Trade Policies Smoot-Hawley Act of 1930 What would be the ramifications of a tariff (tax) of 60% on a product? – Europe would not be able to export as much to U.S. Inability to make debt payments from WWI Retaliatory policies (i.e. their own tariffs?) Inability to buy American products because of a reduction in American $$ flowing into Europe (i.e. farmers need European market)

2. Protectionist Trade Policies Smoot-Hawley Act of 1930 What would be the ramifications of a tariff (tax) of 60% on a product? – American consumers and farmers would be hurt Tariff benefits industry owners (distribution of wealth?) Consumers pay higher prices but are not given higher wages Farmers have a smaller market (No Europe!)

3. Farm Failures What was the state of the farming industry during WWI? – High prices for wheat and other products (Food Administration) – Innovations in technology = efficiency = more production – Farmers take out loans to expand and buy more equipment

3. Farm Failures What happened to farming after WWI? – Markets for products decrease (i.e. Europe) – Prices drop significantly  less income – Coolidge didn’t help (“farmers never made $$”) Farmers negatively affected: – Have less $ = Spend less $- hurts entire economy Income gap = similar problem – Can not pay off loans- foreclosure – Banks fail b/c loans are not collected Auction farms to regain $- not enough

4. Buying on Credit Return to “Superficial Prosperity”- How did consumers get what they wanted in the 1920s? – Buying assets on credit (i.e. houses) Remember: 80% of Americans did NOT have savings – Initially, this “inflated” the market (seemed like demand was real and HIGH) – Led to overproduction

4. Buying on Credit More consumption = more production – More efficient production = more consumption at the beginning of the 1920s top 1% experienced 75% increased income through 1920s; 9% increase for America as a whole BUT, wages did NOT match inflation of prices caused by “demand” – Debt pile-up = spending SLOWS – Overproduction = Loss of $ by building companies i.e. More houses were built than were needed

4. Buying on Credit Fast-forward to post-Black Tuesday When SM crashed, consumers and banks lost investments When banks failed, consumers lost savings Consumers didn’t have $ to pay loans on what they purchased – This was cyclical- No payments to banks = banks fail = foreclosure – Banks foreclosed homes and now “owned” houses- tried to resell but no one had the money to buy! – Housing Bubble- 2007/8 and the Credit Crisis Housing Bubble- 2007/8

Short-term Causes of the Great Depression

1. Stock Market Crash Return to “Superficial Prosperity” (again)- How did consumers get what they wanted in the 1920s? – Buying stocks on margin Everyone wanted piece of ever-growing Wall Street – Demand for stocks went up (get rich quick!) = rising prices – companies therefore are being valued higher than their worth – “Speculation”– will return to this later Took out loans to buy stocks (bought portion of stock) When value of stocks plummeted, buyers owned a stock that was worth less than the loan they had taken out

1. Stock Market Crash Timeline Early September- Prices rise, then drop Sept- Oct: People lose confidence, sell stocks October 29: Black TuesdayBlack Tuesday – 16 million stocks sold – Value declines- no one wants them – Many stuck with stocks with little value By November, investors lost $30 billion ONLY 3% of POPULATION

“Day of Wrath”

2. Bank Failures What caused almost half of the nation’s commercial banks to fail (11,000) by 1933? – Return to reading: Why don’t banks “hold” your deposits? Little interest = no monetary incentive Loans + investing = profit – Banks, too, invest in the stock market

2. Bank Failures What happened after Stock Market Crash? – People lost faith in banks- wanted to withdraw cash Banks hold minimal amount of CASH to begin with Lost $$ in stock market crash People were unable to make loan payments – Return to buying on credit (i.e. houses) Banks didn’t have it to pay customers back!! – Only “member” banks of Fed could borrow Fed kept discount rate low to promote borrowing- helped member banks – What else could Fed have done? (reading)

2. Bank Failures As a result, banks: – Failed (ramifications on next slide), or – Recalled loans from other consumers This also “declined money stock”, aka reduced $ people had to spend on other things Less spending = economy is hurt (i.e. businesses don’t make as much and have to downsize.. MAIN STREET IS CRUSHED and people’s income reduced or gone) – These people then can’t pay their loans! Yikes.

2. Bank Failures Bank failures = declining “money stock” ($ available to consumers) – People couldn’t borrow money- less purchasing power  spending LESS – Less purchase  less $$ for businesses – Business lower prices to make buying easier – Lower prices (deflation)  they need to reduce costs – Costs = Money spent producing goods Paying employees counts!  People are laid off or their wages are reduced

After-Effects GDP (Gross Domestic Product) DECLINES – Amount of goods and services country produces – Today: ~$16 trillion – GDP = GD Income CPI (Consumer Price Index) DECLINES – Average cost of “market basket” – Down = deflation = people HOLD ON TO $ because “tomorrow” it’ll be cheaper – No spending = Economy HURT Unemployment RISES to 25%

After Effects GDP drops as businesses are bankrupt – Railroads, Automobiles – People lose their jobs – “Product” (output resulting from people working) DECREASES

GDP; CPI; Unemployment (circa 1930s)