© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Great Depression

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The depression was a catastrophe never seen before or since. What caused it? Why didn’t the new policies work? What should have been done?

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use to 1933: Using nominal prices, GDP declined 46% Using real prices, GDP declined 27% The capital stock actually declined Unemployment reached 25%

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The true dimensions are impossible to measure: The hopelessness and despair of the American people were immense

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Certain sectors of the economy were already weakened before 1929: Agriculture Construction slowed between 1925 and 1927, then fell sharply in 1928

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The crash itself did not cause the depression The crash ripped optimism out of the public As a result of new pessimism and uncertainty, purchases of consumer durables fell drastically "Uncertainty is worse than knowing the truth, no matter how bad" [The Magazine of Wall Street, November 30, 1929, p. 177]

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12/11/1930: Failure of the Bank of the United States Significant because: Largest failure to date Name recognition and association Location

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Crisis, Round 2: March through August, 1931 More banks failed, crisis spreads to Europe Crisis, Round 3: in 1933 another 4,000 banks closed

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. How was the crisis ended? Bank Holiday, starting March 6, 1933 FDIC took effect January 1, 1934

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Passed in June, 1930

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Debate and Passage of Smoot-Hawley

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Asymmetric information led to more uncertainty which decreased borrowing and lending even more Previous long-term relationships had been broken with so many banks closing New relationships took time to build

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reasons: 1)It didn’t understand the magnitude of the crisis 2)It claimed open market operations were hampered by gold standard and other regulations 3)Internal shift of power from New York to Washington after Benjamin Strong’s death in 1928

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Neither political party wanted to run a budget deficit Most agreed that balancing the budget would generate confidence and restore market stability

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1933: US government ordered all gold to be turned in to the Fed 1934: US fixes the price of gold at $35 per ounce 1928 price was about $20

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use was a good recovery year GDP climbed, prices rose, and the money supply increased

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Early to mid key mistakes: 1)Federal spending was cut 2)New taxes imposed 3)Fed increases reserve requirements

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Answering this question is probably the most unsettled and still causes the most debate about the Depression.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some argue the political climate of the New Deal created uncertainty and therefore discouraged investment The rhetoric was clearly anti-business

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Some policies were created with the purpose of increasing prices: Killing animals Making some food inedible for humans Reducing acreage in active farming

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fiscal policy was not as expansionary as it should have been Monetary policy was actually restrictive during most of the decade

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Read on your own

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Read on your own

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Make sure to differentiate the reasons why the Great Depression occurred and the reasons why it lasted so long. They are different issues and policies.