1. David C. Wheelock September 20, 2007 An Overview of the Great Depression

2. What makes a Depression Great? Recession: When your neighbor loses his or her job. Depression: When you lose your job.

3. Why study the Great Depression? Worst economic disaster of the 20th century. Cause or causes are still debated. A defining event, especially for the government’s involvement in the economy. Useful for learning important macroeconomic concepts.

4. Some Concepts Gross Domestic Product (GDP): Comprehensive measure of the nation’s output of final goods and services. Real GDP: GDP measured at a fixed price level (i.e., inflation adjusted). Nominal GDP: GDP measured at current prices. Recession: Sustained decline in real GDP (approximately two quarters). Officially declared by NBER committee. Depression: Very severe recession.

5. More Concepts Inflation: A sustained increase in the general price level (often calculated in terms of the Consumer Price Index (CPI)). Deflation: A sustained decrease in the general price level. Money Stock: The stock of assets that serve as media of exchange (e.g., coin, currency, checking accounts). Real Interest Rate: Measure of the cost of borrowing adjusted for inflation/deflation.

6. Real output (GDP) fell 29% from 1929 to 1933. Unemployment increased to 25% of labor force. Consumer prices fell 25%; wholesale prices 32%. Some 7000 banks failed. How Great was the Great Depression?

7. Why Did It Happen? Some Suggested Causes The stock market crash – end of the party

8. Stock Market Boom and Bust S&P Composite Index

9. The Stock Market Crash The timing of the crash (Oct. 1929) is suggestive. Possible channels: Destruction of wealth Increased uncertainty Role of banks Conclusion: Probably had some effect, but not big enough by itself.

10. Why Did It Happen? Some Suggested Causes The stock market crash – end of the party Collapse of world trade – globalization in reverse

11. The Collapse of World Trade $ value imports of 75 countries

12. Why Did It Happen? Some Suggested Causes The stock market crash – end of the party Collapse of world trade – globalization in reverse Monetary collapse

13. Bank Failures 7000 banks failed -- many during “panics” Number of banks fell from 25,000 in 1929 to 15,000 by 1934 Possible Channels: Loss of deposits  decline in expenditures Customer relationships broken  harder to borrow Money supply contraction

14. Commercial Bank Failures, 1920-2004

15. Banking Panics Bank depositors lost confidence  bank runs Banks lost gold, currency and other reserve assets Loss of reserves caused banks to reduce loans and deposits (causing money stock to fall) Contracting money stock reduced spending Reduced spending led to lay-offs (increased unemployment), falling prices (deflation) and lower output.

16. Fed officials did not watch (or even measure) the money supply. But, why didn’t they respond to bank panics? Most failed banks were small, nonmember banks. Interest rates were falling and few banks borrowed at the discount window. The Fed’s Monetary Policy

17. Nominal Interest Rate, 1922-33 Percent

18. But Were Interest Rates Really Falling? Deflation caused the real interest rate (i.e., the real cost of borrowing) to rise sharply: i(nominal) – inflation rate = i(real) e.g., 2%  (  10%) = 2% + 10% = 12%  Firms stopped investing in new buildings, equipment, etc.  Bankruptcies increased as borrowers lacked the incomes to repay their debts.  Banks failed because borrowers defaulted on their loans.

19. Nominal and Real Interest Rates, 1922-33 Percent Nominal Real

20. Recovery Rapid money supply growth (end of banking panic, gold inflows)  rising price level  falling real interest rate  and increased spending.

21. Money and the Price Level

22. The Real Interest Rate and Business Investment Business Investment, Billions of Dollars; Annual DataTreasury bill yield minus inflation rate

23. Money (M2) and Output Growth, 1929-41

24. Recovery Rapid money supply growth (end of banking panics, gold inflows)  rising price level, falling real interest rate and increased spending. FDR and the New Deal? – Restored confidence in banking system (FDIC) – Early years marked by regulation/reform, little new spending (alphabet programs, e.g., NRA, WPA, PWA, CCC, etc.) – Later years saw increased spending

25. Recovery Rapid money supply growth (end of banking panics, gold inflows)  rising price level, falling real interest rate and increased spending. FDR and the New Deal? – Restored confidence in banking system (FDIC) – Early years marked by regulation/reform, little new spending (alphabet programs, e.g., NRA, WPA, PWA, CCC, etc.) – Later years saw increased spending World War II (when unemployment finally fell below 10%)

26. Could It Happen Again? The Depression was not a failure of capitalism or markets, but rather a failure of the Federal Reserve. Monetary policy should maintain price stability – avoid deflation and inflation. The Fed should respond to financial crises that increase the demand for money or threaten to disrupt the payments system.

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33. Roosevelt's New Deal: THE MAN WITH A PLAN Relief, Reform, Recovery- 3R’s The Federal Emergency Relief Administration, for instance, provided $500 million for relief operations by states and cities. (Money went to industries and farmers.

34. THE NEW DEAL continued Works Progress Administration (WPA) relief program (which made the federal government by far the largest single employer in the nation). This gave people jobs working on projects such as the Hoover dam and working in forestry.

35. Other New Deal initatives The Social Security Act- Exists today giving money to people who can no longer work. Paid by the younger generations so that when they get older the money will be there. Aid tenant farmers and migrant workers. Creation of the United States Housing Authority Farm Security Administration,- Money to farmers to help keep them from losing their farms. Fair Labor Standards Act of 1938, which set maximum hours and minimum wages for most categories of workers.

36. Sharing stories Sharing historical fictional narratives: 1) List Key words or concepts listed in their stories: 2) Who were the characters in the story? 3) Write summary of the plot of their story? 4) What emotions did their story evoke in you? (I.e. The part made me angry, sad because…) 5) Was their dialogue in the story? If so what were the most important lines? If Not, write one line that could have been added to their story? 6) What themes were identified in their stories?

37. The Great Depression had a different impact on minorities The Great migration (Anglo Americans) caused by the Dust Bowl caused conflicts with… Most worked as migrant workers. CFU: Why was there conflict between the two groups particularly around agricultural jobs.

38. Deportations of the 1930s As a result of the high unemployment rate many Mexican Americans were deported.

39. Anti Mexican sentiment

40. KU KLUX KLAN Threatened African Americans, Jews, Catholics, and recent immigrants. It became a powerful force in Texas and other states, as many influential leaders became members. Enforced unwritten (unconstitutional laws) such as Jim Crow Laws. Remember Plessey V. Ferguson?

41. After World War I Race relations suffered in Texas after WWI when black soldiers who served in the War demanded equal rights. Why was there so much conflict around this issue, particularly during the Great Depression?

42. LULAC AND the NAACP Both African Americans and Mexican Americans fought against discrimination, Jim Crow Laws. To do this they formed organizations such as the NAACP and LULAC National association for the Advancement of Colored People League of United Latin American citizens.