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01 - Causesof theGDepression
01 - Causesof theGDepression
The Facts
In September of 1929 the U.S. economy began showing signs of
contraction (decline from the growth of the 1920s)
August 1929, recession begins, GDP falls by and unemployment
rises.
Automobile sales fall 30% in 1929.
By 1929 farm incomes fall more than 50%
September 1929 stock prices begin to fall, the market crash on
Black Tuesday October 29th losing 90% of its value by 1932.
By 1932 US GDP fell 30%
1929-1932 US factory production fell 46%
1929-1932 US wholesale prices fell 32%
1929-1932 US exports fell 70%
1929-1932 US unemployment will reach 25% (33% in some
regions)
US Unemployment 1910-1960
US GDP 1910-1960
Based on data from: Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP
US Industrial Production
Overproduction
Banking Practices
& Fed Policies
Stock Market
Political Decisions
1. Over-production
Overproduction
The roaring twenties was an era of great prosperity and
economic growth.
Average output per worker increased 32% in
manufacturing and corporate profits rose 62%.
The availability of so many consumer goods, such as
electric appliances, radios and automobiles, offered to
make life easier.
Americans felt they deserved to reward themselves after
the sacrifices of World War I. A return to normalcy.
This led to a high demand for such goods,
so companies began to produce more and more, in order
to meet that demand.
Overproduction
Mass advertising fed mass consumption to satisfy the
needs of mass production.
Wages for labor remained stagnant (mechanization of
labor, Taylorism, suppression of union collective
bargaining). Businesses were investing profits in the stock
market and not in workers wages. So.
The uneven distribution of wealth grows. 1922 1% of the
population owns 36.7% of the nations wealth by 1929 it
has grown to 44.2%
Eventually business produced more than consumers could
purchase. You can only own so many radios, cars, and
appliances.
August 1929 Recession begins, two months before the
stock market crash. During this two month period,
production fell 20%, wholesale prices at 7.5 %, and
personal income fell 5%.
Farm Overproduction
In 1929, Agriculture still makes up half of the US economy
During World War I, with European farms in ruin, the
American farm was a prosperous business.
Increased food production during World War I was an
economic boom for many farmers, who borrowed money
to enlarge and modernize their farms.
The government had also subsidized farms during the
war, paying high prices for wheat and grains.
When the subsidies were cut, it became difficult for many
farmers to pay their debts when commodity prices
dropped to normal levels.
So
Over production of consumer goods and
agricultural goods means
Supply was greater than demand.
A surplus of goods in the market begins
to drive prices down.
Declining prices means declining profits
Declining profits means stock values
(for corporations) begin to fall.
Oh my!!!
Consumer Credit
The uneven distribution of
wealth didnt stop the poor
and middle class from
wanting to possess luxury
items, such as
cars and radios
But, wages were not
keeping up with the
prices and that created
problems!
Consumer Credit
One solution was to let products be purchased on credit.
The concept of buying now and paying later
caught on quickly.
By the end of the 1920s, 60% of the cars and 80% of the
radios were bought on installment credit.
Consumerism in the New Era saw a change in US buying
behavior. Thrift, saving, and frugality were replaced with
consumption, and keeping up with the Jones
So
By 1929 the Fed decided to slow the rapid
(runaway?) growth by increasing interest rates.
Raising interest rates means that it cost more to
borrow and raises the price of existing debt.
So. People borrowed less and purchased fewer
goods.
They also started using available cash to pay off
debt and therefore purchased fewer goods.
Less demand = surplus goods = deflation =
declining profits = declining stock prices = rising
unemployment
Oh my!
George Olsen
"I'm In The Market For You
I'll have to see my broker
Find out what he can do.
'Cause I'm in the market for you.
With margin I'm all through.
'Cause I want you outright it's true.
We'll count the hugs and kisses,
When dividends are due,
'Cause I'm in the market for you.
So
Banks made risky loans to borrowers to
buy stocks on the margin.
Banks used depositors money to
speculate in the market
When panic shook the market, the
banks were left holding the bag
Oh my
So
The Fed fails to manage the bank and
currency crisis.
Depositors now hide their money at
home and banks have no money to lend
Banks close and large amounts of
money disappear from the economy
So
Less money = less consumption = less
production
Businesses go bankrupt
People get laid off
Thus the economy begins an irreversible
downward spiral.
Banks close and large amounts of money
disappear from the economy
By 1931, GNP falls by 18%,
unemployment reaches 16%(8 million)
Political Decisions
The severity of the Depression could have been lessened
if policy makers would have been open to new ideas
Conservative economic policy
Laissez fair, let the market right itself without government
intervention
Balance the budget, do not spend more than collected in tax
revenue
Exports
Imports
3
2
1
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
So
Hoover was not the laissez-fairie
He supported government actions to
ease the crisis
But
It was not enough
And
He fell back on conservative economic
policy and tried to balance the budget
Smoot-Hawley
Ohhh.!!!
Lets Review
Overproduction
Stagnant wages
Federal monetary policy
Banking practices Stock market
Political decisions