THE GREAT DEPRESSION

FALL OF THE WORLD’S GREATEST ECONOMY

“The Great Depression of 1929,
like most other periods of
severe unemployment, was
produced by government
mismanagement rather than by
inherent instability of the
private economy”

- Milton Friedman
 This started with America
winning the World War 1 ! –
ushering in an era of prosperity
& affluence for the American
populace.
 THE
ECONOMY
The Bottom Line
The 1920s was a period of vigorous
economic growth in the United States. That
decade marked the beginning of the modern
era as we know it.
Rapid rise in prosperity induced sweeping
changes in technology, society, and
economy. The electricity
boom revolutionized our way of life in
areas such as transportation,
communication, personal beauty,
housekeeping, entertainment, and many
more.
 BUY NOW PAY
DEFERREDLATER! PAYMENT
Deferred Payment Plan is an agreement between the developer.
The buyer pays 5-25% of the total cost at the time of purchase
and the balance at the time of possession. Differed payment
come in various permutations and combinations which may
allow for the payment to be made at various stages. America
was witnessing such a growth that this seemed to a viable form
of payment schedule for the banks.
THE SECURIETIES
BUSINESS
THE LIBERTY BOND
These were government securities that
were issued by the American government
to raise capital right after the WW1 – Since
America had also sustained damage during
the war and needed help raising capital to
speed up its recovery.
INTRODUCTION TO PRIVATE
BONDS
CHARLES EDWIN
MITCHELL
Infamously know as the “scapegoat of the
worst economic crash” was Vice-President
of National City Company, he was
responsible for the introduction of private
company’s bonds into the market – He was
also one of the pioneers that set up the
foundations for the New-York Stock
Exchange.
 THE BIGGEST BULL MARKET WAS
CREATED IN MAN-KIND’S HISTORY.
IT INSPIREDED SO MUCH
CONFIDENCE INTO THE AMERICAN
POPULACE THAT EVERYONE FROM A
SHOE-SHINE TO A DRIVER –
EVERYONE WAS INVESTING,
SO MUCH SO THEY STARTED
BUYING ON MARGIN
 BUYING ON
MARGIN
Buying on margin occurs when an investor buys an asset
by borrowing the balance from a bank or broker. Buying
on margin refers to the initial payment made to the
broker for the asset— the margin followed was, 10%
down and 90% financed. The investor uses the
marginable securities in their broker account as
collateral.
RESULT

In 1928 the
market went up
by a staggering
50% in 12
months.
 The J.P. Morgan Office
One of the players in this incident is the J.P.
Morgan – a group of wall street inner circle
bankers with there money and influence made
sure the government has
“Zero Interference”
In the financial activities of the wall-street.
Which further fanned the fire of
“Wild Speculations”
If everything was so good
then what happened?
“If orgies of uncontrolled speculation
are allowed to continue the ultimate
collapse is sure to bring a wide
spread depression to the country”

- Paul Werburg
 THE STOCK
MARKET BUBBLE

Share
Prices An economic bubble or asset
bubble is a situation in which
asset prices appear to be
based on implausible or
inconsistent views about the
future.
THE BREWING TROUBLE

The USA president Herbert hoover was skeptical of the wall street
activities and was constantly enquiring about the situation with his
friends in J.P. Morgan – was later assured by Thomas Lamont in a note
telling him “everything is fine”. He did not have the political apatite to
peruse the matter any further.

Mr. Kennedy was one of the few bankers that got out of the
depression scot-free :

“If the shoe shine knows as much as I know about the stock market
maybe its time for me to get out.”
- Joseph
Kennedy
(this statement was issued 5 days before “The Great Depression”)
 THE CRASH
BEGINS
23RD OCTOBER 1929

The Market crash began to happen – the stock prices fell by

the lot – a wave of sellers flooded the stock exchange – a
scene everyone could see but not believe.
THE CARNAGE CONTINUES
24TH OCTOBER 1929
(BLACK THRUSDAY)

The downwards spiral sped up the next day

-
Panic set in
-
People were desperate
-
People’s were being wiped out by the minute
 THE LAST ATTEMPT TO
SAVE THE STOCK MARKET
J.P. Morgan’s banker in a last desperate attempt to save the market form complete melt
down called Charles Mitchell to the JP Head office – provided him a list of select trading
stocks and provided him a corpus of 250 billion dollars and told him to buy as much as he
could.
Among Mitchell’s top purchases were:
1. US Steels – 25000 shares
2. US Radio - 25000 shares
3. General Motors – 15000 shares
Many more….
These purchases were made way above the market prices*

MERACULEOUSLY THE EFFORT WAS ABLE TO STOP THE SPIRAL

AND CONVERT THE DAY INTO THE BIGGEST PURCHASE DAY OF
THE YEAR !
 28th OCTOBER 1929 – THINGS TOOK A
TURN FOR THE WORST !

29TH OCTOBER 1929 – THE CRASH

HAPPENED AGAIN

THIS TIME NOTHING COULD HELP THE

ECONOMY- EVEN THE HOUSE OF J.P.
MORGAN HAD TO FOLD AND MOVE OUT.
THE DOMINO EFFECT – THE BANK SYSTEM
COLLAPSE
After the collapse the banks were left with a
ginormous un-recovered loan which due to the
circumstances was quickly becoming bad asset.
Flow of money to the banks just stopped.
Banks as a consequence face the much dreaded
bank run – which killed about 2000 banks within
the year.
Millions of depositors lost their money without
any hope of recovery.
Ironically it was the banks policy and short-
sightedness to allow financing of the “buying on
margin policy.
 Public was not Sharp fall
depositing unemployment in
money in demand
bank.

The circumstances that

were unfortunately
created were extremely
painful for anyone who
Bank had Large scale Sharp fall
was invested heavily in no capital layoff in supply
the market.
The common was stuck
in a place form where he
could do nothing but
wait for the tide to pass. Solvent
companies Bankruptcy
DEPRESSION
could not get of
loans to companies
operate
END RESULT
Every single flow and connection
that we have studied in Macro-
economics for the American
economy was broken or had
become non functional
businesses household sector
banks government individuals all
the spending, the entire flow of
cash throughout the economy
had come to a screeching halt,
bringing the economy down to
its knees.
THE RECOVERY
 Franklin D. Roosevelt

Roosevelt was elected President of

the United States in 1932, 1936,
1940 and 1944. He served as the
nation’s 32nd president from March
4, 1933 to his death in 1945. He
ushered in the recuperative
measures for America.

“The only thing we have to fear is fear

itself”
 The “New Deal” of recovery!
1. Boost agricultural pricing by offering Government Subsidies to the farmers.
2. Government funded jobs were introduced where-ever possible.
3. Grants were given to the state governments to run `poor` helping schemes.
4. Industry-by-Industry regulation codes were issued and regularized.
5. Federal Deposit Insurance Corporation was established.
6. Security & Exchange Commission was setup finally regularising the stock market.
7. Work Progress Administration – Government expenditure.

INCREASE GOVERNMENT
INJECT MONEY INTO THE CONTROL AND
ECONOMY INTERVENTION IN TO THE
WALL-STREET
Keynesian Economics

The Prime Assertion was

to use government
policies and intervention
to control the Aggregate
Demand and generate
Employment that will feed
the Economic cycle and
remove recession.
 THE PROBLEMS

NO PRECAUTIONARY NO NO NO NO
EMPLOYMENT SAVINGS DEMAND INVESTMENT PRODUCTION SUPPLY
What did the Keynes GOVERNMENT
principles do ? STIMULATION

EMPLOYMENT

INCOME PRODUCTION
STARTED

LOWERED
PRECAUTIONARY SUPPLY START
SAVINGS

BANK STRUCTURE INCREASED

RE-ESTABLISHED INVESTMENT
THE
INCREASED ECONOMY
DEMAND
 WORLD WAR 2 –
BLESSINGS IN
DISGUISE !
The employment generated by the war was enormous and
as the employment increased things started to fall in place.
THANK YOU