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The Crash & Great Depression

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1 The Crash & Great Depression

2 The “Spark” in the US: Fall of the Market
Economic slowdown, summer of ’29… The Crash… Black Tuesday: October 29th, 1929 Huge losses Nov ‘29 = $30 billion ↓ Stock Market recovered, but… Above: The NYSE Below: A run on a bank

3 Short Term Causes: How we went from a Crash to a Depression
Loss of easy way to raise $$$ 9,000 banks close ‘30-’33 (shrinks money supply) Deflation and low consumer spending Businesses lower prices, production and workers

4 Long Term Causes Overexpansion & Overproduction
Companies expanded too fast Built up surplus  cutbacks in production & workers Automation  faster production  less workers needed Insufficient Investment Investment was based on profits When profits ↓ so did investment Poor distribution of US income Really wealthy & really poor Economy dependent on luxury spending Bad Corporate Structure Some companies focused on profit & dividends, not reinvestment Bad Banking Structure Unlinked system  runs & closures World Economic slump High US tariffs cuts off trade Europe defaults on US loans Federal Reserve Refused to lower interest rates to inflate the economy… Above: Broken windows at GM during the Flint, Michigan sit-down strike of Below: Relief line in San Antonio, TX 1939.

5 Monetary Policy in a Nutshell
Oct Sept 1931: money supply ↓ by 10% Oct Jan 1932: discount rate ↑ Money supply ↓ another 12% Meant to defend US$ & prevent outflow of gold Believed the money supply was sufficient so banks held onto excess reserves Feb Jan 1933: Money supply mildly ↑ Banks wanted reserves rather than lend money Jan Mar 1933: Federal Reserve ↑ discount rate From : Monetary supply never expansionary Like Fiscal Policy, aggressive Monetary Policy was never tried At best, passive monetary policy attempted (no cut backs or expansion) The money supply was allowed to ↓ 30% from The Fed did back up some banks, but allowed ½ to falter Underlying Beliefs No central coordination Belief in the Gold Standard Belief that excess reserves signaled sufficient liquidity But it wasn’t sufficient & led to ↑ interest rates & ↓ of private investments

6 An (other) Economist’s Way of Looking at It
Initial Stock Market Crash sets in motion a multiplier effect National Income, or Y = C + I + G + (X – M) C & I (Consumption & Investment) C & I drops due to Stock Market crash Overall impact of just 2% of the economy Credit and Deflation 1920s spending based on credit People stop borrowing to pay back debts X & M (Exports & Imports) Smoot Hawley Tariff & retaliation G (Gov’t spending): The Keynesian Fiscal Solution? Decrease taxes Large and intentional increases in G Never tried due to: Balanced budget mentality Idea that gov’t would misallocate resources Idea that G would crowd out I Idea that gov’t shouldn’t be a relief agency Which are true and which are false?

7 Consequences of the Depression’s Severity
GNP - 25% decline Capital investment down (16.2 billion to 333 million) Global Depression Other countries couldn’t purchase American Products Farm prices & incomes down Industrial unemployment up to 33% Unprecedented duration Government did little Laissez Faire mentality

8 Depression in Urban America
Dire situation in cities Cleveland 50% Akron, 60% Toledo 80% Poverty seen as sign of personal failure 20,000 suicides Public charities overrun Immigration & birth rates ↓ A line of men waiting for work

9 Depression in Rural America
The “Dust Bowl” TX, OK, KS, NE, CO, NM Causes: Act of God: Insects, high temps, draught, wind… Man-made Disaster: Over cropping, over grazing & improper farming methods “Okies” migrate West The Grapes of Wrath Not everyone went 7 of 10 people stayed it out Gov’t policies ineffective

10 Reflection Questions: First discuss with your table partner before writing your answers
In what ways was the economic downturn of the 1930s similar to the current downturn? How was it different? Explain. Explain how the Stock Market Crash marked the beginning of the Great Depression but that it was not the cause of it. List two things that you learned that were interesting &/or that you will remember easily a month from now.

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