2The “Spark” in the US: Fall of the Market Economic slowdown, summer of ’29…The Crash…Black Tuesday: October 29th, 1929Huge lossesNov ‘29 = $30 billion ↓Stock Market recovered, but…Above: The NYSEBelow: A run on a bank
3Short 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
4Long Term Causes Overexpansion & Overproduction Companies expanded too fastBuilt up surplus cutbacks in production & workersAutomation faster production less workers neededInsufficient InvestmentInvestment was based on profitsWhen profits ↓ so did investmentPoor distribution of US incomeReally wealthy & really poorEconomy dependent on luxury spendingBad Corporate StructureSome companies focused on profit & dividends, not reinvestmentBad Banking StructureUnlinked system runs & closuresWorld Economic slumpHigh US tariffs cuts off tradeEurope defaults on US loansFederal ReserveRefused 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.
5Monetary 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 goldBelieved the money supply was sufficient so banksheld onto excess reservesFeb Jan 1933: Money supply mildly ↑Banks wanted reserves rather than lend moneyJan Mar 1933: Federal Reserve ↑ discount rateFrom : Monetary supply never expansionaryLike Fiscal Policy, aggressive Monetary Policy was never triedAt best, passive monetary policy attempted (no cut backs or expansion)The money supply was allowed to ↓ 30% fromThe Fed did back up some banks, but allowed ½ to falterUnderlying BeliefsNo central coordinationBelief in the Gold StandardBelief that excess reserves signaled sufficient liquidityBut it wasn’t sufficient & led to ↑ interest rates & ↓ of private investments
6An (other) Economist’s Way of Looking at It Initial Stock Market Crash sets in motion a multiplier effectNational Income, or Y = C + I + G + (X – M)C & I (Consumption & Investment)C & I drops due to Stock Market crashOverall impact of just 2% of the economyCredit and Deflation1920s spending based on creditPeople stop borrowing to pay back debtsX & M (Exports & Imports)Smoot Hawley Tariff & retaliationG (Gov’t spending): The Keynesian Fiscal Solution?Decrease taxesLarge and intentional increases in GNever tried due to:Balanced budget mentalityIdea that gov’t would misallocate resourcesIdea that G would crowd out IIdea that gov’t shouldn’t be a relief agencyWhich are true and which are false?
7Consequences of the Depression’s Severity GNP - 25% declineCapital investment down(16.2 billion to 333 million)Global DepressionOther countries couldn’t purchase American ProductsFarm prices & incomes downIndustrial unemployment up to 33%Unprecedented durationGovernment did littleLaissez Faire mentality
8Depression in Urban America Dire situation in citiesCleveland 50%Akron, 60%Toledo 80%Poverty seen as sign of personal failure20,000 suicidesPublic charities overrunImmigration & birth rates ↓A line of men waiting for work
9Depression in Rural America The “Dust Bowl”TX, OK, KS, NE, CO, NMCauses:Act of God: Insects, high temps, draught, wind…Man-made Disaster: Over cropping, over grazing & improper farming methods“Okies” migrate WestThe Grapes of WrathNot everyone went7 of 10 people stayed it outGov’t policies ineffective
10Reflection 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.