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

5. Why Did It Happen? Some Suggested Causes
What event is often the first to come to mind when people think of the Great Depression?
-The stock market crash – end of the party

6. Stock Market Boom and Bust
S&P Composite Index
Sept. 1929
July 1932

7. 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.

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

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

10. Why Did It Happen? Some Suggested Causes
Was the crash big enough to cause the Great Depression?
No.
What specific trade policies do some economists suggest caused the Great Depression?
the Smoot-Hawley tariff and protectionist trade policies

11. Why Did It Happen? Some Suggested Causes
Were protectionist trade policies alone enough to cause the Great Depression?
No.

12. What were some of the excesses of the 1920s that some economic historians?suggest caused the Great Depression?
capitalism
such as excessive production of commodities, excessive building, excessive financial speculation and an excessively skewed distribution of income and wealth

13. What is the one explanation that has stood the test of time?
What were some of the excesses of the 1920s that some economic historians?suggest caused the Great Depression?
What is the one explanation that has stood the test of time?
the collapse of the U.S. banking system and resulting contraction in the nation’s money stock

14. What happens if the money supply (stock) shrinks?
What were some of the excesses of the 1920s that some economic historians?suggest caused the Great Depression?
What happens if the money supply (stock) shrinks?
deflation

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

16. Commercial Bank Failures, 1920-2004

17. 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.

18. 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.