Overview of Great Depression 1929

1. The Great Depression 1930

2. “The Great Depression Is To Economics Is What The Big-
bang Is To Physics.”
“The Great Depression is The Holy Grail Of
Macroeconomics “
‘With The Birth Of Modern Macroeconomics, and It
Continues To Haunt Successive Generations Of Economics’

3. WHAT IS IT ?
 Great Depression was a severe worldwide economic
depression in the decade preceding World War II. The
timing of the Great Depression varied across nations,
but in most countries it started in 1930 and lasted until
the late 1930s or middle 1940s
 It was the longest, most widespread, and deepest
depression of the 20th century
 The depression originated in the U.S., after the fall in
stock prices that began around September 4, 1929, and
became worldwide news with the stock market crash
 of October 29, 1929

4. RELEVANCE TO ECONOMICS
• The timing and severity of the Great Depression varied
substantially across countries .The Depression was particularly long
and severe in the United States and Europe; it was milder in Japan
and much of Latin America.
• Declines in consumer demand, financial panics, and misguided
government policies caused economic output to fall in the United
States.
• The gold standard, which linked nearly all the countries of the
world in a network of fixed currency exchange rates, played a key
role in transmitting the American downturn to other countries.
• The Great Depression brought about fundamental changes in
economic institutions, macroeconomic policy, and economic theory

5. Overview Economy
As the 1920s advanced, serious problems threatened the
economy while
Important industries struggled, including:
• Agriculture
• Railroads
• Textiles
• Steel
• Mining
• Lumber
• Automobiles
• Housing
• Consumer goods

6. Background To Great Depression
 The 20’s had major prosperity, both to the economy and to how
Americans lived their lives. It gave people a newfound freedom.
Although they were very expensive, they became very popular.
This dramatic increase was key to the “roaring twenties”.
 By the late 1920s, American consumers were buying less
 Rising prices, stagnant wages and overbuying on credit were to
blame
 Most people did not have the money to buy the flood of goods
factories produced
 The wealthiest 1% saw their income rise 75%
 The rest of the population saw an increase of only 9%
 More than 70% of American families earned less than $2500 per
year

7. Factors Which Led To Great Depression
 Stock Market Crash of 1929
 Bank Failures
 Reduction in Purchasing
 Across the Board American Economic Policy
with Europe
 Drought Conditions(Dust Bowl)

8. Buying on Credit
increased
personal debt.
Higher interest rates
caused
LESS DEMAND
for goods.

9. STOCK MARKET CRASH
 of October 29, 1929
• Stock prices had risen more than fourfold from the low in 1921 to
the peak reached in 1929. In 1928 and 1929, the Federal Reserve had
raised interest rates in hopes of slowing the rapid rise in stock
prices. These higher interest rates depressed interest-sensitive
spending in areas such as construction and automobile purchases,
which in turn reduced production
• By the fall of 1929, U.S. stock prices had reached levels that could
not be justified by reasonable anticipations of future earnings. As
a result, when a variety of minor events led to gradual price
declines in October 1929, investors lost confidence and the stock
market bubble burst. Panic selling began on “Black Thursday,”
October 24, 1929
• The stock market crash reduced American aggregate demand
substantially. Consumer purchases of durable goods and business
investment fell sharply after the crash

10. The Trading Floor Of The New York Stock
Exchange Just After The Crash Of 1929. On
Black Tuesday, October 29,
The Market Collapsed. In A Single Day, 60
Million Shares Were Traded--a Record--and
30Billion Dollars Vanished Into Thin Air.
The "Era Of Get Rich Quick" Was Over. Jack
Dempsey, America's First Millionaire Athlete,
Lost $3 Million.
Cynical New York Hotel Clerks Asked
Incoming Guests, "You Want A Room For
Sleeping Or Jumping?"

12. With the loss of confidence
in stocks, people began to
lose confidence in the
security of their money
being held in banks.
Customers raced to their
banks to withdraw
their savings.
So that led to bank failure

13. BANK FAILURE
 A banking panic arises when many depositors lose confidence in the solvency of
banks and simultaneously demand their deposits be paid to them in cash. Banks,
which typically hold only a fraction of deposits as cash reserves, must liquidate
loans in order to raise the required cash. This process of hasty liquidation can cause
even a previously solvent bank to fail.
 The United States experienced widespread banking panics in the fall of 1930, the
spring of 1931, the fall of 1931, and the fall of 1932. The final wave of panics
continued through the winter of 1933 and culminated with the national “bank
holiday” declared by President Franklin Roosevelt on March 6, 1933
 The panics caused a dramatic rise in the amount of currency people wished to hold
relative to their bank deposits. This rise in the currency-to-deposit ratio was a key
reason why the money supply in the United States declined 31 percent between
1929 and 1933.
 Declines in the money supply caused by Federal Reserve decisions had a severe
contra dictionary effect on output

14. Bank Failure Factories making
Too Much, Farms
growing too much
BANKS Have NO $$
PEOPLE LOST
SAVINGS & JOBS
NO ONE TO HELP!
Factories Fire
Workers
(Don’t need them)
Farm Prices fall
(Farmers can’t
make$$)
Farmers & Factory
Workers can’t pay back
loans to Banks:
DEFAULT!!
Banks Close because they
have no money: Loans
have not been paid back,
can’t give people their
savings

16. Police stand guard outside the entrance to New York's closed World Exchange
Bank, March 20, 1931. Not only did bank failures wipe out people's savings, they also
undermined the ideology of thrift

17. REDUCTION IN PURCHASING
 Actual price declines and the rapid decline in the money supply,
consumers and business people came to expect deflation – that
is, they expected wages and prices to be lower in the future.
 As a result, even though nominal interest rates were very low,
people did not want to borrow because they feared that future
wages and profits would be inadequate to cover the loan
payments
 This hesitancy, in turn, led to severe reductions in both
consumer spending and business investment spending.
 The failure of so many banks disrupted lending, thereby
reducing the funds available to finance investment and hence
Great Depression.

18. Consumer purchases fell somewhat, governments' purchases did not fall at all
compared with 1929 but there was a catastrophic collapse of investment purchases.
Exports fell but imports fell as well so that there was not much of a change in net
exports. It is investment purchases, the purchases of new equipment and buildings and
inventory

19. The problem in the early 1930's was that the rate of inflation was
negative; i.e., there was deflation instead of inflation. This meant that
borrowers would have to pay back more valuable dollars than the ones
they borrowed.

20.  The high real interest rates which came as a result of deflation could have
been a major factor in the collapse of investment which was the immediate
cause of the Depression. Once excess capacity and expectations of decreased
sales develop the level of investment drops to zero. After excess capacity
develops investment purchases will not rise even if the real interest rate
drops. Nonzero investment in such circumstance is maintained only from the
emergence of new products, for which there is no existing capacity, and the
finishing up of investment projects that are already started
 The Federal Reserve Banking System (the Fed) was created to stabilize the
financial system and control the money supply. The Fed however probably
did not know the money supply was decreasing. The Fed saw only the
statistics on the monetary base, the currency in circulation plus the funds
held as reserves by the banks with the twelve Federal Reserve Banks
 The problem was what was happening to the money multiplier. The Fed in
the late 1920's was trying to end the speculative bubble in the stock market.
The Fed managers applied more restrictive monetary policy than they
realized
 The chain of causes of the Great Depression thus leads back to the restrictive
monetary policies of the Federal Reserve System

22. GOLD STANDARD
• Under the gold standard, imbalances in trade or asset flows gave rise to
international gold flows.
• For example, in the mid-1920s intense international demand for American
assets such as stocks and bonds brought large inflows of gold to the
United States To stem the gold outflow, the Bank of England raised
interest rates substantially. High interest rates depressed British spending
and led to high unemployment in Great Britain throughout the second
half of the 1920s
• Maintaining the international gold standard, in essence, required a
massive monetary contraction throughout the world to match the one
occurring in the United States. The result was a decline in output and
prices in countries throughout the world that also nearly matched the
downturn in the United States

23. • Foreign lending to Germany and Latin America had expanded greatly
in the mid-1920s. U.S. lending abroad then fell in 1928 and 1929 as a result
of high interest rates and the booming stock market in the United
States. This reduction in foreign lending may have led to further credit
contractions and declines in output in borrower countries
• The effects of reduced foreign lending may explain why the economies
of Germany, Argentina, and Brazil turned down before the Great
Depression began in the United State
• The 1930 enactment of the Smoot-Hawley tariff in the United States and
the worldwide rise in protectionist trade policies created other
complications. The Smoot-Hawley tariff was meant to boost farm
incomes by reducing foreign competition in agricultural products. But
other countries followed suit, both in retaliation and in an attempt to
force a correction of trade imbalances

24. A drought in the South lead to dust storms that destroyed crops.

25. Natural Disaster “The DUST BOWL”
Great Plains suffers a huge Drought (1931)
 Causes:
a) Drought . . .no rain
b) - New technology, tractors and steel plows tear-up extra sod
that was holding onto soil, drought turns open soil into sand
box
- Huge Dust storms cover ‘Great Plains
 Results
a) Can’t pay banks- Banks take Farms
b) Many Great Plains farmers move to California,
1. Try to get jobs on large farms
2. Treated poorly in Calif. -
*‘Oakies’ & ‘Arkies’-Not wanted in West

26. Great Depression
Causes
• Overproduction
• Bank Closings
Spark
• Stock Market Crash
Results
• Unemployment
• Life savings cost

27. EFFECTS OF THE DEPRESSION
A. JOBLESS / HOMELESS
1. 1930-1932 – JOBLESS GOES FROM 4 TO 12 MILLION
2. HOUSES ARE LOST, PEOPLE BECOME HOMELESS
3. PEOPLE ARE DESPERATE
B. HATRED FOR PRESIDENT HOOVER
C. BONUS ARMY
1. WWI Veterans Who Were Promised A $ Bonus In 1945,
* Veterans Want It Now (1932)
2. Veterans Go To Washington And “Camp Out”
3. Hoover Sends In Army (Eisenhower, Macarthur), Used Tear Gas, Machine
Guns, And Burned The Camp Down

30. HOOVER WINS
1928 ELECTION
• Republican Herbert
Hoover ran against
Democrat Alfred E. Smith
in the 1928 election
• Hoover emphasized years
of prosperity under
Republican
administrations
• Hoover won an
overwhelming victory

31. Herbert Hoover was president at the start
Philosophy: We’ll make it!
What He Did: Nothing
The poor were looking for help and no ideas
on how to correct or help were coming

33. • The most obvious economic impact of the Great Depression was human
suffering. In a short period of time world output and standards of living
dropped precipitously.
• As much as one- fourth of the labour force in industrialized countries was
unable to find work in the early 1930s. While conditions began to improve
by the mid-1930s, total recovery was not accomplished until the end of the
decade
• The Great Depression hastened, if not caused, the end of the international
gold standard. Although a system of fixed currency exchange rates was
reinstated after World War II under the
• Bretton Woods system, the economies of the world never embraced that
system with the conviction and fervour they had brought to the gold
standard. By 1973, fixed exchange rates were abandoned in favour of
floating rates.
ECONOMIC IMPACT

35.  In many countries, government regulation of the economy, especially of
financial markets, increased substantially during the Great Depression.
 The Depression also played a crucial role in the development of
macroeconomic policies intended to temper economic downturns and
upturns. The central role of reduced spending and monetary contraction
in the Depression led British economist John Maynard Keynes to develop
the ideas in his General Theory of Employment, Interest, and Money(1936).
 The Depression changed the family in dramatic ways. Many couples
delayed marriage - the divorce rate dropped sharply and birth rates
dropped below the replacement level for the first time in American
history
 On the other hand, women found their status enhanced by their new
roles. Black women especially found it easier to obtain work than their
husbands, working as domestic servants, clerks, textiles workers and
other occupations.
 This employment increased their status and power in the home, gaining
them a new voice in domestic decisions.

36. Monetarists View
Monetarists highlight the importance of a fall in the money supply. They
point out that between 1929 and 1932, the Federal reserve allowed the money
supply (Measured by M2) to fall by a third. In particular, Monetarists such as
Friedman criticise the decisions of the Fed not to save banks going bankrupt.
They say that because the money supply fell so much an ordinary recession
turned into a major deflationary depression.
Austrian View
Austrian school of Economists such as Hayek and Ludwig Von Mises place
much of the blame on an unsustainable credit boom in the 1920s. In particular,
they point to the decision to inflate the US economy to try and help the UK
remain on the Gold standard at a rate which was too high. They argue after
this unsustainable credit boom a recession became inevitable. The Austrian
school doesn't accept the Friedman analysis that falling money supply was
the main problem. They argue it was the loss of confidence in the banking
system which caused the most damage.
Different Views Of The Great Depression

37. Keynesian View
Keynes emphasised the importance of a fundamental disequilibrium in real output.
He saw the Great Depression as evidence that the classical models of economics
were flawed.
Classical economics assumed Real Output would automatically return to equilibrium
(full employment levels); but the great depression showed this to be not true.
Keynes said the problem was lack of aggregate demand. Keynes argued
passionately that governments should intervene in the economy to stimulate demand
through public works scheme - higher spending and borrowing.
Keynes heavily criticised the UK government's decision to try balance the budget in
1930 through higher taxes and lower benefits. He said this only worsened the
situation.
Keynes also pointed to the paradox of thrift

38. A. Fixing Banks!!!
1. Declared a banking crisis
a. Closed ALL banks/ 4 day “Bank Holiday”
b. Emergency Banking Relief Act- Passed by
Congress, allowed only sound banks to reopen, the
rest remained closed
2. Fireside Chat- told Americans by radio that the
good banks were safer than $$ in a mattress
Fixing the Depression "New
Deal”

39. C. A NEW DEAL!!!
1. People Happy, Roosevelt sends bills to Congress
2. NEW DEAL BEGINS- 3 Goals:
a. Relief for Unemployed
b. Plans for Recovery
c. Reforms to Prevent more Depressions
3. Major New Deal Programs
a. Unemployment
*CCC- Civilian Conservation Corp
*PWA- Public Works Administration
*TVA- Tennessee Valley Authority
b. Recovery Plans
*NRA- National Recovery Act
*AAA- Agricultural Adjustment Admin.
c. Prevention Reforms
*FDIC- Federal Deposit Insurance Corporation
(Have you seen this?)
*SEC- Securities and Exchange Commission

41. Sources Of Recovery:
Policies Followed
Monetary Policies
recovery
•Given the key roles of monetary contraction and the gold standard in
causing the Great Depression, it is not surprising that currency devaluations
and monetary expansion became the leading sources of recovery throughout
the world
Devaluation, however, did not increase output directly. Rather, it allowed
countries to expand their money supplies without concern about gold
movements and exchange rates. Countries that took greater advantage of
this freedom saw greater recovery
The monetary expansion that began in the United States in early 1933 was
particularly dramatic. The American money supply increased nearly 42
percent between 1933 and 1937. This monetary expansion stemmed largely
from a substantial gold inflow to the United States, caused in part by the
rising political tensions in Europe that eventually led to World War II

42. • Worldwide monetary expansion stimulated spending by
lowering interest rates and making credit more widely available
• It also created expectations of inflation, rather than deflation,
and so made potential borrowers more confident that their
wages and profits would be sufficient to cover their loan
payments if they chose to borrow
• One sign that monetary expansion stimulated recovery in the
United States by encouraging borrowing was that consumer and
business spending on interest-sensitive items such as cars, trucks,
and machinery rose well before consumer spending on services.

43. FISCAL POLICIES
• Fiscal policy played a relatively small role in stimulating recovery in the
United States
• Indeed, the Revenue Act of 1932 increased American tax rates greatly in an
attempt to balance the federal budget, and by doing so dealt another
contractionary blow to the economy by further discouraging spending
• Actual increases in government spending and the government budget
deficit were small relative to the size of the economy. This is especially
apparent when state government budget deficits are included, because
those deficits actually declined at the same time that the federal deficit
rose.

44. How It Ended ?
 As a result, the new spending programs initiated by the New Deal had little
direct expansionary effect on the economy. Whether they may nevertheless
have had positive effects on consumer and business sentiment remains an
open question. United States military spending related to World War II was
not large enough to appreciably affect total spending and output until 1941
 The role of fiscal policy in generating recovery varied substantially across
other countries. Great Britain, like the United States, did not use fiscal
expansion to a noticeable extent early in its recovery. It did, however,
increase military spending substantially after 1937.
 France raised taxes in the mid-1930s in an effort to defend the gold standard,
but then ran large budget deficits starting in 1936. The expansionary effect of
these deficits, however, was counteracted somewhat by a legislated reduction
in the French workweek from 46 to 40 hours—a change that raised costs and
depressed production. Fiscal policy was used more successfully in Germany
and Japan.

45. Finally To
Conclude the
Crux of matter
Thank You