Causes of the DepressionCauses of the Depression 1. Collapse of the Stock Market1. Collapse of the Stock Market 2. Lack of Control / Regulation over the Stock Market - 2. Lack of Control / Regulation over the Stock Market -

Insider Manipulation, Price InflationInsider Manipulation, Price Inflation 3. Decrease in taxation in 19213. Decrease in taxation in 1921 4. Lack of Diversity in the Economy4. Lack of Diversity in the Economy 5. Uneven Distribution of Purchasing Power5. Uneven Distribution of Purchasing Power 6. Decline in Exports6. Decline in Exports 7. Credit Structure of the Economy7. Credit Structure of the Economy 8. International Debt Structure8. International Debt Structure 9. Agricultural Depression9. Agricultural Depression 10. Govt. Policy from 1929-1932 (Coolidge, Hoover): 10. Govt. Policy from 1929-1932 (Coolidge, Hoover):

Restrictive Monetary Policy, Large tax increase, Increase Restrictive Monetary Policy, Large tax increase, Increase in Tariffsin Tariffs

There had been depressions before - 1893, 1907.. - There had been depressions before - 1893, 1907.. - Depressions are a normal feature of Economic life in a Depressions are a normal feature of Economic life in a Capitalist societyCapitalist society

But the Depression that started in 1929 was more But the Depression that started in 1929 was more severe / deeper, affected more people, and lasted longer severe / deeper, affected more people, and lasted longer than previous Depressionsthan previous Depressions

Why was there a depression in 1929 and why was it so Why was there a depression in 1929 and why was it so deep, so severe? deep, so severe?

1. Collapse of the Stock Market1. Collapse of the Stock Market

Trading on the Stock Market escalated from 2m to 5m Trading on the Stock Market escalated from 2m to 5m shares a day on average in 1928 and 1929 (on shares a day on average in 1928 and 1929 (on exceptional days up to 10 or 12 million). (Bull market)exceptional days up to 10 or 12 million). (Bull market)

There was a widespread speculative fever that grew There was a widespread speculative fever that grew steadily more intense. steadily more intense.

The prices of stocks soared, and had ceased to bear any The prices of stocks soared, and had ceased to bear any relation to the earning power of the corporations that relation to the earning power of the corporations that were issuing them.were issuing them.

Speculating on the Stock Market had become a Speculating on the Stock Market had become a national obsession, attracting the attention not only of national obsession, attracting the attention not only of the wealthy but of millions of people of modest meansthe wealthy but of millions of people of modest means

Overall, though, only a small % of the population Overall, though, only a small % of the population actually invested (0.5% ?)…..but that small actually invested (0.5% ?)…..but that small percentage of the population invested a lot of moneypercentage of the population invested a lot of money

Why was there more interest in the Stock Market in Why was there more interest in the Stock Market in 1928 and 1929? 1928 and 1929?

1.1. It could provide quick and easy wealth: between May It could provide quick and easy wealth: between May 1928 and Sept 1929, the average price of stocks rose 1928 and Sept 1929, the average price of stocks rose over 40%. Some stocks doubled in value; eg. Hershey over 40%. Some stocks doubled in value; eg. Hershey Chocolate shares increased by over 100%: Banks only Chocolate shares increased by over 100%: Banks only paid 7% annually, compared to the dramatic returns of paid 7% annually, compared to the dramatic returns of the Stock Market.the Stock Market.

2. 2. Credit was very easy to obtain. You had to put down Credit was very easy to obtain. You had to put down very little - usually only 5% - the rest you borrowed very little - usually only 5% - the rest you borrowed from the stockbroker - called from the stockbroker - called buying on marginbuying on margin. . Brokers received 20% interest on the loans, but you Brokers received 20% interest on the loans, but you stood to gain thousands for only a very modest actual stood to gain thousands for only a very modest actual investment.investment.

But, in the fall of 1929 (from October), the Stock But, in the fall of 1929 (from October), the Stock Market began to fall apart (“the bottom fell out) Market began to fall apart (“the bottom fell out)

Why?Why?

1. A general spontaneous feeling emerged that prices 1. A general spontaneous feeling emerged that prices were inflated…that the stock market was saturated - too were inflated…that the stock market was saturated - too many shares, prices too high…people began to sell-off..many shares, prices too high…people began to sell-off..

Suddenly for the first time in years there were more Suddenly for the first time in years there were more sellers than buyers, causing stock prices to drop. The sellers than buyers, causing stock prices to drop. The success of the Stock Market depended on the influx of success of the Stock Market depended on the influx of new buyers / customers and of new money.new buyers / customers and of new money.

2. Stockbrokers, who had lent over $6b in 2. Stockbrokers, who had lent over $6b in margin loansmargin loans to their customers, began to call in the margins (“to their customers, began to call in the margins (“margin margin callingcalling”). Investors who could not pay off the loans, were ”). Investors who could not pay off the loans, were forced to sell off their stock….affecting the market even forced to sell off their stock….affecting the market even

more, pushed down the price of stock even further.more, pushed down the price of stock even further.

There was a brief recovery on Oct 22 - but on Oct 23 There was a brief recovery on Oct 22 - but on Oct 23 there was an even more alarming decline in stock prices. there was an even more alarming decline in stock prices.

On this occasion J.P. Morgan and other big bankers On this occasion J.P. Morgan and other big bankers managed to stave off disaster for a while by buying up managed to stave off disaster for a while by buying up stocks to restore public confidencestocks to restore public confidence

But on Oct 24 (Black Thursday) and then Oct 29, But on Oct 24 (Black Thursday) and then Oct 29, (Black Tuesday), there was a huge panic, with 16m (Black Tuesday), there was a huge panic, with 16m shares traded…..Crashshares traded…..Crash

Stocks in many companies became virtually worthless. Stocks in many companies became virtually worthless.

In the weeks that followed the market continued to In the weeks that followed the market continued to decline, with losses in Oct - Nov totaling $40b in two decline, with losses in Oct - Nov totaling $40b in two months months

The market remained deeply depressed for more than 4 The market remained deeply depressed for more than 4

yrs and did not fully recover for more than a decade.yrs and did not fully recover for more than a decade.

Example of fall in stock / share values during Example of fall in stock / share values during the Great Crash of 1929.the Great Crash of 1929.

Sept 1929Sept 1929 Nov 1929Nov 1929

AT and TAT and T $304 $304 $222 $222

GECGEC $396 $396 $201 $201

HersheyHershey $128 $128 $68 $68

IBMIBM $241 $241 $129 $129

Popular folklore has established the Stock Market Crash Popular folklore has established the Stock Market Crash as the beginning, and even the cause of the Great as the beginning, and even the cause of the Great Depression. There is some truth in thisDepression. There is some truth in this

As the Stock Market rose in the 20s business optimism As the Stock Market rose in the 20s business optimism soared - investment and consumption was high. In soared - investment and consumption was high. In contrast, as stock prices plummeted investment and contrast, as stock prices plummeted investment and consumer demand fell. As a result, unemployment rose, consumer demand fell. As a result, unemployment rose, leading to a further decrease in consumer demand.leading to a further decrease in consumer demand.

Over the next 3 yrs, the crisis grew steadily worse. The Over the next 3 yrs, the crisis grew steadily worse. The US GNP plummeted from over $104 billion in 1929 to US GNP plummeted from over $104 billion in 1929 to $76.4 billion in 1932 - a 25% decline in 3 yrs.$76.4 billion in 1932 - a 25% decline in 3 yrs.

The Stock Market Crash affected banking, and the The Stock Market Crash affected banking, and the supply of money / credit…huge impact on the Economy supply of money / credit…huge impact on the Economy in this wayin this way

But although Oct. 1929 might have been the first visible But although Oct. 1929 might have been the first visible signs of the crisis, and one cause, the Depression had signs of the crisis, and one cause, the Depression had earlier beginnings and more important causes. earlier beginnings and more important causes.

The Stock Market Crash was one factor in causing the The Stock Market Crash was one factor in causing the Depression but not the most important or the only oneDepression but not the most important or the only one

Basically it helped trigger a chain of events that exposed Basically it helped trigger a chain of events that exposed a large number of weaknesses that had long existed in a large number of weaknesses that had long existed in the US Economy. the US Economy.

2. Lack of Regulation of the Stock Market: 2. Lack of Regulation of the Stock Market: Insider Manipulation (see Documentary)Insider Manipulation (see Documentary)

Shareholders / investors often conspired (with each Shareholders / investors often conspired (with each other, media) to inflate the value of their stock and other, media) to inflate the value of their stock and then sell it off at huge profits to unsuspecting buyers then sell it off at huge profits to unsuspecting buyers

Companies over valued their stock and sold too many Companies over valued their stock and sold too many shares at inflated pricesshares at inflated prices

The Federal Reserve, which could have intervened, did The Federal Reserve, which could have intervened, did not regulate to prevent saturation / over investment, or not regulate to prevent saturation / over investment, or fraudfraud

3. Government Policies: debt, deficit and 3. Government Policies: debt, deficit and taxationtaxation

During war years, the national debt had risen from $1.2b During war years, the national debt had risen from $1.2b in 1914 to $24b in 1921. in 1914 to $24b in 1921.

The government decided to cut back on spending to The government decided to cut back on spending to reduce the budget, but it also decided to cut back on the reduce the budget, but it also decided to cut back on the burdensome taxes of the war yearsburdensome taxes of the war years

The feeling was that high taxes not only discouraged The feeling was that high taxes not only discouraged business but brought a smaller net return to the Treasury business but brought a smaller net return to the Treasury than moderate taxes. than moderate taxes.

In 1921, Mellon repealed excess profits tax, reduced In 1921, Mellon repealed excess profits tax, reduced excise taxes, the surtax, income tax, and estate taxes. excise taxes, the surtax, income tax, and estate taxes.

His intention was to spare the rich and shift much of the His intention was to spare the rich and shift much of the tax burden from the wealthy to the middle income tax burden from the wealthy to the middle income groups. groups.

Critics argued that he should have taken advantage of Critics argued that he should have taken advantage of the prosperity of the 20s to cut deeper into the deficit, by the prosperity of the 20s to cut deeper into the deficit, by at least maintaining taxation levels of the upper classes, at least maintaining taxation levels of the upper classes, if not increasing themif not increasing them

They also charged that he indirectly encouraged over They also charged that he indirectly encouraged over speculation in the stock market. If he had absorbed more speculation in the stock market. If he had absorbed more of the national income of the wealthy in taxes, there of the national income of the wealthy in taxes, there would have been less money left for frenzied would have been less money left for frenzied speculation.speculation.

Also, by maintaining tax rates for middle and lower Also, by maintaining tax rates for middle and lower income groups and not reducing them as he had the taxes income groups and not reducing them as he had the taxes of the rich, he deprived those who needed goods of of the rich, he deprived those who needed goods of spending powerspending power

4. Lack of Diversification in the Economy4. Lack of Diversification in the Economy In the 20s, prosperity depended excessively on a few In the 20s, prosperity depended excessively on a few

basic industries, notably Construction and Automobiles basic industries, notably Construction and Automobiles (mining and textiles had declined). (mining and textiles had declined).

In the late 20s these industries had reached their peak In the late 20s these industries had reached their peak and began to declineand began to decline

Expenditure on Construction fell from $11b to under Expenditure on Construction fell from $11b to under $9b between 1926 and 1929. By 1929 many $9b between 1926 and 1929. By 1929 many corporations had expanded their capital facilities to the corporations had expanded their capital facilities to the limit - factories, warehouses, heavy equipment - as limit - factories, warehouses, heavy equipment - as much as needed. much as needed.

Automobile sales fell by a third in the first half of 1929Automobile sales fell by a third in the first half of 1929

As a result there were layoffs in both of these industries: As a result there were layoffs in both of these industries: other workers experienced salary reductions other workers experienced salary reductions

This led to consumer purchasing power being diminishedThis led to consumer purchasing power being diminished

No new industries were emerging to compensate for No new industries were emerging to compensate for these two declining industries – a few increased these two declining industries – a few increased marginally - petroleum, chemicals, plastics - but were marginally - petroleum, chemicals, plastics - but were not yet developed enough to cancel out the decline in not yet developed enough to cancel out the decline in these other sectorsthese other sectors

5. The Uneven Distribution of Purchasing 5. The Uneven Distribution of Purchasing PowerPower

25% of the national income was going to 1% of the 25% of the national income was going to 1% of the population. Prosperity would not last once this wealthy population. Prosperity would not last once this wealthy 1% no longer spent money on industrial good, 1% no longer spent money on industrial good, especially on luxury consumer items, and were no especially on luxury consumer items, and were no longer willing to invest money in the economy or stock longer willing to invest money in the economy or stock marketmarket

The proportion of the National Income going to farmers, The proportion of the National Income going to farmers, workers, and other potential consumers was too small to workers, and other potential consumers was too small to create an adequate market for the huge amount of goods create an adequate market for the huge amount of goods the economy was producing. the economy was producing.

Demand was not keeping up with supply.Demand was not keeping up with supply.

Even in 1929 after a decade of Economic growth, Even in 1929 after a decade of Economic growth, between a half and two thirds of the population lived on between a half and two thirds of the population lived on the edge of or below the estimated minimum subsistence the edge of or below the estimated minimum subsistence level - too poor to share in the great consumer booms of level - too poor to share in the great consumer booms of the 20s, too poor to buy the houses, cars, and other goods the 20s, too poor to buy the houses, cars, and other goods the industrial economy was producing. the industrial economy was producing.

Consumer buying power was not strong enough or Consumer buying power was not strong enough or widespread enough to devour the huge amount of goods widespread enough to devour the huge amount of goods being mass produced.being mass produced.

6. Decline in Exports6. Decline in Exports

Exports formed a significant part of the Economy of the Exports formed a significant part of the Economy of the 20s. 20s.

But even from 1928, European demand for US goods But even from 1928, European demand for US goods began to declinebegan to decline

In some European countries industry and agriculture In some European countries industry and agriculture were becoming more productive, meaning less demand were becoming more productive, meaning less demand for US goodsfor US goods

Other countries like Germany suffered from financial Other countries like Germany suffered from financial crises before 1929 and could not afford to buy goods crises before 1929 and could not afford to buy goods from overseasfrom overseas

7. The Credit Structure of the Economy7. The Credit Structure of the Economy

Much of the Economic boom was based on the credit Much of the Economic boom was based on the credit system. system.

85% of furniture, 80% of phonographs, 75% of washing 85% of furniture, 80% of phonographs, 75% of washing machines and radios, 70% of refrigerators were bought machines and radios, 70% of refrigerators were bought on credit, with installment payments on credit, with installment payments

With unemployment and lower wages after 1929, debtors With unemployment and lower wages after 1929, debtors could not meet these payments. could not meet these payments.

Banks suffered from defaults on loans. .some went Banks suffered from defaults on loans. .some went bankrupt bankrupt

Others raised interest rates and cut back on loans…Others raised interest rates and cut back on loans…meant less money was borrowed by the business sector meant less money was borrowed by the business sector and consumers and consumers

Over 9,000 banks went bankrupt between 1930 and Over 9,000 banks went bankrupt between 1930 and 1933. 1933.

Depositors who were not in debt, whose money was in Depositors who were not in debt, whose money was in these banks, lost their hard earned savings: depositors these banks, lost their hard earned savings: depositors lost over $2.5b in deposits. lost over $2.5b in deposits.

Banks had also invested money from savings deposits Banks had also invested money from savings deposits in the Stock Market – this money was lost foreverin the Stock Market – this money was lost forever

The Stock Market Crash, Margin Calling, Defaulting on The Stock Market Crash, Margin Calling, Defaulting on Loans….all led to the collapse of the Banking SystemLoans….all led to the collapse of the Banking System

The banking system (like the Stock Market) as a whole The banking system (like the Stock Market) as a whole was only very loosely regulated by the Federal Reserve was only very loosely regulated by the Federal Reserve SystemSystem

The Federal Reserve had the power to regulate but did The Federal Reserve had the power to regulate but did not – allow the banks to invest in the Stock Market, and not – allow the banks to invest in the Stock Market, and to give out too many risky loans to consumers, failing to to give out too many risky loans to consumers, failing to maintain enough operating capital maintain enough operating capital

8. The International Debt Structure8. The International Debt Structure

Allied countries owed huge sums of money to the US – Allied countries owed huge sums of money to the US – loans during WW1 and after – depended on German loans during WW1 and after – depended on German reparations and more US loans to repay the US. reparations and more US loans to repay the US.

Under the Dawes Plan the US loaned $200m to GermanyUnder the Dawes Plan the US loaned $200m to Germany

But their economies were shattered from the World But their economies were shattered from the World Depression – Germany was unable to continue Depression – Germany was unable to continue reparations payments…the US became unable to make reparations payments…the US became unable to make new loans after 1929new loans after 1929

European countries were unable to repay the US. European countries were unable to repay the US.

9. Agricultural Depression, Drought, Dust..9. Agricultural Depression, Drought, Dust..

Farm prices, already depressed in the 20s, fell even Farm prices, already depressed in the 20s, fell even more dramatically with the Depression. more dramatically with the Depression.

Between 1929 and 1932, farm income declined by Between 1929 and 1932, farm income declined by approx 60%. approx 60%.

Tenant farmers were the first to suffer, then small Tenant farmers were the first to suffer, then small farmers, then larger onesfarmers, then larger ones

An estimated one third of all American farmers lost An estimated one third of all American farmers lost their land through mortgage foreclosures and evictions.their land through mortgage foreclosures and evictions.

Conditions were even worse in a large part of the South Conditions were even worse in a large part of the South and Midwest known as the Dust Bowl. (Wyoming, and Midwest known as the Dust Bowl. (Wyoming, Colorado, New Mexico, Texas, Oklahoma, Kansas, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota). Nebraska, South Dakota).

Here there was a catastrophic natural disaster; one of the Here there was a catastrophic natural disaster; one of the worst droughts in the history of the nation. Beginning in worst droughts in the history of the nation. Beginning in about 1930 this large area began to experience a steady about 1930 this large area began to experience a steady decline in rainfall and an accompanying increase in heat. decline in rainfall and an accompanying increase in heat. Summer temps averaged over 100 degrees….dust storms Summer temps averaged over 100 degrees….dust storms destroyed entire crop of many farmers, as well as cattle destroyed entire crop of many farmers, as well as cattle

In addition in some areas were devastated by swarms of In addition in some areas were devastated by swarms of grasshoppers grasshoppers

These conditions continued for a full decade, turning These conditions continued for a full decade, turning what had once been fertile farm regions into virtual what had once been fertile farm regions into virtual deserts. deserts.

Led to evictions, land auctions...Led to evictions, land auctions...

Farmers still as a group overproduced though – were Farmers still as a group overproduced though – were their own worst enemies, as in the past / Populist Eratheir own worst enemies, as in the past / Populist Era

10. Govt. Response; Coolidge and Hoover – 10. Govt. Response; Coolidge and Hoover – policies towards Money Supply, Taxation, and policies towards Money Supply, Taxation, and

TariffsTariffs In 1931 the Federal Reserve adopted a restrictive In 1931 the Federal Reserve adopted a restrictive

monetary policy, increasing the prime lending rate, at monetary policy, increasing the prime lending rate, at which banks borrowed which banks borrowed

This discouraged banks from borrowing, thereby This discouraged banks from borrowing, thereby reducing the money supplyreducing the money supply

The total money supply fell by 27% between 1930 – The total money supply fell by 27% between 1930 – 1933, leading to a decrease in credit…..to a decrease in 1933, leading to a decrease in credit…..to a decrease in consumer spending power, decrease in investment consumer spending power, decrease in investment capital capital

The supply of money left in circulation was not large The supply of money left in circulation was not large enough to allow the economy to bounce back after the enough to allow the economy to bounce back after the stock market bubble burststock market bubble burst

Many Economists argue that a severe depression could Many Economists argue that a severe depression could have been avoided if the Federal Reserve had have been avoided if the Federal Reserve had increased the money supply. increased the money supply.

Keynesian Economics supports a decreased interest Keynesian Economics supports a decreased interest rate to increase the money supply to help increase rate to increase the money supply to help increase consumer and capital spending to overcome periods of consumer and capital spending to overcome periods of depression …….Deficit Spendingdepression …….Deficit Spending

In the midst of the severe recession the govt. made a bad In the midst of the severe recession the govt. made a bad situation worse by increasing taxation (decreased at situation worse by increasing taxation (decreased at wrong time, increased at wrong time)wrong time, increased at wrong time)

The Hoover administration in 1932 passed the largest The Hoover administration in 1932 passed the largest peacetime tax rate increase in the history of the US up to peacetime tax rate increase in the history of the US up to that point that point

At the bottom of the income scale, marginal tax rates At the bottom of the income scale, marginal tax rates were raised from 1.5% to 4%. At the top of the scale, tax were raised from 1.5% to 4%. At the top of the scale, tax rates were raised from 25% to 63%.rates were raised from 25% to 63%.

Higher tax rates are considered counter productive in Higher tax rates are considered counter productive in times of recession - decrease disposable income and times of recession - decrease disposable income and reduce consumer demand even further, which had already reduce consumer demand even further, which had already fallen sharply due to monetary contraction. fallen sharply due to monetary contraction.

In 1922 the Fordney-McCumber Tariff increased the In 1922 the Fordney-McCumber Tariff increased the rate to an average of 38.5%. – up from 27% of rate to an average of 38.5%. – up from 27% of Underwood SimmonsUnderwood Simmons

Harding and Coolidge authorized 32 more items to be Harding and Coolidge authorized 32 more items to be added to the list under the Actadded to the list under the Act

In June 1930 - Hoover introduced the highest peacetime In June 1930 - Hoover introduced the highest peacetime Tariff in US History - the Hawley Smoot Tariff, raising Tariff in US History - the Hawley Smoot Tariff, raising

tariffs from the 38.5% to 60%,tariffs from the 38.5% to 60%,. .

These tariff increases backfired for the US -led to a These tariff increases backfired for the US -led to a chain reaction – European countries could not sell in chain reaction – European countries could not sell in US, slowed European Recovery…inability to pay off US, slowed European Recovery…inability to pay off debts to US, and also European countries could not buy debts to US, and also European countries could not buy US manufactured goods. US manufactured goods.

And Europeans retaliated by increasing tariffs on US And Europeans retaliated by increasing tariffs on US goods - contributed to US being unable to sell exports .goods - contributed to US being unable to sell exports .

And, US hopes of raising additional income from tariffs And, US hopes of raising additional income from tariffs to help balance the budget did not materialize - tariff to help balance the budget did not materialize - tariff revenue decreased from $602m to $328m in 1932.revenue decreased from $602m to $328m in 1932.

Causes of the DepressionCauses of the Depression 1. Collapse of the Stock Market1. Collapse of the Stock Market 2. Lack of Control / Regulation over the Stock Market - 2. Lack of Control / Regulation over the Stock Market -

Insider Manipulation, Price InflationInsider Manipulation, Price Inflation 3. Decrease in taxation in 19213. Decrease in taxation in 1921 4. Lack of Diversity in the Economy4. Lack of Diversity in the Economy 5. Uneven Distribution of Purchasing Power5. Uneven Distribution of Purchasing Power 6. Decline in Exports6. Decline in Exports 7. Credit Structure of the Economy7. Credit Structure of the Economy 8. International Debt Structure8. International Debt Structure 9. Agricultural Depression9. Agricultural Depression 10. Govt. Policy from 1929-1932 (Coolidge, Hoover): 10. Govt. Policy from 1929-1932 (Coolidge, Hoover):

Restrictive Monetary Policy, Large tax increase, Increase Restrictive Monetary Policy, Large tax increase, Increase in Tariffsin Tariffs

The impact of the Great The impact of the Great Depression on US societyDepression on US society

Impact of the Depression Impact of the Depression

FamiliesFamilies WomenWomen ChildrenChildren African AmericansAfrican Americans BusinessmenBusinessmen LaborersLaborers FarmersFarmers Mexican AmericansMexican Americans

Read packet and take notes on each groupRead packet and take notes on each group Consider material and psychological impactConsider material and psychological impact