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The Great Depression
How the extraordinary economic boom of the 1920s led to the great economic disaster of the 1930s that reshaped the role of government
Alan Greenspan, current architect of The boom and bust of 2001-2008
Is your Cell Phone Turned On?
From beyond the grave, Anna Nicole Smith
Says
Please,
Turn it
off!
Themes and Topics
• Private Enterprise Pro-Business Policies of the Republican Administrations in
the 1920s
Limits of 1920s Prosperity: The Origins of the Stock Market
Crash and Great Depression
Say's Law and the Nature of the Capitalist Trade Cycle
• Role of government Presidential Leadership Style: Herbert Hoover
Herbert Hoover's Response to the Great Depression
• Multiculturalism/Regional Differentiation Deportation of Mexicans during the Great Depression
Central Analytical Questions
• What were the causes of rapid economic growth in the 1920s?
• What were the sources of instability and weakness in the 1920s economy?
• Why did the stock market become a speculative bubble?
• How did the crash of the stock market undermine the underlying economy of goods and services?
• How do we assess the failure of the Hoover administration to come to grips with the crisis?
Rapid Economic Growth, 1921-
1929
Nature of 1920s Prosperity
• Productivity and Power
Scientific Management • Ford Motor Company’s moving assembly line
Technological Innovation • Internal Combustion Engine
Electrical Power in industry • 1914-30% electrical power
• 1929-70% electrical power
• Steam engines replaced with electrical motors
Cheap Oil • Petroleum products multiplied 16 times between 1919-1929
Consumer Indebtedness
• Rapid economic growth was supported by a liberal credit policy practiced by the Federal Reserve Banks that meant it was easy for consumers to borrow money cheaply
• Installment purchases at to ease of consumption
Underlying Weaknesses
• Distribution of wealth 42% of all families in 1929 earned less than $1,500 per
year
29% of all families in 1929 earned between $1,500 and $2,500 per year
• Farm sector Overproduction and low prices after 1921
• Mal-investment/excess capacity Paper manufacturing (15%); Clothing (40%); Boot and
shoe (50%); Pig Iron (45%); Glass ware (40%); wheat flour (45%); Textile industry (15% for cotton, 45% for silk)
What Went Wrong I?
Strategic Industry: Autos
• Note the core regional basis of the automobile industry in the Northeast and Mid-west
Stock Market, 1920-1929
• Growth in the value of stocks initially reflected the productivity and profitability of the underlying economy
• But after 1926, growth in the value of stocks reflected speculation rather than the health of the economy
What Went Wrong II?
What Went Wrong III?
Federal Reserve Discount Rate changes With onset of Recession Aug 1927 4% to 3.5% With continued Stock Market boom Aug 1928 3.5% to 5% Oct 1929 5% to 6%
The Evidence of Collapse
Unemployment
• Unemployment had stood at less than 5% in 1929
• By 1932, an estimated 25% of the workforce was out of a job, about 12-14 million workers
• In the core industrial region, cities like Dayton, Ohio faced 80% unemployment
Trouble on the Farms
Management of the International
Economy
• Foreign Debts German inflation
Ruhr seizure by France
• Dawes Plan (1925) Restructured German debt and schedule payments over
a longer period
• Dependence on Private Bankers They financed German debt
• Smoot Hartley Tariff Act 1930 Made it virtually impossible for Europeans to sell
exports to US and therefore pay off debts
Herbert Hoover’s Response
• Hoover’s background
• Initial response Reassuring Banalities
Jawboning
Tariff
Immigration
Cut Taxes
• Second response Public Works
Reconstruction Finance Corporation
Deficit spending
Say’s Law
• How conventional economists interpreted the depression It is a natural and good thing because it purges
the economy of the inefficient and unprofitable
The economy is self-adjusting because it has a tendency toward equilibrium
Say’s law says producers would not produce what consumers would not purchase
Role of Government: don’t mess with self-adjusting mechanisms
What Hoover Would Not Do
• By 1932, major corporate leaders had enough with purging the economy
• They saw the principal problem as overproduction and declining prices
• They called for cutting production and fixing prices
• Hoover labeled this approach the biggest attempt at monopoly in American history
• Business switched support to Franklin D. Roosevelt
Election of 1932
Hoover claimed no President had ever done More to combat a Depression Hoover lost nearly 20 Points off his popular Vote from 1928 Note the poor showing of socialist and communist candidates
Critical Thinking Question
• The Great Depression had market causes and government causes
• Which do you think was more decisive?
Conclusions
• Great Depression reveals continuing instabilities in capitalist system
• Hoover’s response reveals serious flaws in how economics profession understands business cycle under modern conditions