3/14/2012
The Great Depression
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The depression was a catastrophe never seen before or since.
What caused it?
Why didn’t the new policies work?
What should have been done?
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1929 to 1933:
Using nominal prices, GDP declined 46%
Using real prices, GDP declined 27%
l
G d l d %
The capital stock actually declined
Unemployment reached 25%
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product or service or otherwise on a password-protected website for classroom use.
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product or service or otherwise on a password-protected website for classroom use.
RGDP
Year 2000 $ Billions
$1,000
$900
$800
$700
$600
$500
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
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product or service or otherwise on a password-protected website for classroom use.
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3/14/2012
The true dimensions are impossible to measure:
The hopelessness and despair of the American people were immense
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product or service or otherwise on a password-protected website for classroom use.
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product or service or otherwise on a password-protected website for classroom use.
Certain sectors of the economy were already weakened before 1929:
Agriculture
Construction slowed between 1925 and 1927, then fell sharply in 1928
The crash itself did not cause the depression
The crash ripped optimism out of the public
As a result of new pessimism and uncertainty, l f
d
purchases of consumer durables fell drastically
"Uncertainty is worse than knowing the truth, no matter how bad" [The Magazine of Wall Street, November 30, 1929, p. 177] © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
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product or service or otherwise on a password-protected website for classroom use.
Dow Jones Industrial Average
Dow Jones Industrial Average
400
400
350
350
300
300
250
250
200
200
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product or service or otherwise on a password-protected website for classroom use.
150
Ja
n-2
8
Fe
b28
Ma
r-2
8
Ap
r-2
8
Ma
y28
Ju
n-2
8
Ju
l-2
Au 8
g -2
8
Se
p -2
8
Oc
t-2
8
No
v -2
8
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c -2
8
Ja
n-2
9
Fe
b29
Ma
r-2
9
Ap
r-2
9
Ma
y29
Ju
n-2
9
Ju
l-2
Au 9
g -2
9
Se
p -2
9
Oc
t-2
9
No
v -2
9
De
c -2
9
Ja
n-3
Fe 0
b30
Ma
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Ap
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Ju
n-3
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Ju
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Au 0
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-29
-29
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b28
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y28
150
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product or service or otherwise on a password-protected website for classroom use.
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Money Supply
50
45
In Billio
ons
12/11/1930: Failure of the Bank of the United States
Significant because:
• Largest failure to date
f l
d
• Name recognition and association
• Location
40
35
30
25
1925
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product or service or otherwise on a password-protected website for classroom use.
Crisis, Round 2: March through August, 1931
More banks failed, crisis spreads to Europe
C
Crisis, Round 3: in 1933 another 4,000 banks closed
d
h
b k l d
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
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product or service or otherwise on a password-protected website for classroom use.
How was the crisis ended?
• Bank Holiday, starting March 6, 1933
• FDIC took effect January 1, 1934
C
k ff
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product or service or otherwise on a password-protected website for classroom use.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Dow Jones Industrial Average
Passed in June, 1930
350
Debate and Passage
of Smoot-Hawley
300
250
200
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product or service or otherwise on a password-protected website for classroom use.
0
0
De
c -3
30
No
v -3
30
Oc
t-
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p-
0
-3
0
Ju
l-3
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30
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-3
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9
9
30
Ja
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29
150
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Top Marginal Income Tax Rate
90%
80%
70%
60%
50%
40%
30%
20%
10%
1925
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product or service or otherwise on a password-protected website for classroom use.
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
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product or service or otherwise on a password-protected website for classroom use.
Asymmetric information led to more uncertainty which decreased borrowing and lending even more
Previous long‐term relationships had been broken with so many banks closing
New relationships took time to build
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Reasons:
1) It didn’t understand the magnitude of the crisis
2) It claimed open market operations were hampered by gold standard and other regulations
3) Internal shift of power from New York to Washington after Benjamin Strong’s death in 1928
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product or service or otherwise on a password-protected website for classroom use.
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product or service or otherwise on a password-protected website for classroom use.
Neither political party wanted to run a budget deficit
Most agreed that balancing the budget would generate confidence and restore market stability
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1933: US government ordered all gold to be turned in to the Fed
1934 US fixes the price of gold at $35 per ounce
1934: US fixes the price of gold at $35 per ounce
1928 price was about $20
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product or service or otherwise on a password-protected website for classroom use.
1936 was a good recovery year
GDP climbed, prices rose, and the money supply increased
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Answering this question is probably the most unsettled and still causes the most debate about the Depression
the Depression.
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product or service or otherwise on a password-protected website for classroom use.
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Early to mid‐1937
3 key mistakes:
1)) Federal spending was cut
d l
d
2) New taxes imposed
3) Fed increases reserve requirements
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Some argue the political climate of the New Deal created uncertainty and therefore discouraged investment
The rhetoric was clearly anti‐business
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Some policies were created with the purpose of increasing prices:
• Killing animals
• Making some food inedible for humans
• Reducing acreage in active farming
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product or service or otherwise on a password-protected website for classroom use.
Read on your own
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Fiscal policy was not as expansionary as it should have been
Monetary policy was actually restrictive during most of the decade
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Read on your own
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product or service or otherwise on a password-protected website for classroom use.
Make sure to differentiate the reasons why the Great Depression occurred and the reasons why it lasted so long They are different issues and it lasted so long. They are different issues and policies.
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