Prosperity and Depression

1. Prosperity and Depression Unit 2 Chapter 7 The Twenties 1919 – 1929 Chapter 8 The Great Depression Chapter 9 The New Deal

2. The Great Depression1928 - 1932 Chapter 8

3. Overview Understand these terms: • Recession – decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. • http://www.frbsf.org/education/publications/doctor-econ/2007/february/recession-depression-difference

4. Overview Understand these terms: • Recession – A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. • Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. • http://www.frbsf.org/education/publications/doctor-econ/2007/february/recession-depression-difference

5. Overview • Recession – A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. http://indianblogworld.com/2009/08/reassessing-recession/

6. Overview Understand these terms: • Depression – a severe recession. • Economists do not have a standard definition • Perhaps a 10% decline in real Gross Domestic Product When your neighbor loses his job, it’s a recession. When you lose your job, it’s a depression.

7. Overview Let’s examine the statistics behind the Great Depression…

8. Overview http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mac/Measure/Lab/LM1.U.html

9. Overview http://en.wikipedia.org/wiki/Great_Depression

10. Overview

11. Overview

12. Overview With which statement do you most agree? • The U.S. government should intervene in the economy during a depression • The U.S. government should intervene in the economy during an economic boom • The U.S. government should never intervene in the economu

13. Causes of the Depression Section 1

14. Learning Objectives • Discuss the weaknesses in the economy of the 1920s. • Explain how the stock market crash contributed to the coming of the Great Depression. • Describe how the Depression spread overseas.

15. Terms and People • Herbert Hoover • Speculation • Black Tuesday • Business cycle • Great Depression • Hawley-Smoot Tariff

16. Assignments

17. Assessments • Quiz, Section 8.1 and overview • Test, Chapter 8

18. Why it Matters Our objective: • How did the prosperity of the 1920s give way to the Great Depression? • In other words, where did all that wealth go?

19. Prosperity Hides Trouble • Consumption of goods was up; Stock market was up • America’s economy was bullish • Bull Market - increasing investor confidence, and increased investing in anticipation of future price increases

20. Optimism Sweeps Hoover to Victory • As Republican presidents has presided over the growing economy • Voters chose another Republican • Herbert Hoover

21. Optimism Sweeps Hoover to Victory • Self made millionaire from work in mining • Left private sector to devote himself to public service • Gained wide respect for organizing Belgian Relief during World War I

22. Optimism Sweeps Hoover to Victory • Ran U.S. Food Administration, post war agency devoted to helping devastated populations • Criticized for helping the Bolsheviks by providing food aid to the Soviet Union, Hoover responded in the following speech, “Twenty million people are starving. Whatever their politics, they will be fed.”

23. Optimism Sweeps Hoover to Victory • Political philosophy: • Encourage competition in economy • Also encourage voluntary cooperation between labor and industry

24. Optimism Sweeps Hoover to Victory • Coolidge chose not to run • Al Smith (a Catholic) of New York was his Democratic opponent • Voters saw in Hoover a accomplished man of integrity

25. Optimism Sweeps Hoover to Victory • Landslide victory for Hoover

26. Problems Plague the Agricultural Sector • Farmer made up one fourth of the workforce • Farming greatly expanded to meet demand created by World War I • Farmers in debt to finance wartime expansion and mechanization - tractors • At end of war, production of food greatly exceeded demand – crop prices fell and kept falling

27. Problems Plague the Agricultural Sector • Depression hit agriculture first (and would last the longest) • So, one fourth of American economy was barely surviving

28. Wealth is Unevenly Distributed • Rising wages masked an uneven distribution of wealth • While factory workers’ wages rose 8%, factory output increased by 32% • As a result, worker incomes rose modestly, while rich investor incomes skyrocketed.

29. Easy Credit Hides Problems • Easy credit and installment buying lead people to purchase goods they can’t pay for • By 1929, Americans had more than $6 billion in personal debt — more than double the 1921 level

30. The Stock Market Crashes Until September 1929, the stock market continued to rise. Many people borrowed money to buy stock, assuming prices would continue to go up. Some economists feared that stocks were over-priced.

31. The Stock Market Crashes Speculation– when investors gamble that stock prices will rise • Speculators were willing to buy stocks with borrowed money that they hope would be paid off by rising stock value

32. The Stock Market Crashes https://onlineint.optionsxpress.com/educate/advanced/margin.aspx

33. The Stock Market Crashes • Margin requirements during the 1920s was only 10%. • Stock sellers – brokerage firms – had loaned stock buyers the other 90% • Black Tuesday – October 24, 1929, the day the stock market crashed • Crash in stock prices caused brokers to call in these loans, which stock buyers could not pay back

34. The Stock Market Crashes • Given widespread speculation on rising stock values, what recreational activity was (is?) buying stock most like?

35. The Stock Market Crashes On October 29th, the stock market went into a free fall as investors tried to sell at any price. 16 million shares were sold on “Black Tuesday.” Billions of dollars were lost in a few hours. Many who bought stocks on margin were wiped out.

36. The Stock Market Crashes • In growth periods, workers are hired, wages rise, and demand for products increases. • In contraction periods, workers are fired, wages drop, and demand for products falls. The Great Crash was a hallmark of the nation’s business cycle. The economy periodically grows and then contracts.

37. The Stock Market Crashes The stock market crash didn’t start the Great Depression by itself. Instead, it quickened the collapse of the U.S. economy.

38. The Stock Market Crashes • How would headlines like these effect the confidence of consumers and investor?

39. The Stock Market Crashes • How did the stock market crash connect to the banking system?

40. The Stock Market Crashes • Review the causes of the crash listed below:

41. The Stock Market Crash • Is it a myth that the stock market crash caused the Great Depression? • Unemployment peaked at 9% two months after the crash and fell to 6.3% by June, 1930 • Unemployment started climbing to historic highs in the months following Hoover signing the Hawley – Smoot Tariff Act

42. The Stock Market Crash • And Hoover kept U.S. currency on the gold standard – government guarantees fixed rate of exchange for dollars into gold • Consequence is government could not expand money supply by printing more money after accepting greater public debt

43. The Stock Market Crash Was the stock market crash really a psychological blow Americas which caused a catastrophic loss of confidence • Did we simply panic and then fail to understand?

44. The Stock Market Crash “The administration did not publicly address the market devaluation until several days (6) after the event, while Hoover held steadfast to the notion that economic laws and a conservative fiscal philosophy would allow the economy to self-correct.” • LIMITED TO FOLLOW, The Early Public Opinion Apparatus of the Herbert Hoover White House, by BRANDON ROTTINGHAUS, Northwestern University, AMERICAN POLITICS RESEARCH, 2003

45. The Stock Market Crash • Hoover’s early judgment of the stock market crash was supported by the majority of newspaper editorialists – at least for a short while

46. The Great Depression Begins America enters of desperate economic period unmatched in its severity • Lasts approximately 1929 – 1941 • Within the Great Depression, there would be recovery, then recession, then recovery • To this day, the causes and effects of the Great Depression are still debated

47. The Banks Collapse Connection existed between stock market crash and banks • Banks had made loan to stock speculators • Now with huge drop in stock values, speculators could not sell stocks to settle loan debt to banks • Bad debts held by banks pile up quickly; bank reserve funds run low – too low • Customers begin to withdraw savings accounts to meet their immediate needs…

48. The Banks Collapse The banking system feels the effects of the crash first.People fear that their money will be lost so they run to the bank and attempt to withdraw their funds. But banks don’t have enough of their money on hand as cash. These bank runs cause banks to fail.

49. The Banks Collapse • Outstanding debt continues to build • But incomes drop 20 – 50% • Prices for goods fall • But the original debt is still at the same dollar amount • Banks accumulating far too many bad loans • Banks attract far less investment, leaving little money or inclination to loan…

50. The Banks Collapse • Bank runs are a psychological event – customers and bankers react emotionally, in a panic.