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The Great Depression What When Who Why Can it happen

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									The Great Depression

         What?

         When?

          Who?

          Why?

   Can it happen again?
    The Great Depression: what?

   A severe and unprecedented worldwide
    decline in economic activity
   Unemployment reached 25%
   About 9,000 bank failures
   Stock market lost nearly 90% of its value
    from 1929 to 1933
   General pessimism and uncertainty
    The Great Depression: when?
   Unprecedented duration: about 1930 to 1940
   Economic activity not revived until World War
    II
   Unemployment cured by military conscription
    and enlistment
   Prosperity did not return until late 1940’s
    The Great Depression: who?
   Herbert Hoover, Republican, was president
    from 1929 to 1933
       His reputation as a “laissez faire” president is
        entirely wrong
       Programs initiated during his administration can
        be thought of as the start of the “New Deal”
   Franklin Roosevelt was president from 1933
    to 1945
       Ran as an economic conservative in 1933,
        promising to balance the budget
       Initiated vast increased in Federal government
        power
            The Stock Market
   The DJI had climbed from about 64 to 381
    during the 1920’s
   A crash in October 1929 sent the average
    below 230 in a matter of days. Much forced
    selling due to margin calls.
   A recovery in the spring of 1930 to about 280
    leading many to believe the worst was over
   Steep decline to a low of 44 in 1932.
   Strong gains followed by another decline in
    1937
   1929 high not exceeded until after 1950
                   Bank failures
   About 9,000 banks failed during the course of
    the Great Depression
   Many of these banks were not insolvent, but
    merely illiquid
   Example “Bank of United States”
       Failed in Dec, 1930 with $200 million in deposit
        liabilities
       Served primarily low-income Jewish immigrants
       Likely could have been rescued by a merger
       Ultimately paid out over 80% of its liabilities
        despite having to sell some assets at “fire sale”
        prices
        Decline in money stock
   The M2 money stock declined from $45
    billion to $33 billion, perhaps in response to
    loan liquidations
   Prices could have adapted to the new lower
    money stock but wages in particular were not
    allowed to fall
   The Fed may have lacked reliable and timely
    statistics
   The Fed was focused on interest rates which
    are more readily apparent
      Why did the stock market
               crash?
   The Fed had inflated the money supply
    substantially during the 1920’s in part to
    support Britain’s ill-advised move to restore
    the pound’s link to gold at its pre-war level
   Much of this money had found its way into
    the stock market
   Speculative fever had spread widely. Some
    were buying on as little as 10% margin
   Even some economists thought stocks could
    only go up
     The Smoot-Hawley Tariff of
               1930
   Raised tariffs on 20,000 items to record high
    levels
   1,000 economists signed a statement of
    opposition
   Proposed by republicans to placate farmers
    who had already been suffering
   President Hoover called the bill “vicious,
    extortionate, obnoxious.” But he signed it.
   Predicable results:
       Drastic fall in international trade
       Retaliatory tariffs, depression exported to Europe
     The Smoot-Hawley Tariff of
           1930 -- why?
   Farmers had suffered their own depression
    during the late 1920’s. Republicans
    promised them restrictions on agricultural
    imports
   Immediate effects of a tariff are likely to be
    beneficial to domestic industries
   Predictable retaliation should have been
    seen
   Consumers generally were the victims, but
    they had no effective voice in Congress
                Unemployment
   The official figure reached 25% in 1933
   Bad as this was, this figure does not include
    underemployment
       Qualified people working at menial jobs
       People given make-work government jobs
   Wages should adjust downward to balance
    supply and demand in labor markets
   Hoover tried to keep wages high, partly by
    “jawboning.”
             Tax increase of 1932
   1931 Federal deficit had reached the
    staggering sum of $2 billion dollars (about
    three days of interest on today’s national
    debt)
   One of the largest increases in tax rates in
    peacetime history. New or increased taxes:
       Excise taxes revived or increased on gasoline, tires,
        automobiles, electricity, malt, toiletries, furs, jewelry, etc.
       New taxes on bank checks, stock and bond transfers,
        telephone, telegraph messages
Federal income, estate and gift
         tax increases
   Normal rate was 1.5 to 4%, raised to 4 to 8%
   Reduction in personal exemptions
   Earned credit repealed
   Taxes on top income brackets raised from 25% to
    63%
   Corporate income tax rate raised from 12% to
    13.75%
   Exemption for small corporations eliminated
   Estate tax doubled; exemption floor halved
   Gift tax reinstated, top rate 33%
        Postage rate increases
   First class rate raised from 2 to 3 cents even
    though first class postage was already
    profitable
   Second class (magazines etc) raised 33%
   Parcel post increased 25% (no UPS or
    FedEx competition)
     Result of tax rate increases
   In spite of drastically higher tax rates, federal
    tax revenue actually were actually lower in
    1932 than in 1931
   Lower tax receipts were due to the
    deepening depression which had been
    worsened by tax increases
    Reconstruction Finance Corp.
   Government agency given $500 million
    capital and authorized to issue $1,500 million
    bonds
   Made loans to failing institutions
       Mostly to banks and railroads
       Many loans to politically connected firms
       Loans kept secret till Congress forced disclosure
            Excuse: disclosure would erode confidence in the
             receiving institution
            Counter: they deserved to lose confidence
       Compare today’s stress tests or CAMELS ratings
             Fed actions in 1932
   Huge monetary inflation, $1 billion in one
    year
   Yet bank deposits declined. Why?
   Excess reserves! Banks reluctant to lend
    because of
       Fear of making bad loans
       Fear of spooking depositors
   Does this sound familiar?
Two interpretations of the Fed’s
     Depression policies
   Friedman: the Fed irresponsibly let the
    money stock drop by 33%
   Rothbard: the Fed tried to re-inflate but the
    public, the commercial banks, and foreign
    holders of dollars wisely resisted. Deflation
    was necessary to correct prior monetary
    excesses.
                 Bank failures
   Approximately 9,000 banks failed during the
    course of the Great Depression – an
    astounding number
   Some of these banks were merely illiquid, not
    necessarily insolvent. Example: Bank of
    United States
   The number of bank failures in Canada
    during this time was exactly zero.
       Canada has always had nationwide banking
       No Canadian central bank at that time
           Roosevelt’s New Deal
   National Industrial Recovery Act
       Attempt to cartelize all industry
       Tailor jailed for charging 35 cents instead of 40
       Parades took on a fascist tone
       Ruled unconstitutional by Supreme Court
   Unilateral abrogation of the gold standard
   Agricultural adjustment act
       Ruled unconstitional
   Works Progress Administration -- “relief”
   Federal Deposit Insurance
   Federal Crop Insurance
   Federal Housing Administration
           Roosevelt’s New Deal

   Social Security
   Securities Exchange Commission
   Tennessee Valley Authority
   Farm Security Administration
   Rural Electrification Administration
   Court-packing scheme
       Seen as a bid for dictatorial power
       Defeated by Congress
           Regime uncertainty
   An aspect of the Great Depression often
    overlooked because it is difficult to quantify
   Business people must try to predict the
    future. This is very hard to do when the rules
    are changing constantly.
   Roosevelt’s explicit policy was to try
    something and if it didn’t work, try something
    else.
          Regime Uncertainty
   Was full-blown dictatorship coming?
   Would business firms see their property
    confiscated?
   Roosevelt’s language and some of his
    initiatives suggested it might be
   It was happening in Germany and Italy
   This was not the sort of atmosphere that
    would instill business confidence
    Roosevelt’s conservative shift
   Toward the end of the 1930’s it looked like
    war was coming
   Roosevelt needed the cooperation of
    businesses for war production
   He brought conservative business people
    into his administration and kicked out some
    of the radical New Dealers
The war ended the Depression,
          or did it?
   Conventional wisdom says that the war
   Unemployment was eliminated.
       Good news: people had paying jobs
       Bad news: the job meant getting shot at
   GNP went up, but ...
       Most of the increase was due to government
        purchases
       Many consumer goods were unavailable
       Passenger cars were not produced
       Gasoline, tires, and sugar were rationed
     What really ended the Great
            Depression
   Roosevelt died in 1945. This did a lot to
    remove regime uncertainty
   Truman was no friend of business, but
    neither was he a radical New Dealer
   Republicans gained control of both houses in
    1946 and proceeded to dismantle or tone
    down some of the New Deal measures.
   A period of prosperity began that lasted until
    about 1970
The panic of 1837-43 versus the
  Great Depression, 1929-33
          Summing up the Great
              Depression
   Usual interpretation:
       Due to inherent flaws in free markets; a “market
        failure.”
       The New Deal rescued the country from the
        Depression while avoiding totalitarianism
   Revised interpretation
       Due to inherent flaws in government
        interventions; a “government failure”
       The New Deal did not rescue the country from
        the Depression nor did World War II. Post-war
        lessening of New Deal programs was the major
        cause of renewed prosperity.

								
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