the great recession vs the great depression - uwgb.edu · pdf filegeorge santayana, 1863-1952....

UWGB LifeLong Learning Presenter

•Bob Srenaski

“Those who do not remember the past are

condemned to repeat it.”

George Santayana, 1863-1952

THE GREAT DEPRESSION

The Greatest Tragedy and World-

Changing Event of the 20th Century

Worldwide Devastation

• Production collapsed – down 40% Germany and U.S.• Prices collapsed – 25% plus• Mass bankruptcies across the world• Mass unemployment – all major countries• Agriculture Price Collapse – bankruptcies & rural unemployment• Civil unrest – food riots – strikes – crime • Vagrant encampments• Collapsed banking systems• Coups in Portugal, Brazil, Argentina, Peru, Spain• Government changes in UK, France, U.S., Germany

Worldwide Economic Devastation

“One vivid, gruesome moment of those dark days we shall never forget. We saw a crowd of some fifty men fighting over a barrel of garbage which had been set outside the back door of a restaurant. Americans fighting for scraps of food like animals.” Louise Armstrong – 1932

Depression Causes

• Stock Market Crash

• Gold Standard

• WWI Debts and Reparations

• Agriculture Failure

• Trade War – Smoot Hawley

• Weak Banking System

• Federal Reserve’s Failures

• Lack of International Cooperation – “Bankers Who Broke the World”

• Economic Ignorance – Monetary & Fiscal Policy - Real Bills Doctrine

The Stock Market

The Gold Standard

The Gold Standard System

• Most major countries (1800’s) – England 1717, U.S. 1834 de facto, 1900 de jure (59 countries on gold by 1914)

• Quantity of country’s money supply proportional to quantity of country’s gold

• Country’s economic well-being dependent upon its money supply which varied with its gold stock.

The Gold Standard System

• “Grain” : “a unit of weight = grain taken from the middle of an ear of wheat”

• British Pound Sterling = 113 grains of pure gold

• US Dollar = 23.22 grains of pure gold

• Dollar to Sterling exchange rate: 113/23.22 = $4.86/Pound

• Gold in US: $20.67 oz.

Rules of the Gold Standard System

• Rate of exchange between countries fixed

• Countries must exchange their currencies for gold on demand

• Imbalances of payments between countries were settled by gold payments between countries

• Exports/imports trade activity must be free of artificial interference

• Bank lending interest rates were the balancing mechanism

Upside of the Gold Standard

•Worldwide Price Stability

The Downside of the Gold Standard

•Bank Panics & Failures

•Recessions

•Depressions

•Unemployment & Poverty

The War

WWI – The War to end all Wars

• Austria/Hungary Serbia

• Germany Russia

• Italy France

BelgiumUnited KingdomUnited States

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Gold Reserves: 1913, 1923($000)

1913 1923

The Bankers Who Broke The World

• United Kingdom - Montagu Norman – Royal Bank of England

• United States - Benjamin Strong – New York Federal Reserve Bank

• Germany - Hjalmar Schacht - Reichsbank

• France - Emile Moreau - Banque de France

Early 20’s Post War United States

• 1920 Fed Raises interest rate to 7% - recession

• 1922 Reduces rate to 4% - economic recovery

• U.S. Housing and real estate market boom

• U.S. stocks move up – reasonable P/E ratios

• Stock Investment Trusts and Margin Loans to Brokers emerge

Late 20’s Post War United States

• 1927 Strong, Norman, Schacht, and Moreau Meeting

•August 1927 Fed lowers rate from 4.0 to 3.5

• Broker Loans: $3.3 B 1927 to $7.0 Billion March 1929

• Stocks: 150 in 1927 to 380 in September 1929

•1928 – March thru May, rate increase from 3.5 to 5.0%

Strong Dies, Replaced by Harrison

• Hoover elected in 1928

• Believes in market forces as cure and balancing the budget

• Smoot-Hawley

• Signs Revenue Act of 1932

• Individual lowest rate 1% to 4%, top rate 25% to 63%

• Estate tax doubled, Corporate 12% to 13.5%

• Federal Reserve increases Interest Rate again to 6%

• Europeans increase rates to protect their gold

• Financial System Crashes

•Post War Germany

Post War Germany

• 1914: 4.2/1

• 1920: 67/1

• Jan ‘22: 190/1

• Jun ‘22: 7,600/1

• Aug ‘23: 620,000/1

• Nov ‘23: 630 Billion/1 2 lb butter: 250 Billion

• Dec 10, 1923: 1 Trillion Reischmarks/ 1Rentenmark

• 1924 Germany returns to gold @ 4.2

Post War Germany – 1924 to 1929

• Hyperinflation ends

• War Reparations Reduced

• U.S. Bank Lending Begins

• Return to the Gold Standard

• Budget Balanced

• Still short of gold

• Economy takes off on short-term U.S. loans

• Boom continues until 1928 when Fed ups interest rates

Post War Germany

•1927 – 1928 The Party’s Over

Short-Term U.S. Lending dries up as money goes into booming U.S. stock market

German Depression Begins

German Recession Impacts National Elections

• 1929 Election: Nazis capture only 2.6% of the vote

• 12 of 491 Reichstag Seats

• Recession Deepens – massive unemployment and misery

• 1930 Election: Nazis capture 107 Reichstag Seats

• May 8, 1931: Credit Anstalt fails causing bank failures throughout Austria and Germany

• Deep depression, running out of gold

• 1933, January 30, Hitler becomes Chancellor

•Back In The United States

Back in the United States

Disease of Bank Failures Sets in• 1929: 659

• 1930: 1,350

• 1931: 2,293

• 1932: 1,453

• 1933: 4,000

• Total 9,755 Approximately ½ of all banks

• Several states with no operating banks

• 25% Mortgages in Default

Treasury Secretary Andrew Mellon

Believed the stock market “speculators” who had lost money deserved it and the U.S. economy was sound and would rebound on its own. The best policy according to Mellon was to:

“liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. People will work harder and live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from the less competent people.”

Back in the United States

• Roosevelt wins 1932 election, in office March 4, 1933

• “get people back to work” and “strict supervision of all banking and credits and investments.”

• Immediate Bank Holiday

• Bank “Stress” Tests

• Reopening restores confidence

• Takes U.S. off Gold

• January 1934, U.S. goes back on gold @$35/oz, a devaluation of over 52%

U.S. Recovery

•During FDR’s first term:• Industrial Production doubled•GDP expanded 40%•Unemployment 24.9% (1933) to 14.3% (1937)

U.S. Government Stimulus Programs

• 1933-1934: $3.5 Billion Spent (5.4% of GNP)

• Aid to states & local Gov’ts: $134 million (1932), $1.7 Billion (1935)

• Programs employing people

• CCC Civilian Conservation Corp

• CWA Civil Works Administration

• PWA Public Works Administration

• WPA Works Progress Administration

• 4 million people employed, 1/6 of population

• $6.50/week on program, private sector $15-$20/week

The Second U.S. Recession: 1937-1938

Recovery Aborted by pressure to balance the budget, FDR folded

Fed Reserve raised bank reserves• Raised interest rates• Fed Gov’t raised taxes• Social Security payroll tax kicked in• Economy driven into recession

• Growth resumed in 1939 – war in Europe

New Deal Notable Legislation

• FDIC Federal Deposit Insurance Program

• FCIC Federal Crop Insurance Program

• NHA National Housing Act (1934)• FHA Federal Housing Authority• Federal National Mortgage Association (Fannie Mae)

• Social Security Act (1935)

• TVA Tennessee Valley Authority

• Securities Act of 1933: “Truth In Securities Act”

• SEC Security and Exchange Commission (1934)

• Banking Act (1933) – Glass-Steagall

Depression Causes

• Religious Belief in the Gold Standard

• Weak Banking System

• Real Bills Doctrine

• Greed & Lack of Rules

• Lack of International Cooperation

• Trade War

• Economic Ignorance & Bad Judgement

Questions?

Love Money Makes the World go round.

ARTICLE VI, United States Constitution

All debts contracted and Engagements entered into, before the Adoption of this Constitution,

shall be as valid against the United States under this Constitution, as under the Confederation.

Federal Reserve System

The Federal Reserve System

• Congress passed the Federal Reserve Act on December 23, 1913

• Response to the 1907 Financial Crisis

• First “Official” Central Bank for the country

• Lender of “Last Resort”

• Establish a stable banking system

• “Independent with the government”, it has the authority to act on its own without prior approval of the Congress

• Maximize Employment

• Stable Prices

• Reasonable Long-term Interest Rates

Federal Reserve System StructureBoard of Governors

• Leadership of entire Reserve System

• 7 Governors

• Appointed by the President, approved by the Senate

• Serve 14 year staggered terms

• Chairman and Vice-Chairman appointed by President for 4 yr. terms subject to their terms as governors

• Chairman reports twice a year to Congress on Fed policies

• Meets periodically with Secretary of the Treasury

Federal Reserve System StructureBoard of Governors

• Federal Reserve System is independent and profitable

• Board operations funded by assessing Federal Reserve Banks

• Also makes money on the assets it holds such as U.S. Treasury Bonds

• In 2013, the Fed made $79.5 billion and sent $77.7 billion to the U.S. Treasury

• $350 billion to the Treasury since 2009

• Financial accounts audited annually by Public Accounting Firms and results made public

• Also subject to audits by The U.S. General Accounting Office

The Federal Reserve District Banks

Atlanta BostonChicago ClevelandDallas Kansas CityMinneapolis New YorkPhiladelphia RichmondSan Francisco St. Louis

Federal Reserve District Banks

• 24 Total Branches

• Private Entities

• Generate the Fed’s revenue through service charges and interest

• Profits are paid to the U.S. Treasury annually

• 9-member Board

• President elected by the bank’s board

• President must also be approved by Federal Reserve Board

Federal Reserve System StructureFederal Open Market Committee (FOMC)

• Seven members of the Board of Governors

• Plus Five Reserve Bank Presidents

• President of New York Fed serves on a continuous basis

• Serve one-year terms, each year one member is elected by the boards of directors of four regional groups of Reserve Banks

• Must meet at least four times a year by law

• Has met eight times annually since 1981

• Meeting participation is limited

• Minutes are released to the public three weeks after the meetings

Federal Reserve System StructureFederal Open Market Committee (FOMC)

• By law, the Board of Governors must keep a record of the actions taken by the FOMC on all questions of policy in its Annual Report to Congress including the votes on and reasons for each action.

• Goal: Price Stability - Inflation Control

• Goal: Encourage, sustain, and control economic growth

• Goal: Maximize employment

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