Causes of the Great Depression & Hoovers Response Myths and Misconceptions Many people believe that the crash of the stock market was the cause of the Depression. Not so, it was only a symptom. Many people also believe that Herbert Hoovers laissez-fair economic philosophy prevented the federal government from taking steps to prevent the crisis. Hoover was proactive in trying to ease the impact of the depression, it was too little, too late. Many people think that the Great Depression was the only major economic crisis in U.S. history. Nope, but it was the worst. Many people do not realize that the Depression was global and affected almost every capitalist economy on earth Some believe that FDR and the New Deal ended the Depression. Wrong again, WWII ended he Depression The Facts In September of 1929 the U.S. economy began showing signs of contraction (decline from the growth of the 1920s) August 1929, recession begins, GDP falls by and unemployment rises. Automobile sales fall 30% in By 1929 farm incomes fall more than 50% September 1929 stock prices begin to fall, the market crash on Black Tuesday October 29 th losing 90% of its value by By 1932 US GDP fell 30% US factory production fell 46% US wholesale prices fell 32% US exports fell 70% US unemployment will reach 25% (33% in some regions) US Unemployment Abstract of the US Department of Labor US Industrial Production US Stock Market US Bureau of Labor Statistics Causes of the Great Depression Overproduction Political Decisions Stock Market Banking Practices & Fed Policies 1. Over-production Overproduction The roaring twenties was an era of great economic growth. Manufacturing and corporate profits rose 62%. The availability of so many consumer goods, such as electric appliances, radios and automobiles, offered an easier life, on CREDIT. This led to a high demand for such goods. Mass advertising fed mass consumption to satisfy the needs of mass production. Eventually business produced more than consumers could purchase. You can only own so many radios, cars, and appliances. So Over production of consumer goods and agricultural goods means Supply was greater than demand. A surplus of goods in the market begins to drive prices down. Declining prices means declining profits Declining profits means stock values (for corporations) begin to fall. Oh my!!! 2. Banking & Money Policies Consumer Credit The concept of buying now and paying later caught on quickly. By the end of the 1920s, 60% of the cars and 80% of the radios were bought on installment credit. Consumerism in the New Era saw a change in US buying behavior. Thrift, saving, and frugality were replaced with consumption, and keeping up with the Jones The Federal Reserve Board The Federal Reserve Board was created by Congress in 1917 in response to the Banking Crisis of The Fed was created as the US central bank with two primary functions: 1) Regulate and inspect the nations commercial banks, by assuring banks had sufficient cash reserves 2) Regulate the amount of money circulating in the economy. Known as Monetary Policy To stimulate growth the Fed increases money in circulation by lowering interest rates for member banks, and decrease in the amount of money banks are required to keep in reserve 3. STOCK MARKET ACTIONS The Stock Market As an investment the goal is to buy low and sell high. The value of stocks soared in the 1920s as corporate profits rose, fueled by mass consumption. (Fueled by credit, shhhhhh!!!) Once a rich mans game, everyone was in the market in the 20s Optimism was high, and speculation was rampant Stock Market: Buying on Margin Buying on the margin means that you can purchase shares with a down payment. The Margin Requirement in 1926 was 10%. So a $100 share of stock could be yours with only a $10 down payment Speculators expect the value of the stock to go up in price enough (at least 90% to break even) covering the balance. Buying on the margin encouraged thousands of small time, new (inexperienced) investors to purchase stocks As long as corporations were selling goods and turning a profit stock prices rose and buying on the margin was safe. As long as Stock Market: Banks & Margins In 1927 banks did two stupid, greedy things 1) Banks began letting customers borrow money to buy stocks and used the customers stock holdings as collateral for the loan. They gave money to people with no money to gamble 2) Banks started to use depositors money to speculate in the stock market. Normally banks pay you interest for savings. Then they loan it to businesses or families that were good risks to buy homes or start companies etc. Not speculate in the market! By 1929, banks had made billions of dollars in risky loans with little collateral to back them up if borrowers defaulted. So Banks made risky loans to borrowers to buy stocks on the margin. Banks used depositors money to speculate in the market When panic shook the market, the banks were left holding the bag Oh my 4. Bad Fed Banking Policies With the loss of confidence in stocks, people began to lose confidence in the security of their money being held in banks. Customers raced to their banks to withdraw their savings. (k.a. bank run) Customers closed accounts and banks were left without cash reserves putting them on the brink of failure. So The Fed fails to manage the bank and currency crisis. Depositors now hide their money at home and banks have no money to lend Banks close and large amounts of money disappear from the economy 4. Bad Political Decisions: The sole function of the government is to bring about a condition of affairs favorable to the beneficial development of private enterprise. ~Herbert Hoover (1930) The Fed will stand by as the market works itself out: Liquidate labor, liquidate stocks, liquidate real estate values will be adjusted, and enterprising people will pick up the wreck from less- competent people." ~ Andrew Mellon (1930) Hoovers Political Decisions Contrary to popular history Hoovers commitment to laissez fair made the Depression worse Hoover initiated several programs to help the economy recover but it was too little, too late Hoover favored volunteerism, or cooperation between business and government over coercive policy Hoovers Political Decisions Rising unemployment led to homeowners defaulting on mortgages and renters being evicted from apartments. The homeless settled in shanty towns called Hoovervilles. Signing the Smoot-Hawley Tariff Revenue Act of 1932 Balancing the budget Hoovers Three Biggest Mistakes Lets Review Overproduction Stagnant wages Federal monetary policy Banking practices - Stock market Political decisions