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Great Depression Econ 114, Dr. Tom Porter

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Wikipedia.org/great depression Basic Data - Unemployment Unemployment exploded to over 20% over a 4 year period following the October 1929 stock market crash. Employment recovered with the beginning of WWII. The natural rate of unemployment is 5% before and after this period.

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Wikipedia.org/great depression Basic Data - Output United States real GDP shows the extent of the depression in the shaded region. This was followed by rapid growth just before and during World War II. This is one of the most dramatic economic cycles in comparison to the trend lines (long-term growth).

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Basic Data - Income The impacts were much greater in some countries. Largest effects: US (& Canada) Argentina No significant impact: Japan Italy

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Basic Data - Prices Consumer Price Index for the US shows a 25% fall in prices from the end of 1929 to the beginning of 1933. Input prices (the WPI) show an almost 40% decline.

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FIGURE 14.8: The Long-Run Equilibrium Price and output move to lower corner.

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http://www.online-stock-trading-guide.com/1929-1930-stock-charts.html Stock Market Crash First Stage A 48% decline from the September peak to November low. Most of the fall occurred in the week around October 29 th, Black Tuesday. Note a 48% rise from the November low does not match a 48% decline. The initial rebound restored confidence.

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http://www.trade-guild.net Stock Market Crash Complete Data The stock decline continued for three years. This is more than a panic. Total decline from September 1929 until July 1933 was almost 90% of peak value. The stock decline reflected and did not cause fundamental changes in the macro-economy.

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Possible Causes Multiple factors negatively affected economy. Debate rages about the dominant factors. Wikipedia provides a short overview. In my world, these are the main factors: 1.Drought 2.Social Changes 3.Technological Changes 4.Trade Policy 5.Monetary Changes

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1. Drought Primary impact on western Canada and United States from 1930 until 1936. Multiple causes ecological and human. Agricultural production fell 75% of topsoil blown away Wheat prices fell from a 1920s high of $12/bushel to $0.12/bushel Saskatchewan farming income fell from $363 million in 1928 to $11 million in 1933 1% direct impact on Canadian GDP.

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1. Drought The impact of the drought is on productivity. Long-run aggregate supply shifts left. A shift of the long-run curve will cause the short-run curve to shift as we alter our expectations. Will we expect a shift in aggregate demand?

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2. Social Changes Prohibition is associated with the 1920s, but is part of a demographic shift that affected the economy. Populations were largely rural before 1920 and become more than 50% urban by 1930. The nature of work also changed from rural production methods to urban, industrial and line assembly types of work.

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2. Social Changes The impacts on the labour market reflected and caused changes in economic productivity. The production function declined further given structural changes in the economy. Long-run aggregate supply shifted further left.

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3. Technological Changes Social change in part reflected a technological shift in production. Most manufacturing industries were transitioning from craftsmen styles of production towards line- assembly production. Investment opportunities changed improving in some industries and declining in others.

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3. Technological Changes Productivity declined in some industries and grew in other industries. Sector and labour market shifts positively and negatively affected productivity. Forming expectations was becoming more difficult.

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4. Trade Policy Smoot-Hawley Tariff Act (1930) international trade breaks down among western countries. Exports and imports fall. no impact on Net Exports or aggregate demand Fewer and more expensive imports: Indirect impact on consumption Impact on production costs Lower exports impact corporate incomes Resources are used in less efficient ways

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4. Trade Policy Overall Impacts: Consumption falls Productivity declines Investment opportunities diminish Net Exports small change

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5. Monetary Changes Tight monetary policies Considered by many economists to be one of the causes of the depression Sort of Companies failed Loans could not be paid Bank losses increased Banks failed

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5. Monetary Changes Savings disappeared Deposits withdrawn from other banks Reserves fell Loans called back (many not paid) More companies failed More banks fell The money supply contracted and access to loanable funds (for investment purposes) disappeared.

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5. Monetary Changes Central banks did not tighten the money supply. The criticism is that central banks could have loosened monetary controls so access to loanable funds could continue and productive investment could also continue. Central banks did not ease bank regulations and investment fell shifting aggregate demand to the left.

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What Started the Fall? The drought, trade policy changes and monetary contraction occurred after 1929. Social and technological changes are long- term subtle changes. The stock market crash signalled the start of the depression, but did not cause it. What caused the stock market crash?

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What Started the Fall? The stock market rose in the 1920s with speculation. Traders (including households) were able to borrow money to buy stocks using the stocks as collateral. Investment and consumption rose on the speculation that was interpreted as real wealth that is, stock price rises were interpreted as productive improvements in the economy. Households, businesses and governments formed incorrect expectations about the future. At some point (October, 1929) the bubble burst.

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Recovery Government, the New Deal and World War II. Massive increase in government spending. Shifts the aggregate demand curve to the right.

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Copyright 2013 Pearson Canada Inc., Toronto, Ontario

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Recovery The impact of stimulus is a shift in aggregate demand. Short-run equilibrium is temporary unless government expenditures help improve productivity. Long-run equilibrium will be somewhere in the triangle ABC. B C

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Wikipedia.org/US Federal Debt The great expansion of the economy during WWII was possible with massive government expenditures This is stimulus. Stimulus is paid for out of future consumption and productivity growth (debt). This is the US and Canadian experience. Recovery North America

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www.greekcrisis.net Borrowing for WWI likely contributed to the stock market crash because many financial institutions were already over extended. This was the European experience. Stimulus worked in the past, but smaller magnitude increases in government spending caused Greek economic collapse Recovery - Europe