Leading up to the Great Depression - Causes and Effects | PDF

LEADING UP TO THE GREAT DEPRESSION What caused the Great Depression? The Legacy of the Progressive Era ¨ The Progressive era had given birth to a new American state. With new laws, administrative agencies, and independent commissions, government at the local, state, and national level...

LEADING UP TO THE GREAT DEPRESSION What caused the Great Depression? The Legacy of the Progressive Era ¨ The Progressive era had given birth to a new American state. With new laws, administrative agencies, and independent commissions, government at the local, state, and national levels had assumed the authority to protect and advance “industrial freedom.” Government had established rules for labor relations, business behavior, and financial policy, protected citizens from market abuses, and acted as a broker among the groups whose conflicts threatened to destroy social harmony. Retreat of Progressivism ¨ World War I killed the Progressive spirit. ¨ The U.S. govt had successfully whipped up mass hysteria, resulting in the (first) Red Scare. ¤ Sacco and Vanzetti ¨ Perhaps the Progressive hope of applying “intelligence” to social problems in a mass democracy is just a myth. ¨ The 1920s gives way to a conservative decade full of social tensions. Urban vs. Rural ¨ For 20 years during the Progressive Era, urban and rural Americans made common cause. But in the 1920s, the urban/rural split would re-emerge. It re-emerged due to three issues: ¨ Immigration restriction: the capstone being the Immigration Act of 1924. ¨ Ku Klux Klan: from 1870s to 1920s, the Klan was a very small element of American life, but in 1920s it explodes. ¨ Rise of religious fundamentalism, highlighted by the Scopes Monkey Trial. The 1920s: Pro-Business Ethos ¨ The 1920s would become the most pro-business decade of the 20th century. ¨ Pres. Harding’s Sec. of Treasury is the multimillionaire banker Andrew Mellon. ¨ Mellon set out to lower the taxes of the rich, reverse the low tariff policies of the Wilson period, return the U.S. to a laissez-faire policy, and reduce the national debt by cutting expenses and administrating the government more efficiently. “The chief business of the American people is business” -Calvin Coolidge ¨ Harding’s and Pres. Coolidge’s Sec. of Commerce was Herbert Hoover, the future 31st president. ¨ L to R: Coolidge, Hoover, Harding, and Mellon (w/ mustache) Return to laissez-faire ¨ Pres. Coolidge vetoes the McNary-Haugen bill twice. This bill would have had the federal government buy wheat from American farmers and either store it or export it abroad at a loss. ¨ Such action by the govt would have benefitted American farmers by propping up prices. ¨ Coolidge vetoes it because he sees such legislation as interfering with the free market (which it most certainly would have done). But the farmers aren’t helped by this approach. President Herbert Hoover ¨ Herbert Hoover was sworn in on March 4, 1929. ¨ As Secretary of Commerce for Harding and Coolidge, he seemed the perfect choice for the job; he had in large part been responsible for the prosperity of the 1920s. ¨ It seemed a sure bet that Hoover would continue the policies of the 1920s. Black Thursday: Oct. 24, 1929 (followed by Black Tuesday on Oct. 29, 1929) ¨ At his inauguration in ¨ Six months later, in March 1929, Hoover October, the stock said, “I have no fears market crashed. for the future of our ¨ Companies lost their country. It is bright with operating income and hope.” their capital. ¨ Millions of Americans lost their life savings, jobs were lost, homes were lost, millions became unemployed. What caused the Great Depression? If the economy was so good in the 1920s, why did the Great Depression happen? Is the stock market the culprit? ¨ The collapse of the stock market in 1929 is a signifying moment, but it did not “cause” the Great Depression. ¨ The Great Depression was a worldwide phenomenon caused chiefly by economic imbalances. ¨ In the U.S., too much wealth had fallen into too few hands; the result is that consumers were unable to buy (i.e., afford) all the goods that were produced. This leads to underconsumption. ¨ Easy-credit policies encouraged by the Federal Reserve and a tax structure that favored the rich helped create this imbalance. Brief history of NYSE during 1920s ¨ During the 1920s, the stock market experienced an absolutely phenomenal rise in the value of the average share of stock. ¨ Between 1923 and 1928, the value of the average share of stock on the NYSE doubled in five years. ¨ Between 1928 and the beginning of 1929, it doubled again. ¨ This means that one dollar in 1923 had become four dollars in the middle of 1929. ¨ People came to believe that you could not lose money investing in the stock market. An overinflated stock market ¨ A writer for one of the financial newspapers in the country wrote, “The difference between gambling and investing in the stock market is that when you gamble one person wins and one person loses. When you invest in the stock market, everybody wins.” ¨ People came to believe that they couldn’t lose money. Money flooded the stock market. The value of stock prices kept increasing to the point where those stock prices no longer reflected the value of the companies they represented. ¨ What a stock price is supposed to do is represent the value – the assets – of a company.  Irresponsible “investing” ¨ “In the 1920s, small investors leapt giddily into the stock market in large numbers. They frequently bought on a 10-percent margin, putting only $1,000 down to buy $10,000 worth of stock. Of a total American population of 120 million, only 1.5 to 3 million played the stock market, but their slick, easy winnings captured the national spotlight. The 1929 market disaster would be heavily concentrated among the 600,000 margin accounts.” ¨ from p. 303, The House of Morgan (1990), by Ron Chernow TIME OUT This next slide is intended to show you why investing in the stock market can be very rewarding. The Rule of 72 ¨ a method for estimating an investment’s doubling time ¨ for example, if you are earning 4% interest, it will take you 18 years to double your money (72 ÷ 4 = 18) ¨ if the interest rate is 8%, it will take 9 years to your double money (72 ÷ 8 = 9) ¨ So you want to invest your ¨ The Rule of 72 has to do money where you will with the power of receive a good return (i.e., compound interest. a higher interest rate/higher yield). The Power of Compounding TIME IN Back to the Causes of the Great Depression ¨ In the fall of 1929, the bubble burst. The stock market tumbled, and it continued tumbling. ¨ Over the next three years, the stock market lost 90% of its value. On Sept. 3, 1929, the Dow Jones Industrial Average sat at what was then a record high of 381. In the summer of 1932 it sat at 41. ¨ The DJIA is a stock index based on the stock prices of America’s thirty largest corporations. America’s thirty largest corporations had lost 90% of their stock value over a four-year period. ¨ So the standard story is that the stock market crash caused the Great Depression. But this is an oversimplification. ¨ The stock market has crashed at other times, and the economy did not spiral into a depression. Other stock market collapses… ¨ Immediately following Sept. 11, 2001, the stock market lost 20% of its value in a matter of days, but then it bounced back, and it bounced back higher. Then a few months later it suffered an even more horrific crash, losing more than 30% of its value, because of the Enron scandal and the Global Crossing scandal. ¨ An even scarier stock market crash happened in October 1987. On a Thursday night, the stock market closed at an all-time high of more than 2,000 points. The following Tuesday night, three trading days later, the stock market closed at under 900 points. It had lost more than 50% of its value in three days… The stock market is volatile ¨ …and then it bounced back. There was no depression. ¨ Stock market crashes don’t actually cause depressions. A symptom of a sick economy ¨ The stock market crash, ¨ Upon closer analysis, rather than the cause there were other of the depression, symptoms of a sick served as a symptom economy. of a sick economy. ¨ That it didn’t bounce back tells us that there was something fundamentally wrong with the health of the nation’s economy. Indicators The symptoms of a sick economy… Farming ¨ The farm economy went into a depression in the early-1920s. Farmers never enjoyed the prosperity of the decade. The Great War (i.e., WWI) had been a golden time for farmers, but with the war over and Europeans farming for themselves, American farmers went into a depression early in the decade and never recovered from it. ¨ The farm economy was a symptom of a sick economy. Construction ¨ Today we watch the construction industry very closely and the reason we do this is that construction is a measure of where people think the economy will be in the future. If people think the economy is going to go in the tank, they’re not going to build a new house, a new factory, etc. Construction starts are an indication of where things are going. ¨ Judging by the construction industry, the first half of the 1920s is great. But by the mid-1920s, things have slowed down, and by the late-1920s, the construction industry has entered into its own depression. ¨ This is another symptom of a sick economy. Automobile Industry ¨ The automobile industry was the engine of the economy in the 1920s. Cars were being sold, and automobile production went up every year until January of 1929 when automobile production peaked and began to taper off. ¨ Production is a product of demand. Henry Ford will produce what he thinks he can sell. By the summer of 1929, industrial production in the aggregate began to decline. ¨ Another symptom of a sick economy. The Banking System ¨ Maybe the most startling symptom of a sick economy is the banking system. ¨ During the 1920s, 14,000 banks failed. When a bank fails, that means that your money is gone. There never is enough money in the vault to pay back the depositors, because the bank has loaned that money out. So there’s a panic. ¨ This happened 14,000 times in the U.S. during this prosperous time. Most of those banks were in rural areas that went unnoticed in Philadelphia, New York, Washington, D.C. ¨ The collapse of these banks suggests a sick economy. All these symptoms… And once the depression began, a lot of missteps were made in the early years of the Great Depression. These missteps made the depression worse, made it a “Great” Depression. A lot of things made the Depression worse… ¨ Smoot-Hawley Tariff (which raises tariffs) ¨ Poor Federal Reserve policy in which the Fed reigns in the money supply when it should have expanded the money supply. (More money in circulation has the effect of driving up prices. This is what is needed to fight a depression.) ¨ These governmental actions make the Great Depression worse. A major cause of the depression… ¨ Wages didn’t keep up with production. ¨ By 1929, demand for industrial products had dropped off. ¨ You could make the argument that corporations didn’t do the responsible thing, which was pay their workers higher wages. Decreased demand leads to layoffs ¨ Workers literally can’t afford to buy what they produce. So by 1929, demand for industrial products dropped off. Because demand dropped off, production gets cut, and when production gets cut, workers get laid off. When workers get laid off, they obviously can’t buy automobiles, but they also can’t buy bread, milk, clothing. And when an automobile factory cuts production, the company quits buying steel, tires, etc. So the factories that produce steel and tires must lay off workers, and now these workers can’t buy things. The economy is in a downward spiral. Workers can’t buy necessities, can’t pay their mortgage, etc. Deflation ¨ When people don’t have enough money to buy what’s for sale, what happens to the goods? ¨ They go down in price. ¨ A depression will cause deflation. ¨ Deflation (which is the opposite of inflation) means that prices are going down. This might sound attractive but it’s absolutely devastating to an economy. ¨ Everything is losing value, and, therefore, no one spends money. To summarize… ¨ There were fundamental weaknesses in the economy, but many people – especially investors – carried on with optimism and kept investing money in the stock market. ¨ But when the markets shook in October 1929, the weaknesses were exposed. President Hoover’s response… ¨ Hoover has some ideas ¨ To Hoover, the (and some of them government should not make sense). But a lot provide “relief.” of his ideas are based on voluntary action. ¨ KEY IDEA: Hoover doesn’t believe that the federal government should help turn things around. The proper role of the government ¨ This is a key question that resonates throughout our history. ¨ Thomas Jefferson believed in small government. He believed this because a small government meant the protection of freedom. ¨ Herbert Hoover believes in small government. But is the government in the 20th century really able to protect freedom by being small? ¨ Does big business require big govt (or small govt) in order to protect freedom and give the little guy a chance? Hoover attempts to help out the banks ¨ The Reconstruction Finance Corporation is created in 1932 to help out the banks. ¨ It provides some help, but not enough to get the banking system back on its feet. ¨ Q: What will FDR’s first move as president be when he takes office? ¨ A: a bank holiday people living in “Hoovervilles” Bonus March, summer 1932 ¨ Bonus Army routed by police forces led by Douglas MacArthur. The Bonus Army ¨ In 1924, Congress passed over (Pres. Coolidge’s veto) the Adjusted Compensation Act (or Bonus Act), which provided a term life insurance policy for veterans of WWI. This policy, which would take effect in 1925 and last until 1945, would provide $1,000 if any veteran died during the twenty year term of that policy. At the end of the policy, if the veteran was still alive, he would receive that life insurance policy as a cash bonus. In other words, he would get a $1,000 check in the mail. By 1932, there was a movement to pay the bonus now. ¨ People needed the money now. FDR elected in a landslide in 1932 Next… President Franklin Roosevelt and the New Deal