By Gisele HanhonJose JimenezIssa Nordein

The Great Depression

Table of ContentsIntroduction

Gisele

Causes of the Crisis Impact of the Economy Crisis Policy’s

The First One Hundred DaysJose

Important Facts FDR Facts Alphabet Soup

The Second New DealIssa

1937 recession Recovery WW2

Introduction

Began with the stock market crash on October 29, 1929

Worldwide phenomenon

Lasted throughout the 1930s in the U.S. and did not completely end until the U.S. entered WWII in 1941

Transmitted to other countries through the gold standard

Causes of the Crisis

Multiple causes: decline in consumer demand, financial panics, as well as misguided government policies that led to a decrease in output

Stock market bubble: “get-rich-quick” mentality and purchasing on margin. The prices of stocks were far higher than their value

Throughout the 20s, investors were indulging in speculation

Causes (cont’d)

Farm debt: farmers could not pay back the loans they took out during WWI due to an decrease in the prices of agricultural goods (econ. historians view this as a reason that contributed to the banking panics)

Government policies: In an attempt to regulate/ limit stock market speculation, a tight monetary policy was implemented in the Summer of 1929.

The Federal Reserve raised interest rates to slow the rise in stock prices in 1928 and 1929

Impact on the Economy

Consequently, consumer demand fell as higher interest rates depressed interest-sensitive spending/investment, such as auto purchases as well as construction causing an oversupply

Excess supply led to a drop in prices, which led to a drop in production

It also transmitted to other countries as high interest rates decreased lending to foreign nations, which caused their output to drop

During the Crisis

The bubble burst on October 24, 1929 (Black Thursday) and panic selling of stocks started.

A group of banks attempted to restore people’s confidence and reduce panic by pooling their resources and bought $40 mil. Of blue chip shares.

However, the stock market crashed on Black Tuesday, (Oct. 29) when stock prices fell 33%

Banking PanicsDue to pessimism about the future, people

wanted currency so they rushed to the banks and demanded their deposits in Fall of 1930, Spring and Fall of1931, and Fall of 1932 &33

Many banks found themselves short of funds because they could not liquidate loans

Response: FDR declared a national “bank holiday” on March 9, 1933 that closed down banks until deemed solvent

Around 9,000 banks failedSuch panics reduced the money supply

Scope of the Crisis

1929-1933 was the worst period of the depression due to significant drop in real GDP and prices as well an increase in unemployment .

Industrial production fell 47%.Real GDP fell 30%.Price level decreased 25%.Unemployment reached 25% in1933 (it was <4% in

1929).BUT…slow recovery began in Spring 1933 when

real GDP increased by 9% per year until 1937 and picked up again mid-1938.

Full recovery occurred due to mobilization for WWII in 1941.

Policy Makers’ Response

Immediately after the crash, President Hoover asked businesses to cut into profits instead of wages/jobs and urged state and local governments to start public works projects.

However, the depression hit by 1930 and there was a drop in wages, which led to a drop in consumption.

Policy Makers’ Response (cont’d)

President Hoover reduce d all 1929 income tax rate by 1% due to budget surplus, but that turned into a deficit by 1930.

By 1932, a tax increase to balance the budget was approved, which crippled recovery .

Consequently, disposable income dropped causing consumption to drop and overall economic activity.

More Policies…The Fed reduced money supply in September

1931 and raised interest rate (to preserve the gold standard and prevent loss of confidence).

Revenue Act of 1932 increased American tax.

Fed’s Contractionary policy: some argued that the Fed chose this over expansionary policy due to fear that an increase in money supply would reignite speculation.

Political instability in Europe from 1933-1937 triggered gold inflows to the U.S. which expanded the money supply 42% and eventually encouraged spending/borrowing.

Important Facts

Other causes of the Great Depression:1. Consumer debt increase.2. WW1 3. Stock prices4. 1% of the population controlled 40% of the wealth

Depositors withdrew several hundred millions of dollars.

Various protest occurred during 1932.1. Bonus Army2. Corn Belt Rebellion

Background on FDR

• Roosevelt studied in Harvard.

• He was diagnosed with polio.

• Ran for Vice President a couple years prior to the recession.

• Fireside chats

Alphabet Soup 1

Civilian Conservation Corps (CCC) was created on March 31th 1933. The CCC employed a quarter million young men in their early twenties and late teens. They planted over 200 million trees, fought forest fires, cleaned beaches, built reservoirs and dug drainage ditches. Furthermore, each worker was paid $30 a month.

The $30 dollars paid to the CCC workers in 1933 would amount to $1,200 per month in 2011. The book I readmentioned that $5,000 equals roughly 200,000. I divided200,000 by 5,000 = 40 *30 = $1,200.

Alphabet Soup 2

Agricultural Adjustment Administration (AAA) The AAA was created on May 12th 1933. This program was created to benefit farmers. The government paid farmers money to reduce their production of crops such as; corn, cotton, wheat and tobacco. Roosevelt intention was to allow other crops to increase in prices.

Alphabet Soup 3

• The Tennessee River Valley (TVA). The TVA was created on May 18th 1933. The bill created the Tennessee Valley authority which covered much of the southeast. A dam was built in Muscle Shoals, Alabama to provide electricity to near by communities. Eventually, other dams were built which the government owned. The power was sold at a low price, which made it possible for people to afford

Alphabet Soup 4

• Public Works Administration (PWA). The PWA was created on June 16th 1933. The program financed the creation of public buildings, infrastructures , bridges and facilities. The Budget of the program is estimated to be around 3.3 billion dollars.

The Civilian Conservation Corps

NRA

NRA is the National Recovery Administration which is it was created by President FDR to help the economy.

NRA Goals…

• Eliminate unfair trade practices• Reduce unemployment• Establish minimum wages and maximum hours• Guarantee the right of labor

Monetary policy Banks had begun to hold large excess reserves.

The Federal Reserve knew that if banks used a large amount of those excess reserves to increase lending, the money supply would quickly expand and price inflation would go up as well.

Recession of 1937–1938Reasons:Cuts in federal spending Increases in taxes

Effects:Unemployment went up from 14.3% in 1937 to

19.0% in 1938Manufacturing output fell by 37% from the 1937 Producers reduced their expenditures on durable

goods, and inventories declined

Recovery: ??????

World War 2, and the recovery

As most of the economist argue, the world war 2 got United States out of the Great Depression.

They believed that government spending on the war led to recovery from the Great Depression, but other argue that war world 2 did not play a big role, but it help in reducing the unemployment rate.

The number of unemployed workers declined by 7,050,000 between 1940 and 1943, but the number in military service rose by 8,590,000.

Were the US citizen s better off or worse off during WW2 ????

Negative impactSome argue that the decrease in unemployment is

because the war and the draft, not because the economic recovery.

Business investment fell during the war. Government spending on the war effort exceeded the expansion in real GNP.

Positive impact• Because the war need a lot of supplies, most of the

factories put to work.• A lot of unemployed people went to war fighting for

their country, which it lead to lower unemployed rate.

¿ Any Questions ?