IB HOA ~ Unit 3, Day ?:the Causes of the American Great

Depression Objective: students will be able to identify the SPICE causes of the U.S. Great

Depression.

Agenda:•submit PLO (in groups…record

group members’ names)•discuss handouts•HW due next class (next slide)….•QOD #?•lecture notes w/ handout: Causes

of the U.S. Great Depression, Day 1 of 2–w/ video clips etc…

HW due next class:• Read & annotate historiographical causes

of the GD (handout).– Sources: above handout, lecture notes, text!

• Working independently, create a P3 essay outline in response to the following prompt:– To what extent did the Stock Market

Crash of 1929 cause the U.S. Great Depression?

• Adhere to IB P3 markband standards.– (Components of a strong P3 essay…?)

• Full sentences: thesis, Ps, Ls - only

Add: Historians ↓

• David M. Kennedy? main cause: economic anemia abroad

• Howard Zinn? Main cause: capitalism!

1. Themes of 1920s?• The U.S. → mostly:

– (was) disillusioned– rejected reform

(progressive ideals)– turned inward (a

return to isolationism due to the horror of WWI)

– embraced social conservatism

– enjoyed prosperity– & leisure

(teenager!)

2. Themes of 1920s? (contd.)• New technologies,

mass-marketing techniques, & new forms of entertainment fostered rapid cultural change along w/ a focus on consumer goods.

• BUT the accompanying changes in moral values & uncertainty about the future produced cultural anxiety & sharp intellectual critiques of American life.

3. Isolationism (causes/effects):

After the idealism of WWI was crushed, Americans turned inward & became hostile toward anything foreign or differentKKK (against ↑

immigration)1st Red Scare

(against communism)

4. A decade of conflict – why?

• Prohibition (1920-33)

• = a federal ban on sale, manufacture, & transportation of alcohol

• via 18th Amendment

5. The Charleston

• popularized by 1923 song of same name

• most popular songs/dances of 1920s

• …men, women, alone, w/ partner, in group…

• @ FIRST: – danced mostly by women

in speakeasies to mock teetotalers (i.e. those who supported prohibition/abstinence from alcohol)

– considered immoral provocative

– 1920's The Charleston

6. George Gershwin’s Rhapsody in Blue

→ 1924 musical piece, composed by American George Gershwin for a solo piano and a jazz band (converging elements of classical music w/ jazz-influenced effects).

G. Gershwin - Rhapsody in Blue, FORTISSIMO FEST 2010

(@ 11:25)

Add: A decade of conflict?

• modernity vs. traditionalism• uncertainty vs. optimism• science vs. religiosity

– e.g. Scopes (Monkey) Trial

America in the 1920s• prosperity for many

– but this was all relative!

• isolationist• conservatism vs. modernity

– social boundaries crossed but…

• mass consumerism• bought on credit & lived

beyond means• business boomed!

– more Americans than ever before experienced highest standard of living in U.S. history, but was it real…?

• companies spent $1.5 billion on advertising in 1927

• first shopping mall • appliances popular (e.g. radios, washing

machines, telephones, cars)

Watch scene 8 from It’s A Wonderful Life

60 Minutes clip: (Lowering the Drinking Age)

• http://www.cbsnews.com/video/watch/?id=4819332n&tag=mncol;lst;3

• Pros and cons of lowering the drinking age to 18 in the U.S.?

• What are the counterclaims raised in the 60 Minutes segment? Responses…?

• American attitudes toward drinking…?– Binge drinking…?

• Do we need laws? cultural values? Or education about alcohol ? …to persuade people to drink responsibly?

• Your opinion? Explain.

ADD: U.S. mood & attitudes?• people’s relationship w/ fed.

govnt. limited in 1929!– mail delivery, tax collection

• Americans blamed themselves– GD hardest for: farmers, AAs,

immigrants

• unemployment & economic decline → huge source of shame…

• people wanted to work• 1932: worst year (25%

unemployment)…

• Grapes of Wrath (1939) – by John Steinbeck

Three most popular American sports in 1920s & 1930s? baseball, boxing,

horse-racing• James Walter

"The Cinderella Man" Braddock (June 7, 1905 – November 29, 1974) was an American boxer who was the world heavyweight champion from 1935 to 1937.

To understand the average American mindset at this time, we’ll watch (mostly) youtube.com movie clips from Cinderella

Man

• http://www.wingclips.com/movie-clips/cinderella-man/stealing-sausage

• Youtube:– Cinderella Man (1/8) Movie CLIP - Braddock

Begs for Money (2005) – Cinderella Man (4/8) Movie CLIP - Fighting

for Milk (2005) HD

What was the Great Depression?

•when? circa 1929 - 1941 •what?

–drastic decline in national economy ↓ (decreasing) business activity↓ (falling) prices↑ (severe) unemployment

Was the stock market crash the main cause of the Great

Depression?• NO!!! (This is a myth!)

– Then, why is it always mentioned as “the” cause in popular culture?

• The stock market crash was just one of many causes of the Great Depression, but it wasn’t the main one. It was simply the most visible one. Everyone could see it – despite the fact that nearly 97% of Americans did not own stock!

• The main cause of the GD was the collapse of the monetary (banking) system, which was much less visible (it’s hard to see (=) an absence of currency) but highly detrimental to the U.S. economy…read on.

Unemployment

• Highest unemployment rate during GD: 25% (1932)

• Unemployment rate today: 6.6% (Jan. 2014)

• 1/13: 7.8%• 2/2011: 9.4%• …2/2012: 8.3%

Unemployment 1925-1933

02468

101214

1925 1926 1927 1928 1929 1930 1931 1932

Year

Unem

ploye

d (in

millio

ns)

What is the difference between a recession and a

depression?

•“A depression is just a really bad recession.”

Some other recessions in U.S. history…

• Structural Problem:– First, recall past

economic downturns:• Panic of 1819• Panic of 1837• Panic of 1857• Panic of 1893• Panic of 1907• ...................

– And what always followed/s these downturns?

Def? The recurring & fluctuating levels of econ. activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. •At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration….

Structural problem w/ business cycle → contractionary spiral (like a contracting

muscle):

Structural Problem, contd:

–Was this an inherent flaw in the capitalist/free enterprise/laissez faire system?

–…or was it merely a self-correcting cycle that an economy simply had to endure?

–...or was/is it a little bit of both?•Let’s break down the problem….

How do we measure the production of an entire nation?

GDP → the value of all goods & services produced in an economy in a year

-huge indicator of a country’s wealth…

GDP = C + I + G + NE:C = consumer spending I = investingG = government spendingNE = net (total) exports

Again, was this an inherent flaw in the capitalist/free enterprise/laissez faire

system?...Or was it merely a self-correcting cycle that a society simply had to

endure?

• classical economists, circa 1930? → BC = a self-correcting cycle

• Keynesians (John Maynard Keynes, a radical in 1930) → BC = an inherent flaw…but correctable!

Two options for how the federal government can handle/help economic

downturns: • Monetary (banking) Policy:

– (Milton Friedman = strict monetarist)

– only the Federal Reserve/Central Bank/Fed should fix economy! • e.g. adjusting interest

rates, buying currency, etc.

• Fiscal Policy:– Keynesian (deficit

spending) economics→ increasing govnt

spending to stimulate an economy

Difference between…?

• Debt: general term for $ owed over time; the accumulated amount of $ the govnt (or household) owes, based on years & years of consolidation

• Deficit: amount of $ the govnt owes for each fiscal year

When the federal government needs more money, it has four

options:

•raise taxes•cut spending•print more $ (which causes

inflation)•sell bonds (to people, foreign

governments)

Keynesian Economics? (= deficit spending)

• A liberal (and frightening) idea in 1930s. Unbalanced budgets w/deficits?! The govnt rescuing banks?!

• U.S. govnt SORT OF adopted Keynesian E.s during the GD. – FDR said, “no way!” to Keynes (What FDR did x 100 would

have been Keynesian – technically speaking (Keynes thought fed. Govnt should have spent more) – but FDR did engage in deficit spending

• Today, “Keynesian” is synonymous w/ “deficit/stimulus spending”• Almost every American president since FDR has been “Keynesian” in

that they have mostly all engaged in deficit/stimulus spending.

• Most Keynesian American president? LBJ (1960s); Obama (due to his stimulus plan)

• What cataclysmic event demanded a Keynesian approach and, in effect, ended the GD? WWII!

Which U.S. Presidents have been Keynesian?

Which presidents have been Keynesian since FDR? I'd say all to varying degrees. To answer the question with integrity, you'd have to go back to every economic downturn and see what happened to federal spending. •If it went up, then the Congress of the time (with the signature of the President -- remind your students that Congress passes laws and the President signs them) was engaging in active fiscal policy; i.e., they were embracing Keynesian prescriptions.•If federal spending remained steady or went down during the economic downturn, then the Congress and President of the time did NOT engage in Keynesian philosophy.

– Cheers! Marc (Johnson, Retired CTHS Economics Teacher)

Back to: What caused the GD?

• Overproduction– The nation’s ability to produce goods

had clearly outrun its capacity to consume or pay for them.

– Again, over-confidence of companies, surplus of products, etc….

What else caused the GD?• “Economic Anemia” abroad

– Europe: unable to repay loans to U.S. banks b/c of WWI

– American uncertainties over war debts, reparations, defaults on loans → caused an adverse effect on international trade

– Hawley-Smoot Tariff (1930)• Def: ↑ U.S. tariffs on over 20,000 imported goods to

record levels to protect U.S. jobs (e.g. farmers) from foreign competition

• Sig: = shortsighted/knee-jerk reaction to early stages of GD actually caused retaliatory tariffs from U.S. trading partners, which ↓ U.S. exports & imports by over 50%.

– bottom line? devastated European economies stopped buying American products - which, in turn, hurt the U.S. economy.

“Though economists and historians continue to this day to debate the main causes of the Great Depression, there can be little doubt that the deepest roots of the crisis lay in the several chronic infirmities that afflicted the post-World War I international economic order and touched every country on the planet. The fighting had taken a cruel toll on key economies such as those of Britain, France, and Germany, the core societies of the advanced industrialized world. The lingering distortions in trade, capital flows, and exchange rates occasioned by the heedlessly punitive Treaty of Versailles, as the economist John Maynard Keynes observed at the time, managed to perpetuate in peacetime the economic disruptions that had wrought so much hardship in wartime. What was more, memories of the war’s bitter fighting and vengeful conclusion rendered the post-war international atmosphere toxic, poisoning the wells of traditional diplomacy and dooming any efforts at concerted multi-lateral action to deal with the gathering crisis. To those abundant physical and institutional ills might be added the psychological maladies of near-religious faith in laissez-faire and the gold standard as the most sacred of orthodoxies…. All of this added up to a witches’ brew of economic illness, ideological paralysis, and consequent political incapacity.”

-From The Great Depression: An Overview by David M. Kennedy

What caused the GD?• Over-expansion of credit:

– How? Through installment-plan buying (e.g. Model T Ford cars), which over-stimulated production.•People lived beyond their means, buying on

credit, not w/ cash.•examples: cars, appliances, …and stocks:

»People bought stocks on margin (=financial collateral – a portion of stock’s full value) … So, if a stock was worth $100 p/share, and person X only had $10 p/share, X could pay that with the promise that X would pay the rest later when the stock’s value increased. But, then, when stock prices fell, and X had not made enough on the value to pay for the rest of it, X was in a pickle (couldn’t pay).

» Buying stocks on margin is not legal today!

What else caused the GD?•Run on the banks (a.k.a. bank runs):

– (Reminder: Banks invest customers’ deposits to make interest off that money, so most money does not sit in vaults.)

– caused: when customers panicked/lost confidence

– occurred: when a large number of bank customers withdrew their deposits at once b/c they believed bank would become insolvent.

– As more people withdrew their deposits, the likelihood of a bank’s default increased, which encouraged further withdrawals….to the point of a bank’s demise.

– Today, up to $250,000.00 p/customer in a bank is insured by the FDIC → Federal Deposit Insurance Company•Sig: helped to restore the American people’s

confidence• Used to have to know your banker well – now, don’t have to! …watch scene 12

from It’s A Wonderful Life

According to most economists, what was THE MAIN cause of

the GD?

= the collapse of U.S. monetary (banking) system

• i.e. an absence of currency in economy (which is hard to see!)

• watch izzit.org DVD: The Great Depression (10 mins.)

What else caused the GD?

• As if man-made disasters were not enough, terrible drought scorched Midwest in 1930…

• effects:– this AGR devastation

exacerbated GD– white and black farmers

lost their farms, some of whom returned to tenant farming

• The Dust Bowl:– caused by severe

drought coupled w/ decades of extensive farming w/o crop rotation to prevent erosion.

– Deep plowing of the topsoil killed the natural grasses that normally kept the soil in place by trapping moisture.

What else caused the GD?• Stock Market Speculation (“The Crash”):• Review:

– buying a stock → increases stock’s value– selling a stock → decreases stock’s value

– Value of stocks drastically declined – and very quickly

– Sig: this was highly visible & affected people psychologically (i.e. people’s economic confidence ↓)

– people began to panic about their stocks, so they liquidated them (i.e. sold them for cash)

– (Again, it’s a myth that SM Crash was the sole or main

cause of the GD --- 97.5% of Americans did not own stock at time)

Did President Herbert Hoover cause the GD?

• NO!• perception vs. reality

• Hoover: conflicted…humanitarian & philanthropist yet also a self-made man, who believed in U.S. virtue of rugged individualism - & opposed govnt interference – believed doing too much would HURT U.S.

citizens– He and his republican predecessors → laissez

faire fed. govnt regarding economy (in general!)• Many do contend that he could have done more,

though….

What were “Hoovervilles

”?

• a collection of huts and shacks, housing unemployed during 1930s – named after President Hoover – to mock him.

Did President FDR end the GD?• NO!

• FDR certainly helped, though:– “There are alternatives to every choice/solution and consequences to pay for every

choice that is made. I think the New Deal provided the least amount of consequences for the American people even though we're more dependent than responsible now.” – Mr. Johnson

– “There are always alternatives. Doing nothing like Hoover wanted to do, was a solution. However, this could have led to a nation-wide revolt. Although this path would have been very messy and difficult, it could have led to more immediate results. Roosevelt, however, did a good job of restoring faith and hope to the American public. This was essential to overcoming the Great Depression without serious consequences. I agree with the way that Roosevelt handled the New Deal/the G. Depression. It gave people the illusion of being greatly helped….” - Mr. Johnson

•FDR’s main contribution? restoring confidence to American people re. banking system – & economy at large (e.g. FDIC (created 1933), Bank Holiday, Fireside Chats, etc.)

–→ REMEMBER: there is a psychological component to economic downturns, and FDR helped to reduce people’s worries/concerns.

FDR’s first Fireside Chat via youtube: fdr fireside chat 1 banking crisis

I never saw him—but I knew him. Can you have forgotten how, with his voice, he came into our house, the President of these United States, calling us friends..."—Carl Carmer, April 14, 1945 (quoted on Museum of Broadcast Comctns. website)

•We live in an era of instantaneous and constant communications, yet many of our political leaders seem to have lost the ability to express their ideas to the people they govern. Franklin Roosevelt not only knew how to do that, he elevated the task to that of an art. Many historians, critics as well as supporters, credit the success of much of the early New Deal as much to the delivery of the messages as to their content.•What was it about FDR's voice, the structure of his Fireside Chats, and the relative novelty of radio in 1933 that made his use of this medium so effective and important historically? Why were Americans willing to engage with this unseen but clearly heard man? What can we learn from this example of presidential leadership?

Again, what finally ended the GD – after

approximately 12 years?• America’s entry into

WWII– production ↑– unemployment ↓– American

factories/contractors flooded w/ orders from U.S. military…• Paid for via

stimulus spending from fed. gov.

Effects/legacy of the GD?

1. ...whether true or not, it fuelled perception that capitalism = unstable, unreliable, in need of more govnt intervention

2. new mindset emerged → fed govnt is responsible for solving people’s problems– A break from the laissez-faire mentality and the

absolute mindset of self-reliance.– These ideas → catalyst for huge, post-Depression

Era growth of govt. in Europe & U.S.

So, what about the Great Recession of 2008?• Who caused it??

• Answer: EVERYONE (Don’t listen to the mainstream media!)– Presidents Clinton, Bush, Bush, Carter, et al (govnt

housing legislation, deficit spending at the wrong time, etc.)

– Countries: China, Japan, South Korea (stopped buying U.S. treasury bonds (which U.S. govnt sells to raise money to pay off its debt)

– Private investors (who play the stock market)– Fed. Chairmen Greenspan, Bernanke (lowered interest

rates too much)– Individual households (over-speculation: living beyond

means - e.g. credit card debt, HELC loans, stocks)– Companies (mass production/low profits, etc.)

– It is the collective culpability of all these participants that has caused this recession. It’s not the sole fault of any one entity. If just one of these had happened, no recession – but they all occurred…and at the same time.

Lesson Learned?

Households/people, government, and companies need to manage their

financial affairs responsibly so that when the bubble bursts – and it will

as history (the natural business cycle) has proven – they can weather

the economic storm much better.- Lesson: have savings set aside for

emergencies!

The Stimulus Package:• From Dr. DeBoer:

– “It’s not that a deficit is so bad; it’s the deficit relative to how rapidly the economy is growing that is always the issue.”

– “Timing is crucial!”… “I would have been much more enthusiastic about this stimulus package a year ago.”

– This recession began in Dec. ’07, this stimulus money won’t be spent until Sept./Oct. of this year (’09). By that time, it could be too late since the window has most likely already passed (2008).• Meaning…the economy will have already started to

correct itself (so this money could be wasted).• And the waiting could cause inflation.

Which method is better for replenishing economic prosperity…a

monetary or fiscal approach?• “It depends!” – the answer to all economic ?s…• History of economies in capitalist societies, that

experienced downturns (circa 1700-1900), all recovered by leaving the market alone (but not without consequence, of course)

• Does that mean we should always let downturns fix themselves? No, not necessarily.

• On the other hand, Keynesian economics has worked, too (e.g. massive deficit spending during WWII). – Also, if a government is going to be economically

interventionist, timing is everything!

Sources?• Mr. Johnson’s AP U.S. history lecture

notes - & brain • “The Great Recession” Lecture Notes,

Dr. Dale DeBoer – CUCS economics professor

• The American Pageant• writings & interviews by Dr. David M.

Kennedy – U.S. History professor, Stanford University (retired)– e.g. Freedom From Fear…