The Great Depression

How the extraordinary economic boom of the 1920s led to the great economic disaster of the 1930s that reshaped the role of government

Alan Greenspan, current architect of The boom and bust of 2001-2008

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Themes and Topics

• Private Enterprise Pro-Business Policies of the Republican Administrations in

the 1920s

Limits of 1920s Prosperity: The Origins of the Stock Market

Crash and Great Depression

Say's Law and the Nature of the Capitalist Trade Cycle

• Role of government Presidential Leadership Style: Herbert Hoover

Herbert Hoover's Response to the Great Depression

• Multiculturalism/Regional Differentiation Deportation of Mexicans during the Great Depression

Central Analytical Questions

• What were the causes of rapid economic growth in the 1920s?

• What were the sources of instability and weakness in the 1920s economy?

• Why did the stock market become a speculative bubble?

• How did the crash of the stock market undermine the underlying economy of goods and services?

• How do we assess the failure of the Hoover administration to come to grips with the crisis?

Rapid Economic Growth, 1921-

1929

Nature of 1920s Prosperity

• Productivity and Power

Scientific Management • Ford Motor Company’s moving assembly line

Technological Innovation • Internal Combustion Engine

Electrical Power in industry • 1914-30% electrical power

• 1929-70% electrical power

• Steam engines replaced with electrical motors

Cheap Oil • Petroleum products multiplied 16 times between 1919-1929

Consumer Indebtedness

• Rapid economic growth was supported by a liberal credit policy practiced by the Federal Reserve Banks that meant it was easy for consumers to borrow money cheaply

• Installment purchases at to ease of consumption

Underlying Weaknesses

• Distribution of wealth 42% of all families in 1929 earned less than $1,500 per

year

29% of all families in 1929 earned between $1,500 and $2,500 per year

• Farm sector Overproduction and low prices after 1921

• Mal-investment/excess capacity Paper manufacturing (15%); Clothing (40%); Boot and

shoe (50%); Pig Iron (45%); Glass ware (40%); wheat flour (45%); Textile industry (15% for cotton, 45% for silk)

What Went Wrong I?

Strategic Industry: Autos

• Note the core regional basis of the automobile industry in the Northeast and Mid-west

Stock Market, 1920-1929

• Growth in the value of stocks initially reflected the productivity and profitability of the underlying economy

• But after 1926, growth in the value of stocks reflected speculation rather than the health of the economy

What Went Wrong II?

What Went Wrong III?

Federal Reserve Discount Rate changes With onset of Recession Aug 1927 4% to 3.5% With continued Stock Market boom Aug 1928 3.5% to 5% Oct 1929 5% to 6%

The Evidence of Collapse

Unemployment

• Unemployment had stood at less than 5% in 1929

• By 1932, an estimated 25% of the workforce was out of a job, about 12-14 million workers

• In the core industrial region, cities like Dayton, Ohio faced 80% unemployment

Trouble on the Farms

Management of the International

Economy

• Foreign Debts German inflation

Ruhr seizure by France

• Dawes Plan (1925) Restructured German debt and schedule payments over

a longer period

• Dependence on Private Bankers They financed German debt

• Smoot Hartley Tariff Act 1930 Made it virtually impossible for Europeans to sell

exports to US and therefore pay off debts

Herbert Hoover’s Response

• Hoover’s background

• Initial response Reassuring Banalities

Jawboning

Tariff

Immigration

Cut Taxes

• Second response Public Works

Reconstruction Finance Corporation

Deficit spending

Say’s Law

• How conventional economists interpreted the depression It is a natural and good thing because it purges

the economy of the inefficient and unprofitable

The economy is self-adjusting because it has a tendency toward equilibrium

Say’s law says producers would not produce what consumers would not purchase

Role of Government: don’t mess with self-adjusting mechanisms

What Hoover Would Not Do

• By 1932, major corporate leaders had enough with purging the economy

• They saw the principal problem as overproduction and declining prices

• They called for cutting production and fixing prices

• Hoover labeled this approach the biggest attempt at monopoly in American history

• Business switched support to Franklin D. Roosevelt

Election of 1932

Hoover claimed no President had ever done More to combat a Depression Hoover lost nearly 20 Points off his popular Vote from 1928 Note the poor showing of socialist and communist candidates

Critical Thinking Question

• The Great Depression had market causes and government causes

• Which do you think was more decisive?

Conclusions

• Great Depression reveals continuing instabilities in capitalist system

• Hoover’s response reveals serious flaws in how economics profession understands business cycle under modern conditions