Transcript Crash & Depression

The
Great Crash
and
The
Great Depression
(Chapter 25 is a must Read!!!)
• In 1929, Yale University economist Irving
Fisher:
“The nation is marching along a
permanently high plateau of prosperity.”
5 days later the bottom fell out of the market.
It ushered in the Great depression and the worst
economic downturn in American History.
Optimism and Prosperity
• 1928—there was great optimism and
confidence in the economy—the Boom was
on!!
• No reason to believe that America’s time had
not finally arrived—we were the top of the
heap.
• Hoover stated: “We in America today are
nearer to the final triumph over poverty than
ever before in the history of any land. The
Poor house is vanishing from among us.”
Optimism and Prosperity
• Everyone believed him;
• The NYT “It has been 12
months of unprecedented
advance, of wonderful
prosperity … [we’re in
the money] …”
• John Jacob Raskob, CEO
of GM and DNC
chairman published an
Op-ed piece
• “Everybody ought to be
rich.”
Optimism and Prosperity
• Raskob went so far as to
publish an article in the
Ladies Home Journal
• Every American could be
rich within a few years if they
only invested $15 per week in
Common Stocks.
• He failed to realize that
most Americans only made
between $17 and $22 per
week. (the lucky ones).
Bull Market
• 1) Rising Stock
Dividends;
• 2) Increase in Personal
Savings;
• 3) Easy Money Policy;
• 4) Over invested and
over production; for
futures production;
• 5) Lack of Stock market
regulation;
• 6) Psychology of
Consumption
The Crash
• Many economists looked to
the market as an economic
health indicator;
• Sept. 1929 Market prices
fluctuated;
• Stock prices and market
valuation was
disproportionately out of line
with true liquid value;
• GDP and GNP was falling
even though stock prices
were steadily rising.
• October 24, 1929 is referred to as “Black
Thursday” Panic ensued as people watched
stocks fall drastically—began dumping adding
to the panic;
• JP Morgan and others bought up worthless
stock to ease the panic; Friday 25th Morgan
maintained a stable market; however, no one
came out and reassured the people—so on
Monday 28th John “Q” Public again began a
selling frenzy;
• Tuesday Oct 29, 1929, it crashed down around
everyone, “Black Tuesday.”
• Many used the market as a
health indicator of the
economy, many viewed
everything as lost and prices
continued to fall;
• November 13th 1929, the
market had lost $30 billion
dollars;
• Still some optimism
persisted: JD Rockefeller,
• “Depressions have come and
gone—prosperity will return
…”
• Music summed up the
mood of the times:
• 1930: “Happy Days Are
Here Again.”
• 1931: “I’ve Got Five
Dollars.”
• 1932: “Brother, Can
You Spare A Dime.”
• GDP dropped from $90
billion to $40 Billion.
The Depression
• President Hoover chose
to call this economic
downturn a Depression;
• He did this because in
American History
downturns as bad as this
was usually referred to
as a “Panic” such as the
“Panic of 1837, 73 and
93”
• Wanted to avoid a panic.
• Unfortunately the economic issues exacerbated
some already perplexing social issues:
• Unemployment and Poverty
• Family disintegration
• Soaring High School drop out rate (4million)
• Homelessness
• Organized protests
• “Hoovervilles” dotted the landscape
• Farmers physically fought foreclosures
• The Bonus Expeditionary Force (WWI
Veterans)
• (They were protesting Unpaid Pensions)
Images of Depression
• Bread and Soup Lines;
• Hoboes Hopping
Freight Trains;
• College Grads as Gas
Station Attendants;
• Increased rates of
suicide[14 to17 per
100,000]; Mental Illness
on the increase;
• Businessmen selling
pencils or apples;
• “Okies” [dustbowl]
• These stereotypes fit only a small percentage of
the people; long-term unemployment and
everyday dismal economics and hopes was
more troubling.
• Two basic economic facts soured the lives of
everyday Americans (it was a global
depression after all): 1) Unemployment
2) Inability to sell goods and services
• In FDRs inaugural address, he stated:
• “Let’s be frank. You and I know that
immediate relief of the unemployed is the
immediate need of the hour.”
• Getting people back to work was tantamount
to any other government initiative.
• To buy and sell, one needed a consumer base
and without a job, there was no consumer base.
Dust Bowl and “Okies”
• Great Depression hit farmers
the hardest, at least in the
midwest and South;
• Low crop prices wiped out
profits;
• A great drought created a
‘Dustbowl’ due to over
farming; grazing, and
drought
• But many farmers stayed
put, because at least they
could eat
• 1/3 of Americans fell below the poverty line;
• Some industries made a profit—for instance the
automobile and cigarettes, and the movies;
• It was called Escapism—at least one could go
for a drive, have a smoke or go to the Movies to
forget for a little while.
• Humorist Will Rogers stated, “We’re the first
nation in the history of the world to go to the
poorhouse in an automobile.”
Franklin Delano Roosevelt
• FDR promised a New Deal;
also promised Relief,
Recovery, and Reform—
• The election of 1932: Hoover
stated, “this … is a contest
between … two philosophies
of government.”
• We have also been taught
that FDR swooped in to save
America!!
What Did FDR Stand For?
• Strong stand on public
power;
• A reduction of federal
expenses;
• A balanced budget.
• Defined himself:
•
•
•
•
Democrat with a capital “D”
Christian with capital “C”
Wilsonian internationally
Gentleman
• FDR needed to be liked; he was charming and
manipulative; he also was very charismatic, dynamic
and used modern mediums to get his message to the
people;
• Accepted his own limitations and surrounded himself
with “The Brain Trust.” Very forward thinking in
terms of gender—Frances Perkins was first female
cabinet member—very evasive, however, when
confronted with Race;
• Very pragmatic, not idealist or an intellectual—very
political savvy—seemed to know what would work
and what wouldn’t work with the people … good pulse
of the popular will and expectations.
• Day after inauguration, rather than nationalize the
banks as many liberals wanted, he enforced a “Bank
Holiday.”
• Inspectors would determine the legitimacy of
solvency—those found lacking would not reopen.
• Only a very few were actually inspected, many others
were closed—however, it gave the public confidence
that FDR was looking out for their best interest –they
trusted him immediately! People began placing their
money in banks again.
First 100 Days
• Convened Congress in special session;
launched the New Deal; The President was
now the legislative leader not congress.
• Mostly what he did was set up new
governmental agencies and oversight boards—
The government would oversee Relief,
Recovery and Reform.
• Any ailing business conformed or they
received no stimulus money or government
bailouts.
“Alphabet Soup”
• Agriculture Adjustment Act (AAA)—designed to
stabilize prices and limit overproduction; first time
farmers were ever paid not to plant crops. U.S.
Supreme Court eventually ruled this act
unconstitutional by an invasion of private property
rights;
• Civilian Conservation Corps (CCC)—a public works
project, under the control of the Army; designed to
promote environmental conservation and get the
young off the street corners and into the world (trees,
lakes, dams, bridges, cleared beaches and camp
grounds—fed the workers and paid them a stipend)
• Tennessee Valley Authority (TVA)—the most
ambitious and controversial; built dams and power
plants along the Tennessee River; brought electricity
to millions of people and provided jobs, however, it
destroyed communities, farms, and small towns all
along the route.
• National Industrial Recovery Act (NIRA);
(established the National Recovery Administration)
designed to stimulate production and competition—it
eliminated anti-trust legislation, but also collective
bargaining—regulate output, prices, and trade—very
controversial because it restricted free trade--
NIRA
• Whether radical or conservative—NIRA failed
for three reasons:
• 1) assumed businesses would police
themselves; most of the codes and regulations
were drawn up by big business—so small
business suffered;
• 2) did not respect collective bargaining;
• 3) tried to stabilize prices by reducing
production.
• FDR tried to be an “Honest Broker.” One who
could negotiate among all competing interests;
• The Executive would take the lead in coercing
business and community to follow his lead;
• 2 Inherent flaws with “Honest Brokerism:”
• 1) Presidents lose influence the longer they are
in office;
• 2) Strong political interest and lobbying groups
can influence even a strong executive.
• The New Deal can roughly be divided into two
periods:
• 1) The First New Deal (1933-1935)—mostly
characterized by Relief of immediate problems
such as unemployment;
• 2) The Second New Deal (1935-1937)—
characterized by Reform—fundamental
reform of society—not just economic issues.
• Did it fail or succeed?
Blame
•
•
•
•
America blamed the 3 “Bs”
Bankers
Brokers
Businessmen
• Other indicators that should
have been picked up on—
artificial money and
abnormally low interest rates
and easy money—the
Florida land boom/Bust—no
one seemed to believe it
could get real bad.
How Did This Happen?
• We have been taught that “wild cat
speculation,” “unregulated big business,”
“capitalist greed,” and that “Hoover was inept
and did nothing to spark a stimulus,” and that
FDR “provided hope and recovery,” But that
in reality, it was WWII that finally pulled
America from the deep economic doldrums of
depression.
• “Historians are not economists and Economists
are not historians” (Murphy, R., 2009). There must
be a better explanation.
• Regardless of one’s economic theory, the
Milton Friedman Chicago School of
Economics—low interest rates and cut taxes
and capitalist oriented or Paul Krugman and
his School of Keynesian (liberal deficit
spending) Economics; both are Nobel
Laureates.
• Both were wrong when it came to interpreting
the Great Crash of 1929 … at least according
to Strickland a simple Math and History
teacher …
• Milton Friedman, rather than blaming Hoover and
capitalism as did Paul Krugman, suggests that it was
the fault of the federal reserve by letting the supply of
money collapse. Simply, inept and incompetent
bureaucrats caused the depression—which is why
Bernanke, a Friedman disciple, made sure there was
plenty of money in the federal reserve by printing
much and reducing interest rates to zero.
• business cycles are determined primarily by
money supply and interest rates rather than
government fiscal policy.
•
• Several Economic Historians point to the following:
• 1) Unequal distribution of wealth—1% of the
population at the top; this suggests that the very
wealthy must invest and continue luxury spending;
when the market crashed both investment and
spending came to an abrupt halt
• 2) Unequal distribution of corporate power: huge
corporation had consumed most middle and small
businesses—the largest corporations controlled over
50% of the nations wealth—so the few that went
under seriously hurt the GDP and GNP
• 3) Banking Structures—no federal restrictions or
uniformed guidelines in spending, investing and
borrowing—no insurance for depositors;
• 4) Foreign Debt—U.S. a creditor nation. The US
insisted on repayment in Gold Bullion. This means
debtor nations had no money to repay their debts—
the tariff was very protectionist (Smoot-Hawley) so
there were no foreign goods coming into the US and
the US had no outlet for its over produced goods
• 5) Poor Economic intelligence—believed in a selfregulating economy; Hoover remained on the GoldStandard; demanded a balance budget etc …
Who was to Blame, Truly?
• Let’s look at this purely from an historical
point of view (no axe to grind).
• Hoover did nothing! (really)—he actually
spent exorbitant sums on public works. He was
in fact excoriated by FDR when on the
campaign trail—accused of spending too
much, when what was needed was a
contraction and balanced budget.
• When in fact bigger government by Hoover
aided the crash—FDR made it worse!
• It has been argued that the cause of the Depression
was due to Hoover’s heartless budget cuts and trying
to balance the budget during such an economic
downturn.
• The reality was Hoover increased massively
government spending creating a deficit of $2.6 billion
because of a public spending plan of $4.6 billion trying
to bolster the economy.
• In today’s terms, that would be akin to Bush running
a $3.3 trillion deficit compared to his actual $162
billion deficit—so Hoover was the model Keynesian
Economist.
• It is true he tried to trim it some and reduce
some of the deficit, but this was after he saw
that these policies were not working very well—
essentially Keynes’ model failed miserably—by
the time Hoover abandoned this policy,
unemployment was at 20%.
• But Krugman as Hoover and Roosevelt missed
the obvious explanation that the unprecedented
federal interventions to fight the depression
were the actual cause of the unprecedented
depression and ensured its severity and
longevity.
• There was precedent; end of WWI America
faced a huge depression. Rather than increase
government spending or forcing wage and price
controls, Pres. Wilson slashed the budget by
$12 billion.
• Moreover, as receipts continued to fall, Wilson
slashed spending further by 34% during a
deepening depression (Keynes’ nightmare)
unemployment peaked at 11.7% in 1921. The
depression was over by 1922-23 and
unemployment was at 2.4%.
• Paul Krugman gives the
impression that
Hoover’s heartless
budget cuts created the
depression—
• Funny he doesn’t
mention that Hoover
also raised taxes. 45%
of deficit decrease was
due to budget cuts, the
remaining 55% was due
to an increase in taxes.
• Unemployment jumped to 8.9% in 1930—if
the stimulus by Hoover isn’t passed then it will
get worse (heard that before), well
unemployment again jumped 16% in 1931
(stimulus did not work); in fact unemployment
jumped to 23% in 1932, and FDRs immediate
spending spree to create stimulus forced
unemployment to 25%.
• Between 1929 and 1934 production continued
to freefall on annual of 27%, by 1933
unemployment broke 28%. Joblessness,
massive reduction in GDP also accompanied
massive Bank failures—depositors by 1933 lost
$1.3 billion. The craziness was that while much
of the population hovered on the brink of
starvation, massive quantities of food and
livestock were deliberately destroyed to fatten
profits.
• FDRs initial influx of alphabet projects created a
small up tick and did give many people confidence.
As with any stimulus there is a small gain, but the
artificiality of it always fails to achieve what it
promises. It was the same with the New Deal.
Unemployment did fall and some people went back to
work and the GNP seemed to be on the rise. People
felt good again. But make-work projects are
temporary and soon the economy receded and again
unemployment shot up. By 1935 it seemed things were
getting better—unemployment still at 10%, but by
1938 unemployment shot back up to above 19%. Just
before the WWII crisis unemployment broke 20%.
• The Keynesians and the Friedmanites both
argue that without implementing their policies
such as deficit spending and slashed reserve
rates to increase the money supply the
depression could have been worse; really. Why
then has there been such panics and
depressions before but they recovered in 2 to 5
years without all this governmental
interference? Moreover the 1930s lasted many
more years and with much more intensity.
Conclusion
• In fact it was only when the government and
the Federal Reserve rolled up their sleeve and
really went to work to fight the downturn that
things really got very worse. The government
caused the depression, the New Deal prolonged
the misery, and WWII hurt the private sector
and individual entrepreneurship and the
overall health of the economy that would not
heal until the private sector boom of the 1950s.