Transcript Analyzing Curriculum Reform

Whatdunnit? The Great
Depression Mystery
Lesson 30
Presented by Dr. Norman Cloutier
Director, UW-Parkside Center for Economic Education
Wisconsin Council for the Social Studies
March 15, 2010
Whatdunnit?
In the 1920s …
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Jobs were plentiful.
Incomes were rising.
Home and car ownership
increased.
60% of all households had
cars, up from 26%.
More teenagers were
attending high school.
Whatdunnit?
By 1933…
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Unemployment= 25%.
Families were losing
their homes.
Many people were going
hungry.
Children dropped out of
school to look for work.
What happened?
• The US possessed the same productive resources
in the 1930s as it had in the 1920s.
• Factories and productive machinery were still
present.
• Workers had the same skills and were willing to
work just as hard.
• How could life have become so miserable for
so many in such a short period of time?
1920s

Prosperity of the
1920s was based
largely on purchases
of homes and cars.

For the first time,
large numbers of
consumers made
purchases on
installment plans.
The Multiplier at Work
• Consumer demand created jobs for workers
who produced cars and homes.
• One person’s spending is another’s income.
• Increased employment
• Increased income
• Increased consumer demand
• Increased employment
• Increased income . . .
End of the 1920s

Toward the end of
the decade
businesses overproduced durable
goods.
 As sales began to
decline,
unemployment
increased.
The Multiplier in Reverse
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Machinery workers stand.
Car sales people stand.
Auto workers stand.
Steel workers stand.
Construction workers stand.
Furniture sellers stand.
Furniture workers stand.
Clothing sellers stand.
Restaurant workers stand.
Grocery workers stand.
The Business Cycle

Normally, people start buying again as
durable goods wear out and prices
decline.
The Business Cycle
In a Normal Recovery
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Machinery workers sit.
Car sales people sit.
Auto workers sit.
Steel workers sit.
Construction workers sit.
Furniture sellers sit.
Furniture workers sit.
Clothing sellers sit.
Restaurant and grocery
workers sit.
Grocery workers sit.
No Normal Recovery
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… but this was no normal recovery.

Stock market crash of October 1929 further decreased
demand.

Banks began to fail in record numbers as businesses
defaulted on loans.

As banks failed, and depositors lost money, the
money supply declined.
Bank Failures Increased
Year
Number of Bank Closings
1920
168
1921
505
1922
367
1923
646
1924
775
1925
618
1926
976
1927
669
1928
499
1929
659
1930
1,352
1931
2,294
1932
1,456
1933
4,004
Money in Circulation Declined
Year
Money in
Circulation*
1929
$26.2
1930
$25.1
1931
$23.5
1932
$20.2
1933
$19.2
*Currency plus bank deposits, in billions of dollars.
The Gold Standard and the Fed
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The Federal Reserve Act of 1913 established the Fed
as the “lender of last resort.”
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The U.S. and other major industrialized countries
were on the gold standard.
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Currency conversion to gold.
International transmission of financial crises.
The Fed found itself in a policy dilemma of taking
action to (1) save failing banks, or (2) protect the U.S.
dollar.
Supporting the U.S. dollar
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Supporting the dollar would require
tight monetary policy.
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Tight monetary policy involves the Fed:
Increasing interest rates.
 Increasing the reserve requirement.
 Selling government bonds.
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Saving the Banking Sector
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Helping the troubled banking sector
would require loose monetary policy.
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Loose monetary policy involves:
Decreasing interest rates.
 Decreasing the reserve requirement.
 Buying government bonds.
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The world financial system that emerged after WWI was
based upon the gold standard. The United States and
Great Britain guaranteed that they would exchange
their currencies for gold at a fixed rate ($20.67) for an
ounce of gold.
Other major countries agreed to exchange their
currencies for gold, US dollars or British pounds.
In 1927, several countries, most notably Germany and
Austria, experienced serious bank runs. To stabilize
their currencies, they exchanged their dollars and
pounds for gold. The United States experienced a
serious loss of gold.
To encourage foreign investors to buy American
investments, the Federal Reserve Banks raised
interest rates.
What Would You Have Done?
A) If you were an American business
owner planning to build a new factory or
buy new equipment, what would you
have done after interest rates were
increased?
What was the Result?
The Federal Reserve lowered interest rates after a time,
but in 1930 and 1931, when the American economy
had already taken a downturn, more bank runs
occurred in many countries, and again gold flowed out
of the United States.
To keep gold in the United States, the Federal Reserve
Banks again raised interest rates.
B) What was the result?
What Would You Have Done?
Now imagine that you are an American citizen with a
bank account.
You read the newspapers. You see that banks are
collapsing in other countries and that the rate of bank
failures in the United States has risen.
C) What might you do?
What Would You Have Done?
In 1932 Congress creates the Reconstruction Finance
Corporation (RFC), which lends money to businesses
that are in trouble, including banks.
The law requires that the names of banks receiving loans
from the RFC must be published.
You read in the newspaper that the bank in which your
money is deposited is receiving help from the RFC.
D) What are you likely to do?
Current Fed Policy?
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Has the Federal Reserve under Ben
Bernanke been following a loose or tight
monetary policy?
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Federal Funds Rate is practically zero.
The Federal Reserve Bank has injected
massive liquidity into the banking system
Excess Reserves, billions
800
700
600
500
400
300
200
100
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Conclusion
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Over-production of goods.
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The multiplier in reverse.
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Unemployment caused declines in income, further
decreasing consumer spending.
Federal Reserve Bank policy deepened and prolonged
the Depression.
Resources
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This entire lesson plan can be downloaded
from the Council on Economic Education:
http://ushistory.councilforeconed.org/wlg/

Ben Bernanke lecture on the role of the Fed
during the Great Depression:
http://www.federalreserve.gov/boarddocs/spee
ches/2004/200403022/default.htm