The Great Crash and Great Depression

(1929-1932)
- The GSMC occurred in 1929. The GD hit the US in 1932 and last for about 10 years.

 Definitions of "crash" and "depression"

Crash

- A crash is a sudden and drastic drop in stock prices. (Stocks are the shares that people own in a
particular company.) The US stock market is the beating heart of American capitalism.

- The crash can take place over a matter of hours or days.

Depression

- A depression is a sustained and long-term downturn in economic activity.

- It is a more severe economic downturn than a recession, which is a slowdown in economic activity over
the course of a normal business cycle. A depression is an unusual and extreme form of recession.

Relationship between GSMC and GD

- Was there a relationship between the GSMC and the GD? There was.

- The statement that the GSMC caused the GD is an oversimplification. The GSMC of 1929 was one of
the causes of the GD. It was a trigger that set things in motion leading to the GD.

The Great Crash of 1929

 Causes

- There were some cracks and weaknesses in the US' economic and financial systems, most notably the
stock market, which would help bring about the crash.

- What actually caused the crash came down to Americans speculating wildly in the US stock market
throughout the 1920s.

- Speculating in the stock market is where shares are bought in the hopes that they gain value so that
they can then be sold for a profit. Wild speculation is speculation done with huge sums of cash and with
a lot of risk.
- The wild speculation was being caused by something known as buying stock on "margin," which is the
purchase of stocks by borrowing from a bank or stock broker. (The loan to the bank or broker is paid
back with the profits reaped as the stock rises in value.) The "margin" refers to percent of the investor's
own money with respect to the total value of stock purchased.

- This can still be done today. But in the 1920s, the margin was set very low (as required by the financial
regulatory authorities). It meant that more Americans could invest in the stock market, and they could
do so with huge sums of money.

- The money that the banks were riskily lending to the stock market investors was public money kept in
savings accounts in banks.

- Throughout the 1920s, as investors bought large amounts of stocks, they depleted its availability, and
so the prices of stocks rose. Usually, the value of stocks of a company in the stock market depends on
how well the company is doing in the economy. But in the 1920s, the value of the entire stock market
was being inflated based simply on how much money was being pumped into it. And so a bubble was
essentially created in the stock market.

- This system was fine when the value of the stocks was stable and increasing. But by 1929, a lot of
people that had invested in the stock market began to recognize the danger of a bubble. They stood to
lose a lot of money if they didn't get out of the market soon. So they began to sell their stocks at once.
This made the stocks more readily available and hence more cheap. This happens all the time, but the
problem happens when everyone begins to sell their stock. The tumble in stock prices made all the stock
owners apprehensive, and so all the people started to sell their stocks. This vicious cycle of the prices
falling and more people selling their stocks for whatever they could is how the crash happened.
Beginning on October 24th and lasting for four days, the GSMC of 1929 occurred. It was a run by
everybody that was invested in the stock market.

 How bad was it?

- Over the course of the Great Crash (October 24-29, 1929), the stock market lost an estimated $30
billion. (Today, that would be $300 billion.)

- On October 29, 1929 (the worst day of the crash), the stock market lost an estimate $14 billion. (Today,
that would be $199 billion.)

- The US lost more money in the Great Crash than the amount it spent to wage the Great War.

 How did it affect the national economy?

- The crash sent ripples through the national economy of the US.

- Many people lost everything they had in the stock market.

- People who had saved money in their banks lost all their money because the banks had lent this money
out.
- Many US companies became bankrupt as their owners lost money in the crash. They had to shut shop
and fire employees.

- No one was immune from the effects of the crash.

- As the initial panic of the crash subsided, things got worse in 1932 as the Great Depression hit the US.

The Great Depression

- The GD was the worst economic calamity in American history.

 Some causes of the Great Depression

 The GSMC of 1929
 Production and purchasing divergence
o Throughout the 1920s, production and purchasing market forces in the US diverged
from one another.
o I.e., production of goods and products in the US increased while at the same time the
purchasing of these goods decreased.
o These two market forces need to stay relatively close to one another. Otherwise,
companies end up laying off workers, and the whole situation becomes a self-defeating
death spiral.
o Why was the manufacturing output increasing in the 1920s? The output was increasing
because of new technological innovations through R&D. New and more efficient ways to
produce products were being determined. One example of technological innovation was
the assembly line developed by Henry Ford. Thus, products became cheaper and easier
to make. Industrial productivity in the US increased 43% in the 1920s.
o Why did purchasing decline in the late 1920s?
o Firstly, for years, the owners of US companies didn't increase the wages of their
workers. A lot of it was out of greed. But another reason was that the real wage of the
workers increased, so the owners didn't feel the need to increase the nominal wages as
well. As wages stagnated, American workers didn't have a lot of money in their pockets.
Hence, they couldn't buy all the goods and products being produced at an ever-
increasing rate.
o Secondly, the purchasing of goods declined due to the farm depression of the 1920s. As
a result, farmers lost their purchasing power, which contributed to the overall decline in
purchasing power of the US consumers.
o Thirdly, during the 1920s, the US had a slightly higher than normal unemployment rate.
A normal unemployment rate is around 3 to 4 percent. But in the 1920s, the US had an
unemployment rate of about 5 to 6 percent. When more than the normal amount of
people don't have jobs, consumption of goods and products naturally declines.
 o Lastly, in 1930, US Senators Reed Smoot and Willis Hawley authored and introduced the
Smoot-Hawley Tariff, which imposed the highest protective tariffs in American history.
The tariff was meant to force the American consumers to buy locally produced goods
and products to boost consumption. But the tariff ended up adversely affecting the US
economy since the foreign countries affected by the tariffs responded with their own
tariffs on American goods. Any vacuum in local purchasing of US produced goods could
not be compensated then by selling these goods to foreign consumers. This also
contributed to the purchasing of goods and products declining in the late 1920s.
 Policies of the federal and state governments
o Both the federal and state governments made things worse.
o Shifting tax policies during the GD. The government can stimulate the economy using
tax policies. It can either provide tax cuts to wealthy business owners, allowing them to
hire more workers and hence put money in the worker's pockets. Or it can tax the
wealthy business owners more and divert the money to the poor unemployed people.
At the onset of the GD, the US federal government decided to implement the first
policy. But when it felt that the policy wasn't working, it switched to the latter policy.
This shifting tax policy contributed to the problems by muddling the economy.
o Refused to intervene in the stock market. For years, there was wild speculation going on
in the US stock market. But the federal government refused to pay heed to any warnings
and to intervene in the stock market. The federal government refused to intervene
because there was no precedent of doing this. People in the federal government were
still very much committed to the laissez-faire attitude towards the national economy. It
is possible that had the federal government intervened, it might have been able to
soften the blow of the crash.
o Refused to intervene in the farm depression. Farmers got hit with a depression 10 years
earlier than whole country, and the federal government just refused to intervene in it.
The farm depression contributed to the American's loss of purchasing power. The
federal government didn't intervene because of the prevalent laissez-faire attitude and
because there was no precedent (same as with GSMC of 1929).
o Ardent belief in a balanced budget. For a long time in American history, both political
parties believed in what is called a balanced budget(i.e., revenue equal to expenditure).
By refusing to spend beyond the budget, the federal government failed to undertake
measures to stimulate the economy (measures that would have required money) that
could have soften the blow of the GD.

 Extent of the Great Depression

- During the GD, 100,000 companies declared bankruptcy. They shut shop and fired hundreds of
thousands of workers.
- From 1929 to 1932, 4300 banks went bankrupt (mostly because of the GSMC of 1929). Individuals and
companies which owed the banks money couldn't pay back the loans. Public money in these banks was
gone. Today, the public money in private banks is insured by the federal government. But it was not at
that time.

- At the height of the GD, unemployment was 20 percent (highest ever in American history). The people
who were employed had to take pay cuts.

- In 1929 right before the whole economy collapsed, the national income for the US was $82 billion. By
1932, the national income was $40 billion.

 Federal response to the Great Depression

- The federal response to the onset of the GD and the collapse of the economy fell on the shoulders of
the president of the US, who at the time was Herbert Hoover. He was the 31st president of the US from
1929 to 1933.

 Voluntary aid of businesses and labor unions. The president requested the business leaders and
the labor unions to help each other out and go easy on one another. Towards the labor union,
the president requested to stop asking for higher wages and to stop putting a lot of demands on
the employers. When it came to the business owners, the president asked them to voluntarily
help the workers out.
 Some increases in federal budgetary spending. A lot of the things that Hoover liked to spend
federal money on while in office were public works projects (highways, canals, dam,
government buildings, etc.). The idea behind public works projects was that the federal
government would spend money beyond the budget to hire people to provide materials for the
projects and to build the projects. The idea was to provide short-term relief by putting money
into the pockets of the American people. And not only did the projects provide relief for the
public but the country also benefited from them.
 Federal loans to struggling state governments. As the economy began to collapse, the people
didn't have any money, and tax revenues began to dry up for a lot of the state governments.
Some states became embroiled in very hard financial times and began to struggle on the brink
of bankruptcy. So the federal government under Hoover extended loans to some of these
struggling state governments. Again, this was Hoover spending money beyond the budget, but
this time on federal loans.
 Reconstruction Finance Corporation. Perhaps the most iconic way in which President Hoover
responded to the onset of the GD was through something called the Reconstruction Finance
Corporation. The RFC was how Hoover envisioned creating long-term employment and putting
money permanently into the pockets of the American people in the hopes that it would kick-
start the national economy. The federal government under the RFC would put large deposits in
the federal district banks spread around the country. The federal district banks would then be
directed to make loans to American corporations and businesses of good repute in trouble. This
would allow these corporations and businesses to stay afloat and keep their employees hired.
 The idea was that the money would trickle from these corporations into the pockets of the
American labor force. The RFC created a trickle down approach in the economy rather than
diverting federal funds straight into the pockets of the American people. Hoover and the
Republican Party believed that the best way to create job growth would be through stimulating
corporations and businesses. The plan didn't exactly work out as intended because the federal
banks were hesitant to loan the money to corporations, and the corporations that did get
loaned the money were hesitant to spend it.

- Hoover deserves the credit for creating new ways to use the power and money of the federal
government to fight economic situations. However, in the end, it was simply not enough action and
spending to stave off the GD. The American people would probably not have let him go any further
anyways. The Americans weren't willing to do more at the onset of the GD until things got significantly
worse.