Money & Banking

Week 6- day 1
The Great Depression - 1929

https://www.youtube.com/watch?v=Sv7IP2qL0
gg

The Great Depression in 1 minute

The Great Depression - 1929
Video on Moodle
• In your own time, please see the video on Moodle
on the Great Depression, describes a lot of details
and clarifies many point regarding the topic.

• Time of prosperity & buying on credit

• https://www.youtube.com/watch?v=qlSxPouPCIM
• Minutes 3.39-5:35
 A bit of History
• World War I 1914-1918
• Post World War I technology
developed:
• Refrigerators
• Cars
• Planes
• After WWI was a time of prosperity
 A bit of History
• The beginning of buying on credit …

• “In fact, credit was used in the purchases of up to 90% of

major durable goods by the end of the 1920s.  Average
purchases of major durable goods rose from 3.7% of
disposable income between 1898 and 1916 to 7.2%
between 1922 and 1929. Accompanying this rise in
purchases of durables was a drop in the personal savings
rate, from 6.4% of disposable income in the former
period to 3.8% in the latter.”

Source: http://www.dailykos.com/story/2008/1/14/436037/-
The Great Depression - 1929
• US started the idea of selling Liberty bonds to
pay for the war – used Charlie Chaplin and
others to promote this
Era of Investments
• Wall St. saw this opportunity and started selling
bonds and stocks, everyone started investing.
(Started with Citibank).
• Brokers were providing buying on margin up to
90% !!!! – no government regulations then
• The government was based on capitalism:
laissez-faire
Era of Investments
• Women were
allowed to invest

• 1928: In 12
months stocks
went up by 25%
1929
• March 1929 – Hoover becomes President of
the USA, feels eerie about the market but does
nothing.
• Bankers and other investors were collaborating
putting through buy orders and selling –
manipulating the market
• 23 Oct 1929 – Wed – Stock Market starts to
plummet and panic erupts
Video of the crash
• https://www.youtube.com/watch?v=qlSxPouPC
IM

• Hoover 23:10-24:51
• Crash starts 26:40
The beginning of the Great Depression
1925 – start of era of housing bubble
1928 – era of stock price boom – déjà vu?
Homeless boy sleeping in a box in
Seattle
Homes made from boxes, these slumps were called Hooverville named for President Hoover
 Children waiting in soup lines to get soup
donated by charities, many families starved and
suffered from malnutrition
Many lost their life savings slept on the streets and
many committed suicide
1931
• Bank runs and Bank panics (look at figure 12.5
page 358 in your textbook)
• Over 2000 banks failed and closed
• There were no deposit guarantees
• No reserve requirements
• People kept their money under the mattress
• Lost faith in the financial system
1931
A bit of History
1932
FDR

https://www.youtube.com/watch?v=qlSxPouPCIM

Minute 51.00-54.39
Roosevelt to restore confidence in Banking
• Regulated the financial system
• Ended speculation
• Guaranteed deposits (FDIC)
• Strict government supervision
• Investigation into the crash which ended with
findings of fraud and jail terms
• SEC was set up to clean Wall Street
• ‘Too-big-to- fail policy’ idea initiated – more
formalized in the 1980s
• Lender of last resort
What year was Monopoly invented?
Great Depression Policies
• What policies that came about because of the
Great Depression that ended with the financial
crisis of 2007?

• What key provisions did the 2007 crisis

introduce? (p.372-373)

• What similarities do you find between the

Great Depression and the Financial Crisis?
What similarities do you find between the Great Depression and the
Financial Crisis?

• Panic, liquidity, cheap money (low interest rate),

margin, investing blindly (not knowledgeable –
naive investors) causing bubbles
• 1929- oversupply of commodities and stocks
bought on credit (90% on margin)
• 2007- oversupply of real estate and MBS/stock
bought on credit (also at times with no down
payment and to sub-prime), overleverage.
• Bank’s lack of transparency, greed, bonuses
Book Question
• 2.1-2.4 p. 378
• 2.7-2.10

• What is debt deflation?

• What is systematic risk?

Debt Deflation
• A situation in which the collateral used to
secure a loan (or another form of debt)
decreases in value. This can be detrimental
because it may lead to a restructuring of the
loan agreement or the loan itself.
Systematic Risk
• The risk inherent to the entire market or an entire 
market segment. Systematic risk, also known as
“undiversifiable risk,” “volatility” or “market risk,”
affects the overall market, not just a particular stock or
industry. This type of risk is both unpredictable and
impossible to completely avoid. It cannot be mitigated
through diversification, only through hedging or by
using the right asset allocation strategy.