Financial Crises: A Focus on the Great Depression

Transcription

1 Financial Crises: A Focus on the Great Depression

2 Economies can register boom and bust Crises in History: Tulip mania - Netherlands 1637 South Seas Bubble, UK 1720 The Mississippi Bubble, France 1720 Panic of 1819 USA The Long Depression UK, USA, Europe Panic of 1907 Wall Street Crash 1929, Great Depression Oil crisis 1973 (UK IMF in 1976) Savings and Loan Scandal, USA, , US$ 125 bn bailout Japanese asset bubble ? Mexico 1994 Asian financial crisis ( IMF crisis ) Thailand, Indonesia, South Korea, Philippines, Russian financial crisis 1998 Dot-com bubble 2001 Argentina defaults largest debt default in history

3 Background the United States Economy in the 1920 s The United States economy in the 1920 s was very strong The growth of the automobile industry had a positive impact on many other industries Unemployment was low Shorter working hours and higher wages gave Americans more spare time and more money for entertainment

4 U.S. History is nicknamed the Roaring Twenties

5 Life in the 1920s Moving Picture Shows ( movies ) all movies were silent films at first (had music but no talking) -Charlie Chaplin was the most famous silent film star -first talking movie was The Jazz Singer (1927) staring Al Jolston -famous movie stars of the 20s: Rudolph Valentino, Clara Bow, Mary Pickford, Lillian Gish, Charlie Chaplin

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7 Life in the 1920s: The Jazz Age Music / Dance the radio made music more popular -Jazz was the most popular music of the 20s started in New Orleans -Louis Armstrong was the most popular jazz musician of the 20s -George Gershwin was a popular composer wrote Rhapsody in Blue -popular dances included: Charleston, Fox-trot, and Tango

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9 Life in the 1920s Literature famous authors included: -F. Scott Fitzgerald The Great Gatsby -Sinclair Lewis Main Street -Ernest Hemingway A Farewell to Arms

10 Transportation Life in the 1920s *Henry Ford made the 20s happen -responsible for changing the automobile industry by using the assembly line each worker had a specific job million cars on the road million -developed the Model T car

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12 1920s GOOD TIMES ARE HERE TO STAY! Gross National Product went up All economic indicators showed increased prosperity Consumption went up

13 Installment Buying In the 1920 s Americans began buying items they could not afford through the use of installment buying (buying on credit) This increased the demand for goods But it also increased consumers debt

14 Consumer Goods Americans began to purchase large amounts of consumer goods, mostly on credit- Installment Plans Washing machines Radios Vacuum cleaners Refrigerators

15 The Stock Market The strength of the economy led many people to invest in the Stock Market in hopes of becoming rich

16 Buying Stock on Margin People who did not have money to purchase stock could buy stock on margin Banks and stock brokers would loan people money to purchase stock People had to pay back the bank/brokers with interest Simple example with no interest rate

17 Buying Stocks on Margin: Scenario A Hello, sir. I would like to purchase 100 shares of stock in the Ford Motor Company. How much is it going to cost me? investor stock broker

18 Buying Stocks on Margin: Scenario A Well, Ford stock costs $10 per share. You want to buy 100 shares? Figure it out yourself, smart guy! investor stock broker

19 Buying Stocks on Margin: Scenario A Ummm 100 shares x $10 per share = $1, Oh, well. I only have $100. I can t afford 100 shares. investor stock broker

20 Buying Stocks on Margin: Scenario A No, problem! Just give me $100 and you can owe me the rest! investor stock broker

21 Buying Stocks on Margin: Scenario A Like, how much would that be? Let me think $1,000 worth of stock - $100 paid = $900 owed investor Alright, it s a deal!! stock broker

22 Buying Stocks on Margin: Scenario A Six months later, Ford stock doubles to $20 per share. My 100 shares are now worth shares x $20 per share $2,000 investor stock broker

23 Buying Stocks on Margin: Scenario A That s great! Now pay me the $900 you owe me! investor stock broker

24 Buying Stocks on Margin: Scenario A No problemo! It was a pleasure doing business with you! investor stock broker

25 Buying Stocks on Margin: Scenario A Now let s figure out how much money I made! $2,000 net worth - $900 owed $1,100 profit - $100 initial investment investor $1,000 net profit

26 Buying Stocks on Margin: Scenario B Six months later, Ford stock decreases to $1 per share. My 100 shares are now worth shares x $1 per share $100 investor stock broker

27 Buying Stocks on Margin: Scenario B Too bad, hotshot! You still owe me $900! investor stock broker

28 Buying Stocks on Margin: Scenario B But I m broke! What am I going to do! investor stock broker

29 Buying Stocks on Margin: Scenario B I don t care what you do as long as you pay me back! investor stock broker

30 Buying Stock Buying stock on margin can be very fruitful...but you have high risk.and you can register severe losses!

31 Signs of Trouble But the Roaring Twenties weren t roaring for everyone... Although the economy of the 1920 s was very strong signs of trouble began to appear

32 The Roots Causes (Signs of trouble) of the Great Depression 1.) Over-production and underconsumption (failing DEMAND) unemployment 2.) Huge farm surpluses: -led to a drop in farm prices -many farmers lost their farms because no one needed their food The Great Depression 4.) Unequal distribution of wealth 3.) Lack of diversification variety of goods!

33 The Roots Causes of the Great Depression 5.) Credit problems & Stock Market speculation The Great Depression 6.)High Tariffs (Hawley-Smoot Tariff) competition prices of certain goods! 7.) Low Interest Rates (Federal Reserve)

34 Signs of Trouble Overproduction and huge farm surplus: Massive business inventories- --- Increased Supply

35 Effects of Overproduction Farms and factories overproduced beyond the demand. Businesses cut production Demand for goods fell. Workers suffered from wage cuts and lay offs. People had little or no money to spend.

36 Signs of Trouble Lack of diversification in American economy--prosperity of 1920s largely a result of expansion of construction and automobile industries

37 Signs of Trouble Unequal distribution of wealth 1. people were very rich or very poor: 1% of Americans controlled 40% of the wealth in this country 2. 20% of the nation lived in poverty (late 1920s)! 3. Farm income declined 66% from 1920 to 1929

38 Signs of Trouble Huge credit problems 1. Stream of bank failures in late 1920s as customers (many of them farmers) were unable to pay mortgages 2. Many bankers had invested money in the stock market 3. By October 1929, margin buying reached $8.5 billion in loans to stock purchasers 4. Low margins encouraged speculative investment on the part of banks, corporations, and individual investors

39 Signs of Trouble Decline in demand for American goods in international trade 1. High American protective tariffs discouraged trade Hawley-Smoot Tariff 2. Some nations, particularly Germany, were experiencing financial crises and inflation and they could not afford to purchase American goods

40 The Stock Market Crash Immediate Cause of the Great Depression the Stock Market Crash: Prices of stock rose throughout the 20s By Sept. 1929, the Dow Jones average reached 381

41 The Great Depression Thursday, October 24, 1929 some stockholders began to pull out of the market afraid of a crash Tuesday, October 29, 1929: - Black Tuesday -the day the stock market crashed, and it largely symbolizes the start of the Great Depression

42 Black Tuesday Tuesday, October 29, 1929: investors panicked and started selling before their stock became worthless Dow Jones fell to 261 (41 in 1932) between $6 and $9 billion was lost

43 The Stock Market Crash

44 The Great Depression Economic Downturn accelerated by stock market crash leads to the Great Depression One of the most difficult periods in American history

45 Consequences of the Stock Market Crash People who had invested all their savings in stock lost everything People that had bought stocks on margin could not pay back banks

46 The Great Depression Between 1929 and 1933, 100,000 businesses failed Corporate profits fell from $10 billion to $1 billon Between 1929 and 1933, over 6000 banks failed with over 9 million savings accounts lost ($2.5 billion)

47 CROWD OUTSIDE A CLOSED BANK

48 RUN ON BANK

49 The Great Depression By 1933, 13 million workers were unemployed (25% unemployment) and many were underemployed

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52 The Great Depression Malnutrition increased, as did tuberculosis, typhoid and dysentery. In 1932, 95 people died of starvation in New York City Many turned to soup kitchens and breadlines for food

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54 The Great Depression Children were forced to work Many people became homeless -many of the homeless lived in small villages made of cardboard boxes and crates nicknamed hoovervilles (named after Pres. Hoover who was blamed for the Depression)

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56 The Great Depression Large numbers of homeless workers travelled the U.S., particularly the Southwest, seeking work

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59 Change in economic indicators United States Great Britain France Germa ny Industrial production 46% 23% 24% 41% Wholesale prices 32% 33% 34% 29% Foreign trade 70% 60% 54% 61% Unemployment +607% +129% +214% +232%

60 President Hoover President Herbert Clark Hoover and business leaders attempted to calm Americans by assuring them that the country's economy was fundamentally sound

61 The Dust Bowl An environmental disaster in the southern Great Plains during the 1930 s Severe drought during 1931 caused the soil to dry out and swept the soil away Farmers had cleared millions of acres of grassland Grass had held the soil in place Farmers went bankrupt and moved west

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64 President Hoover s Response Did not believe that it was the role of the government to provide relief to Americans He believed in a limited role for government and worried that excessive federal intervention was a threat to capitalism Urged Americans to turn to community and church resources (Salvation Army, Community Chest, Red Cross) to meet needs of the poor

65 Hoover s Response Gradually used federal agencies to address issues 1. Met with business and labor leaders to reduce layoffs and strikes 2. Financed federal work projects, such as massive dams in the West (Boulder, Hoover, and Grand Coulee) 3. Set up RFC (Reconstruction Finance Corporation) in 1932 to make loans to stimulate economy in a "trickle-down" manner

66 The Election of 1932 President Hoover (Rep) vs. Franklin Delano Roosevelt (Dem) Hoover refused to accept any responsibility for the economic downturn ("No president must ever admit he has been wrong") and was booed and jeered when he made his few campaigns outside Washington 1. Campaign slogans: "The Worst is Past," "Prosperity is Just Around the Corner 2. Accused FDR of seeking the destruction of capitalism

67 The Election of 1932 Franklin Roosevelt wanted to use the power of the government to solve the crisis: 1. Offered a New Deal for the "forgotten man" 2. Campaign slogan: "Happy Days are Here Again" signaled Democratic optimism in face of economic problems

68 The Election of 1932 FDR won 57% of the popular vote and Democrats took control of both the House and Senate

69 The Bank Holiday One of Roosevelt s first actions as president was to declare a Bank Holiday: Roosevelt ordered that all Banks close for 4 days Congress passed the Emergency Banking Relief Act This gave FDR a wide range of power over the banks Setup a system to protect people s money that was deposited in the banks The goal was to restore public confidence in the banking system

70 Fireside Chats To restore confidence in the economy: He used the radio regularly Fireside Chats to deliver a message of hope and optimism to the American people and explain his plans and programs: The only thing we have to fear is fear itself Fireside chats were so called because Roosevelt would sit by a fireplace in the White House when he spoke

71 The First 100 Days FDR launched Hundred Days of legislative and administrative changes after taking office 1. Relief provide assistance to the poor; provide government jobs to get people back to work 2. Recovery- actions to restart consumer demand for products 3. Reform- create laws and government programs to prevent further economic decline

72 New Deal Programs The New Deal was FDR s response to the Great Depression First New Deal (1933) Second New Deal (1935) He tried to get the economy moving again and give help to those in need

73 New Deal Programs (1933) 1) Federal Deposit Insurance Corp. insured bank deposits up to $5,000 prevented people from losing their money when their bank closed 2) Tennessee Valley Authority built dams, power plants provided cheap electricity employed up to 40,000 workers

74 New Deal Programs 3) Civilian Conservation Corps offered outdoor work to unemployed single men recruited young men (18-25) from the cities set up camps - planted trees, fought forest fires, built dams, etc. (environmental work)

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76 New Deal Programs 4) Agricultural Adjustment Act paid farmers not to produce certain crops (cotton, wheat, tobacco, corn, etc.) trying to eliminate any increase prices of goods 5) National Industrial Recovery Act controlled business practices set minimum wage levels (usually.30 to.40 cents an hour depending on job) shortened workers hours to create new jobs

77 New Deal Programs (1935) 1) Works Progress Adm. employed writers, teachers, librarians, actors, musicians, and artists expanded the number of workers in existing organizations created 100,000 s of jobs 2) Social Security Act required a social security tax to be taken out of every workers paycheck gave money to those who were disabled or to old to work

78 Impact of the New Deal: Increased the power of the Pres. Conservation gains dams built, trees planted, etc. Created new federal social programs social security, welfare Deficit spending the gov t spends more money than it brings in from taxes

79 Major Issues in American History What is the government s role in the economy? John Maynard Keynes in a crisis, the government should spend money to stimulate the economy Trickle down economics Allow businesses to prosper and workers will benefit