Alan Greenspan, current architect of The boom and bust of 2001-2008 The Great Depression How the extraordinary economic boom of the 1920s led to the great economic disaster of the 1930s that reshaped the role of government
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Themes and Topics Private Enterprise Pro-Business Policies of the Republican Administrations in the 1920s Limits of 1920s Prosperity: The Origins of the Stock Market Crash and Great Depression Say's Law and the Nature of the Capitalist Trade Cycle Role of government Presidential Leadership Style: Herbert Hoover Herbert Hoover's Response to the Great Depression Multiculturalism/Regional Differentiation Deportation of Mexicans during the Great Depression
Central Analytical Questions What were the causes of rapid economic growth in the 1920s? What were the sources of instability and weakness in the 1920s economy? Why did the stock market become a speculative bubble? How did the crash of the stock market undermine the underlying economy of goods and services? How do we assess the failure of the Hoover administration to come to grips with the crisis?
Rapid Economic Growth, 1921-1929
Nature of 1920s Prosperity Productivity and Power Scientific Management Ford Motor Company s moving assembly line Technological Innovation Internal Combustion Engine Electrical Power in industry 1914-30% electrical power 1929-70% electrical power Steam engines replaced with electrical motors Cheap Oil Petroleum products multiplied 16 times between 1919-1929
Consumer Indebtedness Rapid economic growth was supported by a liberal credit policy practiced by the Federal Reserve Banks that meant it was easy for consumers to borrow money cheaply Installment purchases at to ease of consumption
Underlying Weaknesses Distribution of wealth 42% of all families in 1929 earned less than $1,500 per year 29% of all families in 1929 earned between $1,500 and $2,500 per year Farm sector Overproduction and low prices after 1921 Mal-investment/excess capacity Paper manufacturing (15%); Clothing (40%); Boot and shoe (50%); Pig Iron (45%); Glass ware (40%); wheat flour (45%); Textile industry (15% for cotton, 45% for silk)
What Went Wrong I?
Strategic Industry: Autos Note the core regional basis of the automobile industry in the Northeast and Mid-west
Stock Market, 1920-1929 Growth in the value of stocks initially reflected the productivity and profitability of the underlying economy But after 1926, growth in the value of stocks reflected speculation rather than the health of the economy
What Went Wrong II?
What Went Wrong III? Federal Reserve Discount Rate changes With onset of Recession Aug 1927 4% to 3.5% With continued Stock Market boom Aug 1928 3.5% to 5% Oct 1929 5% to 6%
The Evidence of Collapse
Unemployment Unemployment had stood at less than 5% in 1929 By 1932, an estimated 25% of the workforce was out of a job, about 12-14 million workers In the core industrial region, cities like Dayton, Ohio faced 80% unemployment
Trouble on the Farms
Management of the International Economy Foreign Debts German inflation Ruhr seizure by France Dawes Plan (1925) Restructured German debt and schedule payments over a longer period Dependence on Private Bankers They financed German debt Smoot Hartley Tariff Act 1930 Made it virtually impossible for Europeans to sell exports to US and therefore pay off debts
Herbert Hoover s Response Hoover s background Initial response Reassuring Banalities Jawboning Tariff Immigration Cut Taxes Second response Public Works Reconstruction Finance Corporation Deficit spending
Say s Law How conventional economists interpreted the depression It is a natural and good thing because it purges the economy of the inefficient and unprofitable The economy is self-adjusting because it has a tendency toward equilibrium Say s law says producers would not produce what consumers would not purchase Role of Government: don t mess with selfadjusting mechanisms
What Hoover Would Not Do By 1932, major corporate leaders had enough with purging the economy They saw the principal problem as overproduction and declining prices They called for cutting production and fixing prices Hoover labeled this approach the biggest attempt at monopoly in American history Business switched support to Franklin D. Roosevelt
Election of 1932 Hoover claimed no President had ever done More to combat a Depression Hoover lost nearly 20 Points off his popular Vote from 1928 Note the poor showing of socialist and communist candidates
Critical Thinking Question The Great Depression had market causes and government causes Which do you think was more decisive?
Conclusions Great Depression reveals continuing instabilities in capitalist system Hoover s response reveals serious flaws in how economics profession understands business cycle under modern conditions