The Roaring 20s and the Great Depression

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The Roaring 20s and the Great Depression

• Ing. Tomáš Dudáš, PhD.

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Roaring Twenties

• The Roaring Twenties is traditionally viewed as
  an era of great economic prosperity driven by the
  introduction of a wide array of new consumer
  goods
• At first, the recession of wartime production
  caused a brief but deep recession, known as the
  Post-WWI recession.
• Quickly, however, the U.S. economy rebounded as
  returning soldiers re-entered the labor force and
  factories were retooled to produce consumer goods.

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Roaring Twenties

• Many of the devices that became commonplace had
  been developed before the war but had been
  unaffordable to most people. The automobile,
  movie, radio, and chemical industries skyrocketed
  during the 1920s
• Radio became the first mass broadcasting medium
• The new technologies led to an unprecedented need
  for new infrastructure, largely funded by the
  government. Road construction was crucial to the
  motor vehicle industry several roads were
  upgraded to highways, and expressways were
  constructed
• Urbanization reached a climax in the 1920s. For
  the first time, more Americans lived in cities of
  250,000 or more people than in small towns or
  rural areas

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Social and cultural issues

• On August 18, 1920, Tennessee became the last of
  36 states needed to ratify the Nineteenth
  Amendment, granting women the right to vote
• In 1920, the manufacture, sale, import and export
  of alcohol was prohibited by the Eighteenth
  Amendment to the United States Constitution in an
  attempt to alleviate various social problems
  this came to be known as "Prohibition
• Jazz Age
• Organized Crime

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Presidents during the roaring twenties

• Warren G. Harding - laissez-faire policies,
  served from 1924 to 1923
• Calvin Coolidge was popular due economic
  prosperity, 1923-1929
• Herbert Hoover
• "We in America today are nearer to the final
  triumph over poverty than ever before in the
  history of any land. - 1928

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Tax cuts in the 20s
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The Great Depression basic facts

• Between 1929 and 1933 the manufacturing output
  fell by half
• Automobile production fell by 75
• 2 hamburgers for 5 cents but the people could
  not afford to buy them
• People would work for 10 cents per hour but
  employers could not profit from their labor
• Banks were filled with idle reserves but
  borrowing did not occur
• Agricultural production rotted in the fields
  and people went hungry

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The Great Depression basic facts

• 13 million people became unemployed. In 1932, 34
  million people belonged to families with no
  regular full-time wage earner
• Homebuilding dropped by 80 between the years
  1929 and 1932
• From the years 1929 to 1932, about 5,000 banks
  went out of business
• Over one million families lost their farms
  between 1930 and 1934
• Over 60 of Americans were categorized as poor by
  the federal government in 1933

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"Black Thursday"

• The Great Depression began on "Black Thursday"
  with the Wall Street Crash of October, 1929 and
  rapidly spread worldwide.
• Share prices on the NYSE collapsed and they
  continued to fall, at an unprecedented rate, for
  a full month Black Friday, Black Monday, Black
  Tuesday
• Dow Jones Industrial Average for 10/28/1929 and
  10/29/1929
• Date change change close
• October 28, 1929 -38.33 -12.82
  260.64
• October 29, 1929 -30.57 -11.73
  230.07

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Dont trust economists ?

• There may be a recession in stock prices, but not
  anything in the nature of a crash. Dividend
  returns on stocks are moving higher. This is not
  due to receding prices for stocks, and will not
  be hastened by any anticipated crash, the
  possibility of which I fail to see.
• Irving Fisher, two days after the peak of the
  bull market 1929

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The Spiral of depression
Fewer goods are sold.
Demand drops.
In order to stay in business companies cut wages
Companies are forced to cut costs by laying
people off
People lose their confidence start saving
their money
Demand drops even further.
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Explanations of the great depression

• Explanation 1 The laissez-faire free market
  caused the Great Depression, and the New Deal
  pulled the economy out of it.
• Keynesians
• Explanation 2 A market economy goes through
  natural ups and downs, but the Federal Reserve
  let the money supply collapse in the early 1930s,
  turning a normal downturn into the Great
  Depression.
• Monetarists

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Explanations of the great depression

• Explanation 3 The Federal Reserve fueled the
  stock market boom of the 1920s with its
  easy-money policies. After the crash, the Fed did
  the wrong thing by cutting rates and propping up
  unsound institutions. Hoover and FDR's
  interventions in the economy only made things
  worse.
• Austrian economic school

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The monetarist view

• Milton Friedman and Anna Schwartz A monetary
  history of the US
• The decline of aggregate demand was caused by a
  decline of the money supply
• This led to a reduction in output, income,
  employment and prices and this led to the
  further reduction of money supply
• In order to replenish their losses, banks
  decreased lending
• Starting point First bank panic in November
  1930 (Bank of the United States key failure)

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The Austrian view

• F. A. Hayek, Maurice Rothbard
• Main reason - excessive loosening of the
  financial discipline before the crash in 1929
• Too much Federal Reserve effort
• The normal self-correcting mechanisms of the
  market could not work

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The Keynesian view

• Keynes The General Theory of Employment,
  Interest and Money (1936)
• Self-correcting mechanisms that some economists
  claimed should work during a downturn may not
  work in practice
• According to the classical economists, lower
  interest rates would lead to increased investment
  spending and demand would remain constant.
  However, Keynes states that there are good
  reasons why investment does not necessarily
  increase in response to a fall in the interest
  rate.
• Businesses make investments based on expectations
  of profit. Therefore, if a fall in consumption
  appears to be long-term, businesses analyzing
  trends will lower expectations of future sales.
  Therefore, the last thing they are interested in
  doing is investing in increasing future
  production, even if lower interest rates make
  capital inexpensive.

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Hoover and the Great Depression

• President Hoover took aggressive action to stem
  the depression by using the power of the federal
  government New Deal light
• Important policy wages should not decrease and
  industry should keep employment
• He created a wide variety of agencies and boards
  that contained the best minds in American
  business to suggest solutions
• Agriculture - Federal Farm Board
• Industry Federal Building program

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Responses - Smoot-Hawley Tariff Act

• The Smoot-Hawley Tariff Act was an act signed
  into law on June 17, 1930, that raised U.S.
  tariffs on over 20,000 imported goods to record
  levels
• The act was originated by Senator Reed Smoot, a
  Republican from Utah, and Representative Willis
  C. Hawley, a Republican from Oregon
• President Hoover opposed the bill and called it
  "vicious, extortionate, and obnoxious" because he
  felt it would undermine the commitment he had
  pledged to international cooperation
• Result - U.S. imports decreased 66 from US4.4
  billion (1929) to US1.5 billion (1933), and
  exports decreased 61 from US5.4 billion to
  US2.1 billion, both decreases much more than the
  50 decrease of the GDP

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Responses -Glass-Steagall Act

• Two Acts of the same name
• The first Glass-Steagall Act was passed in
  February 1932 in an effort to stop deflation and
  expanded the Federal Reserve's ability to offer
  rediscounts on more types of assets such as
  government bonds as well as commercial paper.
• The second Glass-Steagall Act was passed in 1933
  in reaction to the collapse of a large portion of
  the American commercial banking system in early
  1933.
• The second Glass-Steagall Act introduced the
  separation of bank types according to their
  business (commercial and investment banking)
• This division ended in 1999

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