The Great Depression: Causes, Effects and Recovery - Prof. Moore, Study notes of Development Economics

Download The Great Depression: Causes, Effects and Recovery - Prof. Moore and more Study notes Development Economics in PDF only on Docsity! Amelie Turcotte ECON 2200 4/12/11 The Great Depression: Chapter 23, Part 1 I. Key Economic Indicators (Figures 23.1 - 23.4):  Note both the depth & the duration of the decline. 1. Note that recovery isn’t complete until the economy reaches and maintains its pre- depression levels of output  1929-1933: Real GDP fell by 1/3 o Industrial output fell by 1/2 o Gross investment (I) reduced to almost nothing  I < replacement rate 1. (level of investment spending necessary just to maintain the capital that firms have currently; repairing, restoring current stock)  Real capital stock actually declined! 1. Ability to produce actually fell 2. I ↓ => productive capacity ↓ o Consumer durables output fell by 80%, and did not fully recover until 1940.  C ↓ 1. By comparison, consumer durables output fell by 43% in early 1920s recession. However, it had fully recovered by 192  Unemployment Rate: o 1929: UR = 3.2% (1.5 million) o 1933: UR approaching 25% 1. Underemployed- many people not unemployed, but high business people doing menial labor  11.5 mill unemployed  2.2 mill in government-created emergency jobs  Many more were “underemployed”: working, but for fewer hours than desired or at a job that does not fully utilize worker’s human capital  33% of the labor force = 1933 estimate of an “unemployment” rate that includes: 1. Official unemployed 2. Government Emergency Workers 3. Underemployed o Duration  UR remained > 10% for a decade  Many workers never recovered  Deflation: o 1929-1933: CPI fell by 25%  Page 1 AD1933 P Level AS P1 Amelie Turcotte ECON 2200 4/12/11  Bank Failures (both losses for shareholders and lenders): o 1930-33: nearly 10,000 banks closed  About 1/3 of banks that existed in 1929 had failed by 1933.  Billions of dollars in depositor & shareholder losses  Stock Prices: o S&P Composite Index (annual average):  1929: $26.02  1932: $6.93 o 1929-33: $85 billion in stock losses o Impact: Wealth (Fig 23.4) & Psychological  May not explain why the depression happened, but may explain why it took so long to recover (because it made people afraid)  While stock market “crashes” don’t typically cause recessions (just a symptom), the wealth losses and negative expectations can add to recessionary pressures and extend the duration of the recession  The wealth losses and negative expectations can add to recessionary pressures and extend the duration of the recession (less confident and nervous  demand and purchasing power ↓)  Long, slow recovery: o Real GDP did not reach & maintain pre-Depression rates until late 1930s o Manufacturing did not do so until 1939-40 II. Factors Contributing to the Decline A. Recall the structural weaknesses we identified in the 1920s economy:  After 1925: Big decline in construction sector (especially residential, but also commercial) o over-building (1918-25) led to market saturation o cyclical swing in a major component of GDP 1. I ↓ 2. Construction sector experienced a “gentle slide” downward from 1925- 1928, and then a “marked decline” after 1928  Troubled agricultural sector o Farm income growth lagged behind other sectors o Farm debt & bankruptcies (Growing debt burden of US farmers => ↑ defaults/ foreclosures => ↑ bank failures)  (Rural) bank failures, especially in South and Midwest Page 2 AD1929 P2 Real GDP GDP2 GDP1 Amelie Turcotte ECON 2200 4/12/11 o No, based on the cliometric evidence, D was increasing more rapidly than S in the call-loan market. Thus, credit (s) was/were being drawn into the market by rising call-loan interest rates Page 5 Amelie Turcotte ECON 2200 4/12/11  Bust: The Crash of '29 o Spring 1929: A mild decline in consumer durables output began. Followed by a decline in nondurables output in Summer 1929 o Sept 1929: The stock market peaked o In Fall of 1929, stock investors began to feel nervous. Mild decline in stock prices begins in early October, but trading volume is normal o Mid-to-late Oct 1929: Stock prices began to decline rapidly  "Black Thursday" (10/24/29)  13 mill shares traded (> 4x normal trading volume)  NYC banks & financiers eased situation by buying 1. Attempted to “prop up” stock prices by adding demand to market, but unable to prevent overall decrease in stock prices  Following week panic resumed: Black Tues(10/29)  >16 mill shares traded  Average stock price fell by 25%  Sell off continued thru November  Stock prices 1/2 of August value 1. Note that individual shareholder losses depended on when shares were purchased, but many had bought during the 1928-29 “bubble” expansion o Through 1930, prices for most stocks were still above 1926 levels. (See Figure 23.4) o $1000 invested in Sept. 1926 was worth  $2116 in Sept. 1929  $360 in July 1932 (low-point of market) o Panic selling fueled by  margin buyers faced w/ inflated losses  loans called in by (nonbank) lenders o Optimism of '20s became pessimism & fear of '30s  Note that consumer durables market was/is heavily impacted by changes in consumer confidence D. 3 Waves of 1930s Bank Failures: Table 23.1 (Preceded by foreclosures & rural bank failures of 1920s)  1st Wave: Late 1930 o Banks in South & Midwest fail o Panic spreads o Dec. 1930: Bank of U.S. (NYC commercial bank) fails  confusion b/c of the name  largest bank to have failed up to that point o Fed’s response? (none; “let the irresponsible banks fail”) Page 6 Amelie Turcotte ECON 2200 4/12/11  2nd Wave: Spring-Summer 1931 o International crisis o Sept. 1931: Britain leaves gold standard, which fuels further banking panic  1930-1932: 5,000 US banks close; deposit losses = $3 billion  3rd Wave: Early 1933 o Worst run yet o 4,000 US banks close; deposit losses = $3.5 billion  Mar. 6, 1933: FDR imposes national, 1-week "bank holiday" o Inspection o Psychological impact  Gold hoarding ended: All monetary gold must be exchanged at Fed for paper currency  Federal Deposit Insurance Corp (FDIC) established; began operations Jan. 1934  Banking crisis subsides for rest of 1930s o 1934: 61 banks fail o Rest of 1930s: <100 bank failures per year Page 7