Cause Of Depression (Section B)

Question 1

Keynesian view

Answer 1

Insufficient demand
Depressed sectors (Agriculture and textiles)
Differential development of consumption, production, wages and profits
Overseas demand shrunk due to tariffs
Govt. failed to stimulate demand (didn’t spend enough)

Question 2

Monetarist view

Answer 2

The fed pursued a policy of ‘dear money’ (high interest rates) and failed to increase supply when it was needed
Banking crisis
Failure to control the supply of money in the economy

Question 3

Austrian School view

Answer 3

Economic cycles are inevitable and capitalist system will quickly balance itself
Failing businesses should be left to fail

Question 4

International dimension

Answer 4

War debts in Europe weaknesses their capacity to consume US goods
Britain removed the British gold standard (pound) [a key prop in world trade] and America failed to step up and stabilise it

Question 5

Bank and govt failures

Part I Bank

Answer 5

Bank-thousands of banks all with no insurance. Used depositors money for investment (speculation). The federal reserve was based in Washington-not New York (communication problems)

Question 6

Bank and Govt failures

Part II govt

Answer 6

Used Laissez faire attitudes especially in regards to regulation of banks and business
Federal reserve inherently weak

Question 7

Stock market

Answer 7

Very low amount of regulation led to a vast amount of speculation and insider dealing
The stock market seemed to be based on state of mind rather than economic fact (inherently unstable)
14 bill was wiped off share values
14% drop in market

Question 8

Industry

Answer 8

The dynamism of the new industries led to rapid expansion and growth
Too much was eventually being produced and it could not be absorbed by consumers (market saturation)

Question 9

Consumption

Answer 9

Wages were not rising fast enough to maintain expenditure
Insufficient purchasing power
By 1927 the majority of people who could afford to buy-had bought

Question 10

Hawley-Smoot tariff

Answer 10

1930
Put an average of 40% import tax on foreign industrial items (led to retaliatory tariffs which led to a decline in US exports)
Many US farmers opposed the tariffs

Question 11

Reconstruction finance corporation

Answer 11

1932
Had authority to lend up to $2bill to rescue banks, trusts and credit unions
Gave 1.5 bill to finance state public works
Necessitated tax rises
But biggest loans went to the biggest companies

Question 12

Revenue act

Answer 12

1932
Big tax rises-largest in US peace time (raised to 63% from 25%)
Introduced to pay for increased federal expenditure
(Hoover wanted to balance the budget-not in deficit financing)

Question 13

Emergency relief and construction act

Answer 13

1932-amendment to RFC
Could release loan funds for the public works projects across the country
But eligible state had to declare themselves bankrupt and “promise that revenues would eventually pay off the federal loans”

Question 14

Main causes

Answer 14

International dimension
Banking and govt. failures 
Agriculture 
Stock Market 
Industry 
Consumption

Question 15

Stocks on day of crash

Answer 15

9 million shares changed hands
14% drop in market
14 billion dollars wiped off share values
The market shrunk 50% in six weeks

Question 16

Agriculture

Facts and Figures

Answer 16

1929 US farmers annual income stood at $273 (below the average of 750)
Net income of farms fell from 6.1b in 1929 to 2b in 1932
Wheat harvest fell to 7000 in 1933 (from 1m)
Value of farmland dropped 30% between 1920 to 1929
3,500 foreclosure out of 5280 farms

Question 17

Inequality of wealth

Answer 17

16m families lived below poverty line (60% of population)
In 1931 15.9% of urban workforce lost their jobs. By 1933 this had risen to 25%
GE’s income fell from 60.5 in 1930 to 14.17 in 1932
Top 5% of Americans earned 1/3 of national wealth

Question 18

Who’s to blame

Banks

Answer 18

No fed deposit insurance system existed to provide security+majority of banks were independent
Used depositors for speculation
Federal Reserve Board was made up of private bankers who did nothing to prevent speculation
Low interest rates were made to protect Gold Standard but made money cheap

Question 19

Who’s to blame

International dimension

Answer 19

Large war debts of GB and France owed to US and weaknesses their capacity to buy US goods
Removal of pound sterling weakened the international trading system
World trade detracted by tariffs (in 1929 it was 36b but by 1932 it was 12b)
1931 Europe banking system was close to collapse and GB abandoned gold standard
Fed raised interest rates to stop outflow of gold from US a

Question 20

Who’s to blame

Hoover part I

Answer 20

Mistakes:Hawley Smoot Tariff of 1930 and had no control of congress
Tried to mobiles the country behind a programme of economic expansion (tried to get business and unions to spend) however wage cuts stopped this
US steel instituted a 10% wage cut (they employed 1.7m)

Question 21

Who’s to blame

Hoover II

Answer 21

Established National Credit Corporation in 1931
A Capitol fund of 500m was established
BUT the revenue was controlled by conservative bankers who only spent 10m
Bank failures in the year 1931 ran at record levels