Cause Of Depression (Section B) Flashcards
Keynesian view
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)
Monetarist view
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
Austrian School view
Economic cycles are inevitable and capitalist system will quickly balance itself
Failing businesses should be left to fail
International dimension
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
Bank and govt failures
Part I Bank
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)
Bank and Govt failures
Part II govt
Used Laissez faire attitudes especially in regards to regulation of banks and business
Federal reserve inherently weak
Stock market
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
Industry
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)
Consumption
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
Hawley-Smoot tariff
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
Reconstruction finance corporation
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
Revenue act
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)
Emergency relief and construction act
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”
Main causes
International dimension Banking and govt. failures Agriculture Stock Market Industry Consumption
Stocks on day of crash
9 million shares changed hands
14% drop in market
14 billion dollars wiped off share values
The market shrunk 50% in six weeks
Agriculture
Facts and Figures
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
Inequality of wealth
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
Who’s to blame
Banks
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
Who’s to blame
International dimension
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
Who’s to blame
Hoover part I
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)
Who’s to blame
Hoover II
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
