20081013: The Great Depression

Audio: The Great Depression

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The Collapse of Real GDP, and Recovery:

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Components of Real GDP:

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The Consumption Function:

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The Semi-Stabilizing Role of Government:

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Dr. New Deal and Dr. Win-the-War:

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The Collapse of Private Investment:

• Can account, with multiplier, for essentially everything...

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The Propagation Mechanism: Three Theories for the Collapse of Investment (and Consumption):

• Friedman: Inept Federal Reserve policy and banking crises...
• DeLong and Summers: Expected deflation and self-fulfilling expectations...
• Bernanke: Bank failures and the credit channel...

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The Impulse:

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1928

• The construction boom is over.
• Farmers' share of the national income has dropped from 15 to 9 percent since 1920.
• Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. Trading will mushroom from 2-3 million shares per day to over 5 million.

1929

• Herbert Hoover becomes President.
• Business inventories grows three times larger than the year before.
• Freight carloads and manufacturing fall.
• Automobile sales decline by a third in the nine months before the crash.
• Recession begins in August, two months before the stock market crash.
• Stock market crash begins October 24. Investors call October 29 "Black Tuesday."
• Congress passes Agricultural Marketing Act to support farmers until they can get back on their feet.

1930

• By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Expands the money supply with a major purchase of U.S. securities.
• However, for the next year and a half, the Fed will add very little money to the shrinking economy.
• Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: "Liquidate labor, liquidate stocks, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people."
• The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen.
• The first bank panic occurs late this year.
• Democrats gain in Congressional elections, but still do not have a majority.
• GDP falls 9.4 percent from the year before.
• The unemployment rate climbs from 3.2 to 8.7 percent.

1931

• No major legislation is passed addressing the Depression.
• A second banking panic occurs in the spring.
• GDP falls another 8.5 percent.
• Unemployment rises to 15.9 percent.

1932

• GDP falls a record 13.4 percent.
• Unemployment rises to 23.6 percent.
• Industrial stocks have lost 80 percent of their value since 1930.
• 10,000 banks have failed since 1929, or 40 percent of the 1929 total.
• The Fed makes its first major expansion of the money supply since February 1930.
• Congress creates the Reconstruction Finance Corporation.
• Congress passes the Federal Home Loan Bank Act.
• Bonus March: July 28, 1932
• Top tax rate is raised from 25 to 63 percent.
• Roosevelt: "I pledge you, I pledge myself, to a new deal for the American people."

1933

• A third banking panic occurs in March. Roosevelt declares a Bank Holiday
• "100 Days" of intensive legislative activity.
• Millionaire businessmen discuss overthrowing Roosevelt with a military coup. Talk to General Smedley Butler.
• Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.
• Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.
• U.S. goes off the gold standard.
• Roosevelt rejects Keynes' advice to begin heavy deficit spending.

1934

• Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.
• Congress passes the Securities and Exchange Act and the Trade Agreement Act.
• The economy turns around: GDP rises 7.7 percent.
• Unemployment falls to 21.7 percent. A long road to recovery begins.
• Sweden becomes the first nation to recover fully from the Great Depression.

1935

• The Supreme Court declares the National Recovery Administration to be unconstitutional.
• Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.
• Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.
• GDP grows another 8.1 percent.
• Unemployment falls to 20.1 percent.

1936

• The Supreme Court declares part of the Agricultural Adjustment Act to be unconstitutional.
• Top tax rate raised to 79 percent.
• GDP grows a record 14.1 percent.
• Unemployment falls to 16.9 percent.
• Germany becomes the second nation to recover fully from the Great Depression

1937

• The Supreme Court declares the National Labor Relations Board to be unconstitutional.
• Roosevelt seeks to enlarge and therefore liberalize the Supreme Court.
• GDP rises 5.0 percent.
• Unemployment falls to 14.3 percent.
• World War II in Asia begins with the Japanese invasion of China.

1938

• Congress passes the Agricultural Adjustment Act of 1938 and the Fair Labor Standards Act.
• GDP falls 4.5 percent.
• Unemployment rises to 19.0 percent.
• Britain becomes the third nation to recover as it begins deficit spending in preparation for war.

1939

• GDP rises 7.9 percent.
• Unemployment falls to 17.2 percent.
• World War II in Europe begins with Hitler's invasion of Poland.