The 1929 Stock Market Crash and the Great Depression (122-129)

What were the key reasons fro the economic crash in 1929?

The credit boom and bubbles in the prices of assets like stocks and houses.

What does it mean to buy stocks on margin?

The borrowed most of the stock price from brokers.

What was the effect of the Federal Reserve raising interest rates in 1928-29?

Triggered a sequence of events that sparked the market crash. Higher rates reduced demand or stocks which caused prices to fall and investors who were unable to cover the debts they took to purchase stocks tried to liquidate quickly causing prices to fall further. Banks were unable to collect loans they made to investors and were illiquid and then insolvent

What was the Fed’s intended effect when raising interest rates in 1928/29?

to stem the bubbles in housing and stocks

What international factor may have increased the global reach of the deppression?

The need to maintain the gold standard meant other countries had to increase interest rates which led to tighter monetary policies around the world.

Raising interest rates is monetary policy often employed to do what?

To curb a bubble such as was the case again in the GReat Recession/.

What innovations helped make farming more efficient in the 1920s?

Fertilizers developed during WW1, new machinery, and tractors

How manyy tractors were used in 1918?

80000

How many tractors were in use in 1929?

850000

What was the effect of more efficient agricultural production on agricultural prices?

they fell

What international factor played a role in increasing competition in the agricultural sector?

American farmers faced peacetime competition such as from Egyptian cotton and Argentine beef

Those farmers that didn’t moved out of agricultural or close/sell their farms did what?

lobbied the government for price and income supports

Why did farmers want to expand their farms during WW1?

There was a high price for agricultural commodoties

How did farmers receive the funds to expand their farms? What was happening to land prices as they sought to expand?

borrowing; land prices were rising due to increased demand for land

From 1921-1929 ow many American farms faced foreclosure?

1/6th

What sector entered the Great Deppression at a greater disadvantage due to problems during to economic struggles in the 1920s?

The agricultural sector since they entered in a weakened state, heavily indebted however Agricultural was still a significant share of the economy.

What was the state of the US banking system at the time that credit access improved?

underdeveloped

What was the McFadden Act? When was it put in place?

It prohibited banks from creating branches across state lines; 1927

What effect did the McFadden Act have on banks?

It limited growth which had just begun (as banks opened more than one branch), and limited banks’ ability to diversify their portfolio of assets across multiple markets and economic activities.

What happened in Florida in April 1929?

A fruit fly infestation devastated Floridian citrus farmer revenues and led to local bank runs.

What saved Florida banks in early 1929?

The Federal Reserve Bank of Atlanta physically brought stocks of money to commercial Florida banks to maintain customer faith in the banking system.

Why did some officials not want to interfere with bank failures during the Great Deppression?

They believed some banks should fail because of poor business decisions or because there was too many banks and the weakest should be weeded out.

At what frequency did bank runs occur throughout US history leading up to the 1920s?

They were quite common so the early Depression years didnt spark a significant change in this regard.

When was the Deposit Insurance Corporation established? 

1933

What was the goal of the Federal Deposit Insurance Corporation (FDIC)?

To reduce bank runs and improve banking sector’s stability. Deposits at member banks were guaranteed up to a certain value during a bank crisis.

Between 1929 and 1931 what happened to stock prices?

They halved

Between 1931 and 1932 what happened to stock prices?

They halved again to the trough

Between 1932 and 1937 what was the general trend in the prices of stocks?

Generally rising

Whats more important to note about the Great Depression rather than the initial drop in stock market?

The huge contraction in real GDP

What caused the contraction in Real GDP?

It was indirectly a result of the stock crash but the loss of confidence and poor government policies were also key factors

What had been the long run trend in real GDP up to the depression?

2% growth per year

What percent decline in output characterizes most recessions?

1-2% decline in output

What % decline in output did the US see in value of goods during the Great Depression?

25% decline in output

What was the equivalent of a 25% decline in output?

Shutting down all production west of the Mississippi River

By what percentage did production fall in the manufacturing sector?

50%

What happened to the market for durable goods like automobiles fridges and radios?

People could no longer afford them and they stopped buying durable goods immediately. 

When had exports peaked before the Depression?

March 1929

Why was there no foreign demand to boost the US during the depression?

There was a peak in exports in March 1929 which was followed with a steep fall off in exports.

What key market fell to 1% of GDP in the 1930s?

Investment undertaken by new firms

What percentage of GDP was investment in new projects by firms during the 1930s?

1%

From 1929 to 1933 by what percentage did the price of agricultural goods fall?

55%

Why was there widespread deflation during the Great Depression?

Declining consumption and an inward shift of the AD curve

What is a key characteristic of most recessions?

Widespread deflation

What caused the early 1930s to be particularly destabilizing and pronounced?

The money supply was already contracting before the crash and continued contracting as the crisis continued

Productivity growth rates between 1929 and 1941 exceeded that of any other time since when?

1870

What are possible explanations for the productivity growth rates between 1929 and 1941?

Continuation of innovations in products and processes since 1920s, increased demand for war goods and munitions that have to be produced under pressure with less workers during WW2, and infrastructure investment (like for roads) which was strong since late 1920’s onward.

What assumption can be made about the workers that kept their jobs during the Great Depression?

They were likely the best ones at each firm which would explain high levels of output per worker

What happened to high school, enrollment and graduation rates during the 1930s?

They continued to rise likely due to low wages and scarce job opportunities which led more people to continue education instead of entering bleak job market.

During what period did bank runs occur “en masse?”

1929-33

What happened to bond prices and interest rates because of bank runs?

Bond prices fell and interest rates rose

By 1933 whatt fraction of banks that existed in 1929 had failed?

1/2