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ECON 2200 Unit 4 notes (The Great Depression)

by: Kevin Smith

ECON 2200 Unit 4 notes (The Great Depression) ECON 2200

Marketplace > University of Georgia > Economcs > ECON 2200 > ECON 2200 Unit 4 notes The Great Depression
Kevin Smith
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These are the notes from April 4th and 8th classes. Moore started going over these notes on the Monday before our unit 3 test and continued them on Friday. This is only what she went over those two...
Economic Development of US
Class Notes
ECON 2200, uga, moore




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This 5 page Class Notes was uploaded by Kevin Smith on Sunday April 10, 2016. The Class Notes belongs to ECON 2200 at University of Georgia taught by Moore in Spring 2016. Since its upload, it has received 130 views. For similar materials see Economic Development of US in Economcs at University of Georgia.


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Date Created: 04/10/16
The Great Depression: Part 1 (Chap 23) I. Key Economic Indicators (Figures 23.1 - 23.4) • Note both the depth & the duration of the decline. The recovery is not complete until the economy reaches and maintains pre- recession levels of output and unemployment •   1929-1933: Real GDP fell by 1/3 o   Industrial output fell by 1/2 o   Gross investment spending (I) was reduced to almost nothing. Investment decreasing, firms were not even doing enough investment to maintain capital investment §   I < replacement rate The replacement rate is the $-value of investment spending necessary to maintain the current capital stock. Productive capacity of U.S. down §   Real capital stock actually declined! o   Consumer durables output fell by 80%, and did not fully recover until 1940. By comparison, in the early-1920s recession consumer durables output fell by 43%, but it had fully recovered by 1923. pronounced decline because durables follow the economic cycle •   Unemployment Rate: o   1929: UR = 3.2% (1.5 million) o   1933: UR approaching 25% §   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 1933 estimate of a revised unemployment rate, including (1) officially unemployed, (2) government emergency workers (3) underemployment à 33% of labor force o   Duration §   UR remained > 10% for a decade §   Many never recovered •   Deflation: o   1929-1933: CPI fell by 25% •   Bank Failures: 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 benchmark measure of stock prices o   1929-33: $85 billion in stock losses o   Impact: Wealth (Fig 23.4) & Psychological Stock market crashes don’t typically cause recessions; however, the wealth losses and negative expectations created by a crash can add to recessionary pressures and can also extend the duration of a recession. People were afraid to spend and therefore, the economy was hurt •   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 construction) Purchasing   o   over-building (1918-25) led to market saturation after 1925, prices for homes and newly  built  =   other buildings fall à leads to defaults on mortgages Investment   o   cyclical swing in a major component of GDP •   Troubled agricultural sector o   Farm income growth lagged behind other sectors o   Farm debt & bankruptcies increased because they bought expensive land and capital during the war to meet the high demands for agricultural goods à led to more defaults and foreclosures for farmers •   (Rural) bank failures, especially in South and Midwest banks portfolio was not diverse, too risky o   Recall the Fed’s response FED thought the banks were mismanaged, but they could not diversify because of the restrictions on interstate branch banking B. The Stock Market: Boom (p. 415-420 in Chap 22) and Bust (p. 424-427 in Chap 23) •   Please read on your own (p. 415-416): Speculative “mood” of the times; Stock market boom preceded by: o   The (original) Ponzi scheme o   The Florida real estate bubble •   Boom: The Great Bull Market (Table 22.7) o   1920s: Individual income and wealth rose not so much for farmers but real incomes grew by 20% overall for households, rich are getting richer but so is the middle class §  An emerging middle class (whose disposable income increased) leftover money available for stock investment – this is the first time the middle class had become investors in stock (whereas before it was only available to the very wealthy) o   Business conditions were strong and earnings were up (especially for firms in consumer durables industry) §  dividends rose middle class loved to receive dividends as “free money” §  stock prices rose (capital gains) buying low and selling high o   Stock became an increasingly attractive asset, as shown by Table 22.7 §  1926-1928: S&P Common Index up by 58% §  1928-1929: + another 30% the biggest part of the boom (led some historians to believe there was some what of a bubble in the stock market at this time, not so much in the early-mid 20s) Prices for most stocks increased consistently throughout the 1920s, but the price increases were particularly rapid in 1928-1929. o   However, stock prices rose faster than earnings. (See Econ Insight 22.1 & Table 22.8) ratio of price-to-dividend was rising (as time went on, investors were willing to pay more for a stock that would have given the same amount of dividends as before) they expected dividends in the future to be a high return §  An asset’s price typically reflects the discounted value of expected net earnings from the asset. §  Price-to-dividend ratio (especially 1928-29): P-to-D ratio reflects the price that buyers were willing to pay, on average, for each $ of dividends. In 1928-1929, stock prices, on average, were rising much more rapidly than typical, past dividend levels would dictate. The unusually high P-to-D ratio at the end of the 1920s reflects extreme optimism about future firm earnings/dividends. There was no reason to believe that firms would increase dividends in the future (question as to why people were willing to pay much more than before for those dividends) §  Speculative bubble = When the price of an asset increases because people believe that its price will continue to increase. Price does not reflect “market fundamentals.” Speculative bubbles can be self-inflating because as people keep believing the dividends will be higher in the future, they will keep purchasing stock. This drives up stock prices due to higher demand for stock. Eventually, people lose faith in future in dividends or get priced out of the market, prices drop due to less demand, and the bubble pops o   If there was a speculative bubble, why did it happen? §   White (1989): “New Age” theory/Optimism (See quotes from Fisher on p. 420 and Hoover on p. 422. Also, video clips on eLC.) Fisher’s confidence in the stock market gave consumers optimism even weeks before the crash Hoover claims that the U.S. is on the eve of permanent prosperity and close to getting rid of poverty White theorizes that in the 1920s, people began to believe that technology had fundamentally changed the nature of production and the economy such that the U.S. had entered a “new age” of “permanent prosperity” and growth. (could affect the P-to-D ration by pushing it up because optimismàhigher demandàhigher prices)  


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