ECON 2200 The Great Depression outline notes from 4-11-16
ECON 2200 The Great Depression outline notes from 4-11-16 ECON 2200
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This 2 page Class Notes was uploaded by Kevin Smith on Tuesday April 12, 2016. The Class Notes belongs to ECON 2200 at University of Georgia taught by Moore in Spring 2016. Since its upload, it has received 26 views. For similar materials see Economic Development of US in Economcs at University of Georgia.
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Date Created: 04/12/16
o The Fed was less optimistic (p. 413) § Feared speculation would divert funds from I people would put so much money into stocks that there would be less money for the investment portion of aggregate demand Commercial banks were making loans to support speculation. The Fed feared that this would reduce the funds available to firms for investments in capital. The FED wanted to see banks make loans for capital and less speculation § Real Bills Doctrine The Fed stated that it would restrict discount window loans to banks whose Not very own loans were backed by “real bills.” Real bills – “tangible assets” effective Loans by banks to support purchases of tangible assets (I) If banks loans were not for tangible assets, then they could not go to the discount window when they ran low on loanable funds § “Moral suasion:” The Fed pressured banks (especially in NYC) to limit loans for stock purchases. The FED didn’t want to see a lot of speculation loans but they could not raise the DR to prohibit them because it would have lowered the money supply everywhere and that would have hurt economic growth FED’s dilemma: How to reduce the flow of funds to the stock market without lowering money supply? o However, stock purchases cont'd to rise via purchases on margin (leveraging) (Typically, 40-50% of purchase price borrowed) § Makes return greater if stock price ↑, BUT also greater loss if stock price ↓ (Example on p. 413) If stock price goes up, % return goes up and the borrower benefits If stock prices go down, % loss if greater As stock prices go down, people exit the market to lock in their profits, which causes more people to want to leave the market and prices spiral down § The Fed continued to try to discourage banks from making loans for margin purchases. In Aug 1929, the Fed took the step of increasing the discount rate from 4.75% to 6% in an effort to further discourage bank loans for speculation. However,… In hindsight, this was a badly times move on the FED’s part because they tightened the money supply in an already diminishing economy (slowly but there is evidence of lower economic activity in the summer of 1929) and starved the upcoming recession even worse o By 1929, $8.5 billion in brokers' loans were made for margin purposes § Only $1.8 billion of the total was loans from banks. § The remaining $6.7 billion was from non-bank lenders, esp. corporations! § 1929: Standard Oil of NJ diverted $69 million/day § These were call loans. Loan that can be called in for repayment at any time Firms give their money to brokers, who lend that money on behalf of the firms When the firms call in those loans, the investors have to come up with the money à sell stocks à stock supply goes up à stock prices go down à other investors see the stock prices falling and then pull their investments out of the market as well (another down spiral of stock prices and investment) • Econ Insight 22.2: Did the increased availability of call loans for margin purchases fuel the bull market? Demand for call loans was creating the supply (not that the supply of call loans was creating the demand)
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