Financial Crises: A Focus on the Great Depression Economies can register ‘boom’ and ‘bust’ Crises in History: Tulip mania - Netherlands 1637 South Seas Bubble, UK 1720 The Mississippi Bubble, France 1720 Panic of 1819 – USA The Long Depression 1876 – 1896 UK, USA, Europe Panic of 1907 Wall Street Crash – 1929, Great Depression 1930-45 Oil crisis 1973 (UK – IMF in 1976) Savings and Loan Scandal, USA, 1986-96, US$ 125 bn bailout Japanese asset bubble – 1986 - ? Mexico 1994 Asian financial crisis (“IMF crisis”) – Thailand, Indonesia, South Korea, Philippines, 1997-8 Russian financial crisis 1998 Dot-com bubble 2001 Argentina defaults – largest debt default in history - 2002 Background the United States Economy in the 1920’s The United States economy in the 1920’s was very strong The growth of the automobile industry had a positive impact on many other industries Unemployment was low Shorter working hours and higher wages gave Americans more spare time and more money for entertainment U.S. History is nicknamed the Roaring Twenties Life in the 1920s Moving Picture Shows (―movies‖) – all movies were silent films at first (had music but no talking) -Charlie Chaplin was the most famous silent film star -first ―talking‖ movie was The Jazz Singer (1927) staring Al Jolston -famous movie stars of the 20s: Rudolph Valentino, Clara Bow, Mary Pickford, Lillian Gish, Charlie Chaplin Life in the 1920s: The Jazz Age Music / Dance – the radio made music more popular -Jazz was the most popular music of the 20s – started in New Orleans -Louis Armstrong was the most popular jazz musician of the 20s -George Gershwin was a popular composer – wrote ―Rhapsody in Blue‖ -popular dances included: Charleston, Fox-trot, and Tango Life in the 1920s Literature – famous authors included: -F. Scott Fitzgerald – The Great Gatsby -Sinclair Lewis – Main Street -Ernest Hemingway – A Farewell to Arms Life in the 1920s Transportation *Henry Ford – ―made the 20s happen‖ -responsible for changing the automobile industry by using the assembly line – each worker had a specific job -1920 – 8 million cars on the road -1929 – 23 million -developed the Model T car 1920s GOOD TIMES ARE HERE TO STAY! • Gross National Product went up • All economic indicators showed increased prosperity • Consumption went up Installment Buying • In the 1920’s Americans began buying items they could not afford through the use of installment buying (buying on credit) • This increased the demand for goods • But it also increased consumers debt Consumer Goods Americans began to purchase large amounts of consumer goods, mostly on credit- Installment Plans – Washing machines – Radios – Vacuum cleaners – Refrigerators The Stock Market • The strength of the economy led many people to invest in the Stock Market in hopes of becoming rich Buying Stock on Margin • People who did not have money to purchase stock could buy stock on margin – Banks and stock brokers would loan people money to purchase stock – People had to pay back the bank/brokers with interest – Simple example with no interest rate Buying Stocks on Margin: Scenario A Hello, sir. I would like to purchase 100 shares of stock in the Ford Motor Company. How much is it going to cost me? investor stock broker Buying Stocks on Margin: Scenario A Well, Ford stock costs $10 per share. You want to buy 100 shares? Figure it out yourself, smart guy! investor stock broker Buying Stocks on Margin: Scenario A Ummm… 100 shares x $10 per share = $1,000.00 Oh, well. I only have $100. I can’t afford 100 shares. investor stock broker Buying Stocks on Margin: Scenario A No, problem! Just give me $100 and you can owe me the rest! investor stock broker Buying Stocks on Margin: Scenario A Like, how much would that be? Let me think… $1,000 worth of stock - $100 paid = $900 owed Alright, it’s a deal!! investor stock broker Buying Stocks on Margin: Scenario A Six months later, Ford stock doubles to $20 per share. My 100 shares are now worth... 100 shares x $20 per share $2,000 investor stock broker Buying Stocks on Margin: Scenario A That’s great! Now pay me the $900 you owe me! investor stock broker Buying Stocks on Margin: Scenario A No problemo! It was a pleasure doing business with you! investor stock broker Buying Stocks on Margin: Scenario A Now let’s figure out how much money I made! $2,000 net worth - $900 owed $1,100 profit - $100 initial investment $1,000 net profit investor Buying Stocks on Margin: Scenario B Six months later, Ford stock decreases to $1 per share. My 100 shares are now worth... 100 shares x $1 per share $100 investor stock broker Buying Stocks on Margin: Scenario B Too bad, hotshot! You still owe me $900! investor stock broker Buying Stocks on Margin: Scenario B But I’m broke! What am I going to do! investor stock broker Buying Stocks on Margin: Scenario B I don’t care what you do as long as you pay me back! investor stock broker Buying Stock Buying stock on margin can be very fruitful...but you have high risk….and you can register severe losses! Signs of Trouble But the ―Roaring Twenties‖ weren’t roaring for everyone... Although the economy of the 1920’s was very strong signs of trouble began to appear The Roots Causes (Signs of trouble) of the Great Depression 2.) Huge farm 1.) Over-production surpluses: and under- consumption -led to a drop in farm prices (failing DEMAND)… -many farmers lost their farms because no ↑ unemployment one needed their food The Great Depression 4.) Unequal 3.) Lack of distribution of diversification wealth ↓ variety of goods! The Roots Causes of the Great Depression 6.)High Tariffs 5.) Credit problems & Stock Market (Hawley-Smoot speculation Tariff)… ↓ competition ↑ prices of certain goods! The Great Depression 7.) Low Interest Rates (Federal Reserve) Signs of Trouble • Overproduction and huge farm surplus: Massive business inventories- --- Increased Supply Effects of Overproduction Farms and factories overproduced beyond the demand. Businesses cut production Workers suffered Demand for from wage cuts goods fell. and lay offs. People had little or no money to spend. Signs of Trouble • Lack of diversification in American economy--prosperity of 1920s largely a result of expansion of construction and automobile industries Signs of Trouble • Unequal distribution of wealth 1. people were very rich or very poor: 1% of Americans controlled 40% of the wealth in this country 2. 20% of the nation lived in poverty (late 1920s)! 3. Farm income declined 66% from 1920 to 1929 Signs of Trouble • Huge credit problems 1. Stream of bank failures in late 1920s as customers (many of them farmers) were unable to pay mortgages 2. Many bankers had invested money in the stock market 3. By October 1929, margin buying reached $8.5 billion in loans to stock purchasers 4. Low margins encouraged speculative investment on the part of banks, corporations, and individual investors Signs of Trouble • Decline in demand for American goods in international trade 1. High American protective tariffs discouraged trade • Hawley-Smoot Tariff 2. Some nations, particularly Germany, were experiencing financial crises and inflation and they could not afford to purchase American goods The Stock Market Crash Immediate Cause of the Great Depression – the Stock Market Crash: • Prices of stock rose throughout the 20s • By Sept. 1929, the Dow Jones average reached 381 The Great Depression • Thursday, October 24, 1929 – some stockholders began to pull out of the market – afraid of a crash • Tuesday, October 29, 1929: -―Black Tuesday‖ -the day the stock market crashed, and it largely symbolizes the start of the Great Depression Black Tuesday • Tuesday, October 29, 1929: investors panicked and started selling before their stock became worthless Dow Jones fell to 261 (41 in 1932) between $6 and $9 billion was lost The Stock Market Crash The Great Depression • Economic Downturn accelerated by stock market crash leads to the Great Depression • One of the most difficult periods in American history Consequences of the Stock Market Crash •People who had invested all their savings in stock lost everything •People that had bought stocks on margin could not pay back banks The Great Depression • Between 1929 and 1933, 100,000 businesses failed • Corporate profits fell from $10 billion to $1 billon • Between 1929 and 1933, over 6000 banks failed with over 9 million savings accounts lost ($2.5 billion) CROWD OUTSIDE A CLOSED BANK RUN ON BANK The Great Depression • By 1933, 13 million workers were unemployed (25% unemployment) and many were underemployed The Great Depression • Malnutrition increased, as did tuberculosis, typhoid and dysentery. – In 1932, 95 people died of starvation in New York City – Many turned to soup kitchens and breadlines for food The Great Depression • Children were forced to work • Many people became homeless -many of the homeless lived in small villages made of cardboard boxes and crates nicknamed ―hoovervilles‖ (named after Pres. Hoover who was blamed for the Depression) The Great Depression • Large numbers of homeless workers travelled the U.S., particularly the Southwest, seeking work Change in economic indicators 1929–32 United Great Germa France States Britain ny Industrial –46% –23% –24% –41% production Wholesale prices –32% –33% –34% –29% Foreign trade –70% –60% –54% –61% Unemployment +607% +129% +214% +232% President Hoover • President Herbert Clark Hoover and business leaders attempted to calm Americans by assuring them that the country's economy was fundamentally sound The Dust Bowl • An environmental disaster in the southern Great Plains during the 1930’s • Severe drought during 1931 caused the soil to dry out and swept the soil away – Farmers had cleared millions of acres of grassland – Grass had held the soil in place • Farmers went bankrupt and moved west President Hoover’s Response Did not believe that it was the role of the government to provide relief to Americans He believed in a limited role for government and worried that excessive federal intervention was a threat to capitalism Urged Americans to turn to community and church resources (Salvation Army, Community Chest, Red Cross) to meet needs of the poor Hoover’s Response Gradually used federal agencies to address issues 1.