Commendatori's Blog

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Causes of the Great Depression – Anything Sound Familiar?

Posted by commendatori on February 8, 2009

  • In the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt.
  • People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products.
  • Businesses began to fail as construction work and factory orders plunged. By 1928, the Construction Boom was over.
  • By 1929, public consumption was markedly down. Freight carloads and manufacturing fell drastically. Automobile sales declined by a third in the nine months before the crash.
  • Construction was down $2 billion in the period since 1926.
  • Stock market crash begins October 24, 1929. Investors call October 29 “Black Tuesday.” Losses for the month will total $16 billion, an astronomical sum in those days.
  • By February, 1930, 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.
  • Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay.
  • The first bank panic occurs later this year; a public run on banks results in a wave of bankruptcies. Bank failures and deposit losses are responsible for the contracting money supply.
  • With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.
  • Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
  • Marriner S. Eccles, FDR’s Fed Chair noted: “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties.”
AND THIS IS WHAT HAPPENED TO AMERICA IN THE 1930′S
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