Causes of Depression: 1929 - 1932

The Great Depression started like many other depressions, with an initial recession.  The steps below are how David Kennedy lays out how the recession turned into the Great Depression.

Red Letters = Events or actions that modern economists would lead to a contraction (deeper recession) in the economy.
Blue Letters = Events or actions that economist would lead to an expansion (recovery) in the economy.


1929

• Deep recessions in Agriculture, the housing market, and automotive industry began over the past several years.
• Stock Market Crash
• Fed buys bonds and lowers discount rate
• Many large private businesses (including U.S. Steel) commit to not cutting wages during the recession
• Federal, state and private commitments for construction projects
• Federal ($200 million), State ($2 Billion), Private ($9 Billion)

1930

• June 17:  Hawley-Smoot Tariff (highest tariff in history)
• November:
• Dems win midterms - Speaker John Nance Gardner commits to "avoid committing our party to definite program"
• Runs on banks begin in Louisville at the National Bank of Kentucky
• Bank runs spread throughout the midwest
• Banks call-in loans for liquidity for withdraws
• Banks sold bonds and real estate holdings to have cash for depositors
• As all of the banks sold their assets, in increase of supply of bonds and real estate on the market led to the decrease of price of these goods.  Thus, lowered the value of other banks' assets.
• December 11:  The Bank of the United States in NYC closed (not to be confused with Bank of America)
• $286 million from 400,000 depositors
• Largest in history
• End of December:  Business cut the 1929 commitment for construction projects

(Economic Data at end of 1930)

GDP down 12%, Unemployment 8.9%, 1,352 bank closures, 26,355 business failures

**This still wasn't as bad as 1921 recession, so officials thought it was going to be over quickly**

1931

• First Quarter of 1931
• Banks tighten credit to maintain liquidity for runs on the bank
• led to the contraction of the money supply
• FED doesn't act because Fed chair dies and others are worried about the failure of the NYC bank
• Spring 1931
• Causes from Europe
• Dawes Plan in place since 1924
• American loans fund Germany's ability to pay reparations.  Germany's reparations fund Britain and France's ability to repay war debts to the United States.
• ***There are $1.5 billion in American loans in Germany***
• Germany attempts at a custom union with Austria causes France to threaten restrictions on Austrian and German banks
• Sets off a bank panic in Austria and then in Germany
• September:
• September 21:  Britain (central country to world economy) broke from the gold standard (standard international payment) and defaulted on gold payment to foreign creditors
• Includes U.S. war debts from Dawes Plan
• The $1.5 billion in German loans are now worthless
• withing a month 522 U.S. banks failed
• As international fear grew, foreign investors began withdrawing gold and capital from the American Banking system
• adds pressure to the current domestic runs on the banks
• U.S. steel cuts wages 10% - causes other private companies to break 1929
• October
• FED increased discount rate to begin the deflation process in order to bring gold back into the American financial system
• 2,294 banks failed by the of 1931

1932

• January:
• Reconstruction Finance Corporation
• $500 million loans available for businesses
• February:
• Glass-Steagall Act
• Broadened the definition of collateral for Federal loans
• attempted to expand the money supply 
• June 6:
• Revenue Act
• Hoover turned to balancing the budget with a tax increase
• Thought was that the increase in taxes and the elimination budget deficits would expand the money supply by allowing more private loan-able funds for private use.
• July
• Ottawa Agreement
• Britain created an Imperial Preference system (a closed trading bloc) which sealed off the British empire from commerce of other nations
• November
• Election of FDR