The Great Depression

• Causes
  • Agricultural Prices in the US drop, which leads to bad farm loans.
  • The loans weaken the US banks, who reinvest more deeply in stocks
  • The bank's buying so many stocks creates an artificial demand (increases price above real value)
  • When people realize that the stocks are overpriced, they sell their stocks which induces the wall street crash.
• Flowchart
  • The Wall Street Crash in October 1929
  • Bank Failures occur, so the banks start to recall European loans
  • Industries become static or start to shrink in Germany because they have to pay back loans
  • These industries starts laying off employees
  • Personal spending decreases
  • Which causes industries to lay off more people, and the cycle repeats
  • Governments start to protect domestic products with Tariffs.
  • The US has the highest tariff in history in 1930, called the Hawley-Smoot Tariff.
  • The tariffs cause a collapse of international trade, which causes a loss of industrial profit
  • The loss of profit also causes a decrease in Industrial growth
• Hoover's Laissez-faire Response
  • "Business Cycle"
  • The market will write itself
• Economic policies
  • Keynesian: John Maynard Keynes
    • used in 1930 FDR and AH are successful in using this method
    • liberal
    • a decrease in spending transforms recessions into depressions
    • you cannot force the private sector to take preventative measures
    • the privates stop hiring and decrease production because people stop spending
    • The government's role should be to promote spending through creating employment with government jobs
    • you can lower taxes/ instead do rebates, or offer incentives to spend
    • the government steps in to stop the ciris
  • Monetarist Policy: Milton Friedman
    • conservative
    • the monetarist policy states that the problem in a recession is about money
    • Individual authority which regulates monetary policy, called the Federal Reserve.
    • The Problem is caused by monetary contraction
    • you can print more money, which leads to inflation, or control/manipulate the interest rates to influence spending
    • increase monetary liquidity (blood analogy)