Financial Distress

and finance Allah shmoop What was the Great Depression Okay

So what is the Great Depression Yes yes it's the

feeling you get after a major break up You know

where you sit in front of the TV for twelve

hours at a time shoving massive amounts of Cheetos in

your mouth and obsessively checking your ex's instagram feed one

form of great Depression But the Great Depression we're talking

about here describes a key period in the twentieth century

Specifically the Great Depression represents the worst economic downturn in

American history Ever wonder why your great grandpa spent so

much time burying Mason jars filled with quarters in the

backyard while obsessively mumbling about those *** banks While starting

in the late nineteen twenties the Great Depression lasted until

in the early nineteen forties really ending Justus America for

ever cared for entry into World War two The Depression

included mass unemployment widespread bank shut down There were significant

foreclosure like people getting kicked out of their homes Then

there was starvation and well just long lasting financial trauma

So first a bit about the name When economic conditions

are good and the economy is growing That's called an

expansion when the economy slows down While that's known as

a recession if a recession last for a long time

and gets particularly bad well then it becomes a depression

And when a depression goes on for well over a

decade and it spreads throughout the world where it contributes

to mass political dislocation which eventually feeds into the causes

of World War Two well then it becomes the Great

Depression Great Not in a good way Well it's nineteen

eighteen World War is over The countries of Europe were

bombed out and bankrupt Thank you Germany and the U

S Emerged from the war is the key economic power

in the world Now it's the nineteen twenties US is

the centre of world economy The jazz age is in

full swing Gatsby is there hosting lavish parties in West

Egg Babe Ruth is partying down with Charlie Chaplin in

a C speakeasy owned by Al Capone The U S

Is benefiting from a boom and consumer products and rapid

expansion of technological improvements like radios That was high tech

in those days There were cars there were refrigerators Yeah

they're all becoming common household items and we made him

we exported him well Meanwhile financial speculation runs rampant You

could make a killing in a Florida land deal or

by booming tech stocks like RC A right the Radio

Corporation of America But things started to get shaky toward

the end of the decade late nineteen twenties commodity prices

have been falling for some time leaving farmers who sell

the ultimate commodity you know coloring turnips wheat out of

much of the prosperity of the nineteen twenties Meanwhile the

stock market was pumped up by unstable margin trading Basically

people have been borrowing money to bet on stocks A

trader has a thousand bucks in his account His broker

lets him borrow another five hundred dollars on margin Margin

just means that the trader is allowed to borrow money

to purchase more stock The shares of stock become the

collateral for the money he borrowed If the broker ever

wants the money back the cash ola while the broker

can then make a margin call meaning that the broker

Khun demand that the investor there a trader sell his

stock immediately in order to pay the money back Well

the system works well when the stock market's going up

up But as you can imagine it can lead to

disaster when stocks decline quickly So first look at how

it works in the good times The trader has a

thousand dollars worth of equity but takes on five hundred

bucks in margin So all in that Khun by fifteen

hundred dollars worth of stock purchasing hundred shares of Amalgamated

Fedora Ink at fifteen dollars each stock goes up twenty

Trader then sells the stock for two thousand dollars pays

back the five hundred bucks he borrowed plus and maybe

twenty five bucks and interest Then he keeps the additional

profit well The trader just made four hundred seventy five

dollars from his thousand dollars of equity position or thousand

dollars in stock for the owned That's forty seven point

five percent return even though the stock only went up

a third like thirty three percent Well the additional dough

from the margin account further inflates the stock bubble of

the nineteen twenties but it also makes the bubble Mohr

unstable Well margin in those days acted to pump up

the profits when stock market rose but it also acted

to deepen the pain When stocks went down traders lost

more than they had and brokers got caught with large

amounts of outstanding debt that well nobody could pay back

Same traders Same thousand dollar account same five hundred dollars

margin All invested in one hundred shares of Amalgamated Fedora

Ink at fifteen bucks a share But now the doomsday

scenario The bubble bursts Amalgamated food or a drop from

fifteen dollars a share too four dollars a share The

broker makes a panic margin Call the trader sells his

hundred shares and gets the four hundred bucks It's all

he can get Well now he's lost eleven hundred dollars

on his thousand dollar account The brokerage is still owed

one hundred dollars The broker is on the hook for

that hundred dollars but the brokers also loaned the same

margin to one hundred other clients Each of them are

also one hundred bucks in the hole So now the

brokerage there's ten grand in the hole in the economy

The nineteen twenties cheap credit pumped up other parts of

the financial industry It wasn't just the stock market Speculation

ran rampant Creating an unstable system Susceptible The shocks like

that Which brings us to nineteen twenty nine right here

the troubles culminate in a massive stock market crashed It's

not the plunge in stock prices that causes the Great

Depression but the crash acts as a curtain raiser for

much of the hardships to men Calm following the Wall

Street bloodbath things quickly get bad for the rest of

the economy Like businesses collapse unemployment skyrockets Banks begin to

fail There are mass foreclosures and bankruptcies So what happens

here Late twenties early thirties It's Grapes of Wrath time

Yeah the people in charge like President Herbert Hoover and

the Federal Reserve Well they don't really know how to

deal with this kind of downturn Previous economic panics have

occasionally been sharpened painful but they've always corrected themselves quickly

Not after nineteen twenty nine Things just keep getting worse

over the coming years Announced nineteen thirty two Election year

President Hoover is defeated by FDR Franklin Delano Roosevelt FDR

gets elected on the promise of a new deal a

series of measures meant to re invigorate the economy and

regain confidence in the finance industry Well FDR in a

newly elected Congress immediately started passing relief actions Banking reform

government regulation finance regulation Also government start spending money on

relief efforts and projects meant Teo get people backto work

well The new Deal takes its inspiration from British economist

John Maynard Keane's He theorized that governments should combat economic

troubles with deficit spending in an effort to stimulate demand

and give business a kick start after nineteen thirty two

while things improve though a full recovery takes the rest

of the decade Ultimately the preparations ahead of World War

Two and eventually the boost from all of this spending

pulled the US out of the Great Depression So yeah

it didn't even need to go to counseling Uh oh