Great Depression

Causes of

The Great Depression

The Great
Depression

is one of the

most

misunderstood

events in
American
history…

Some point to the

Crash of the
Stock Market

as the cause of the

Depression…

Not true.

Some blame

Herbert Hoover,

claiming his
“hands-off”

economic policies
dragged America

into the

Depression…

Not accurate.

The Great Depression was a
worldwide event.

By 1929, the world
suffered a major rise
in unemployment.

Multiple Choice

The Great Depression only happened in the US.

• True

• False

All nations were interconnected
but Germany was the big loser –

for NOW!

Money was moving but doing

little good!

There are several
explanations, but the most
obvious causes are four:

1. Overproduction
2. Banking & Money Policies
3. Stock Market Actions
4. Political decisions

1. Over-production:

The “roaring twenties” was an

era when our country

prospered tremendously.

The availability of so many

consumer goods, such as
electric appliances and

automobiles, offered to make

life easier.

Americans felt they deserved

to reward themselves after

the sacrifices of

World War I.

Open Ended

Why was the 1920s called the "Roaring 20's"?

This led to a
high demand

for such goods,

so companies began to
produce more and more,

in order to meet that

demand.

But in reality there existed:
*Underconsumption of these
goods here and abroad,
because people didn’t have
enough cash to buy all they
wanted…
* There still existed an
uneven distribution
of wealth and income.

Open Ended

Did people have the means to buy new technology? Why or why not?

Americas’ farms were
overproducing, as well.
During
World War I,
with European
farms in ruin,
the American
farm was a
prosperous
business.

Increased food
production during
World War I was

an economic

“boon” for many

farmers, who

borrowed money
to enlarge and

modernize

their farms.

The government had also

subsidized farms
during the war,

paying high prices

for wheat and grains.

When the subsidies were cut,
it became difficult for many

farmers to pay their debts when

commodity prices dropped to

normal levels.

Open Ended

What happened to the farmers during and after WWI?

So, to summarize it,

HIGH DEMAND

for consumer goods

and

agricultural products

led to

OVERPRODUCTION.

2. Banking & Money Policies

The uneven
distribution
of wealth
didn’t stop

the poor and
middle class
from wanting

to possess

luxury items,
such as cars
and radios…

But, wages were not keeping up

with the prices of those goods…and

that created problems!

One solution was to

let products be

purchased on credit.

The concept of

“buying now

and paying later”
caught on quickly.

Multiple Choice

What is credit?

• buying later and paying now

• buying everything you want without paying it back

• buying now and paying later

• a bonus paycheck

There had been credit
before for businesses,

but this was the

first time

personal consumer credit

was available.

By the end of the 1920s,
60% of the cars and 80%
of the radios were bought

on installment credit.

The Federal Reserve

Board

was created
by Congress

in response to the

Banking Crisis of 1907.

The Federal Reserve

was suppose to serve as a

protective “watchdog”

of the nation’s economy.

It had the power to set

the interest rate for loans

issued by banks.

Multiple Choice

What the purpose of creating the Federal Reserve Board?

• To make sure the government doesn't regulate businesses

• To be the "watchdog" of the nation's economy

• To be the "savings" account for the US

• To loan money to people

In the 1920s,

the “Fed” set very
low interestrates
which encouraged

people to buy on the

“installment” plan

(on credit.)

More buyers meant

more profit for

companies, so they
produced more and

more…

so much that a
surplus of goods

was created!

In 1929, the Fed worried
that growth was too rapid,
so it decided to raise the

interest rates and

tighten

the supply of money.

This was a bad
miscalculation!

Facing higher
interest rates

and accumulating debt,

people began to

slow down

their buying of
consumer goods…

So,to summarize,
banking policies
which offered
“buying on credit”
first with
lower interest rates,
then raising those rates,
caused a dangerous situation
in the economy.

Open Ended

What was the problem with the interest rates?

Buying on Credit

increased

personal debt.

Higher interest rates

caused

LESS DEMAND

for goods.

3. STOCK MARKET

ACTIONS

The Stock Market was an

indicator of national prosperity.

Multiple Choice

What was one indicator of the nation's prosperity?

• The Stock Market

• Congress

• National Bank

• Nothing

The Stock Market
growth in the 1920s

tells a story of
runaway optimism
for the future.

Just as one could buy

goods on credit,
it was easy to
borrow money
to invest in the
stock market;
This was called

“margin investing”

(or “buying on margin.”)

Multiple Choice

To borrow money to invest in the Stock Market is called?

• loan

• mutual funds

• buying on margin

• Trading stocks

Small investors were
more apt to invest in

the Stock Market
in large numbers

because the

“margin requirement”

was only 10%.

This meant that you would

buy $1,000 worth of

stock with only 10% down,

or $100.

People leapt at the chance

to invest

in business!

As business was

booming in the 1920s

and stock prices

kept rising

with businesses’
growing profits,

buying stocks

on margin

functioned like buying

a car on credit.

The extensive

speculation

that took place

in the late 1920s

kept stock prices high,

but the balloon

was due to burst…

The crucial point came when
banks began to loan money to

stock-buyers.

Wall street investors were
allowed to use the stocks
themselves as collateral.

If the stocks dropped in value,
the banks would be left holding

near-worthless collateral.

Open Ended

What do you think is the problem of the banks loaning money to stock-buyers?

So what went wrong?

The Crash:

“Black Tuesday”

Oct. 29, 1929,
the
Stock Market

crashed.

Over 16

million shares
sold in massive
selling frenzy.

Losses

exceeded

$26 billion.

Actually, the “crash” was by no

means a one-day event.

A month earlier,

trading increased rapidly
as stock values dropped

and people panicked,

trying to sell their stocks

before losing too much
of their investments.

Open Ended

What exactly happened on Black Tuesday?

The Stock Market

Crash of 1929

was only a symptom-
not the cause of the

Great Depression.

Buying on Margin

was a

risky market

practice.

Bank loans for
stock purchases

was an

unsound practice.

More Poor

Banking Policies…

With the loss of

confidence in stocks,
people began to lose

confidence in the security

of their money

being held in banks.

Customers raced to their

banks to withdraw

their savings.

Open Ended

Why did people race to the banks to get their money?

The Federal Reserve was
also established to prevent

bank closings.

It was suppose to serve
as the “last resort” lender
to banks on the verge of

collapsing.

Multiple Choice

What was the Federal Reserve also supposed to help with?

• To prevent banks from closing

• To provide financial assistance to individuals

• To regulate the stock market

• Nothing else

However,the Fed had

lowered its requirement of

cash reserves

to be held by banks.

Many banks didn’t have
enough cash available to

match the amount of

money in

customers’ accounts.

In early 1930, there were
60 bank failures per month.

Eventually, 9,000 banks

closed their doors between

1930 and 1933.

Multiple Choice

How many banks would close by 1933?

• 60

• 9,000

• 100

• 2,000

Simply put, when a bank
fails, a large amount of
money disappears
from the economy.

There was no insurance for
depositors at this time,
so many lost their savings.

As banks closed their doors and more
people lost their savings, fear gripped

depositors across the nation.

Business also lost its
money and could not
finance its activities…

More businesses went
bankrupt and closed
their doors, leaving more
people unemployed…

…Causing unemployment to reach

even higher levels.

Open Ended

How does bankruptcy affect unemployment?

4. Political Decisions:

The Depression could have been less
severe had policy makers not made

certain mistakes…

Leaders in government and business

relied on poor advice from

economic & political experts...

“The sole function of the government is to

bring about a condition of affairs favorable
to the beneficial development of private
enterprise.”

Herbert Hoover (1930)

But did Hoover really believe in a

“hands-off”

free market philosophy?

Hoover did take action to
intervene in the economy,

but it was

too little too late-

Hoover

dramatically

increased
government
spending for

relief,

doling out millions

of dollars to

wheat and cotton

farmers.

Within a month
of the crash,

Hoover met with

key business

leaders to urge

them to keep
wages high,
even though
prices and

profits

were falling.

Open Ended

Was Hoover able to help the US economy? Explain why or why not.

The greatest mistake of the

Hoover administration was

passage of the Smoot-Hawley

Tariff, passed in 1930.

(It came on top of the

Fordney-McCumber Tariff of
1922, which had already put
American agriculture into a

tailspin.)

The most protectionist
legislation in history,

the Smoot-Hawley Tariff

Act of 1930

raised tariffs on

U.S. imports up to 50%.

Officials believed that raising trade

barriers would force Americans

to buy more goods at home, which

would keep Americans employed.

But they ignored
the principle of

international trade-

it is a two-way street;

If foreigners can’t sell

their goods here,

they will shut off our

exports there!

It virtually closed our

borders to foreign goods

and ignited a vicious

international trade war.

Europe had debts from

World War I and Germany

had reparations to pay.

Foreign nations curtailed

their purchase of
Americans goods.

Open Ended

Why was the Smoot-Hawley Tariff the greatest mistake of the Hoover administration?