The Causes of the Great Depression

1. The Causes of the Great Depression

2. Speculative Boom = Spectacular Crash • Business was thriving in the 1920s • Businesses making money • Americans thought they could make easy money by investing • Seemed like there was no limit to the Bull Market • Buying from Brokers: people who bought and sold stocks • Brokers let investors Buy on Margin

3. Buying on Margin • Buying stocks was easy in the 1920s. You didn’t even need to have the full amount to buy stocks. • Example: buying on margin allowed you to only pay 10% of the stocks price up front. You could be loaned the other 90% • Someone with only $1,000 could borrow $9,000 and get $10,000 worth of stocks • Led to Stock Speculation: buying not to invest in a company because you think it will do well, but buy today so you can sell tomorrow and make a quick profit. • Leads to inflated prices of stocks (stock is worth more than it should be

4. A House without a Strong Foundation • The market was unstable because of speculation • As the market went down, brokers wanted their loans to be paid • Because stock prices were falling, investors couldn’t pay back the loans • Individuals had to sell homes, cars, furniture to repay debts • Businesses had invested profits in the market and had to close – people lost jobs.

5. The Crash • Market hits its peak on September 3, 1929 • Prices drop after this • Sometimes in small amounts, sometimes in tumbles • October 29, 1929: Black Tuesday • Bear Market – market in which prices decrease steadily • By the end of 1929 investors had lost $30 Billion

6. Banking Crisis Wipes Out Savings • During the 1920s banks were a part of the speculation boom • Loaned money to brokers who loaned money to investors • Banks used money from people’s savings accounts for the loans • Banks began calling in their bad loans, when people couldn’t pay the bank back people got nervous

7. Runs on the Bank • As the economy went down, people lost confidence in the safety of their banks holding on to their money. • This led to Bank Runs – panicked depositors lining up around the block to try to withdraw their money from the bank • Those who got there first usually got their money back • But if the bank ran out of cash, the bank closed and depositors lost their investments • 3,800 banks close in 1931 and 1932

8. Banking and Stocks Aren’t the Only Problem Causing the Great Depression • Too much for sale, too little to spend • New technology in manufacturing and farming create a 32% increase in production • Overproduction: More products are available than people can afford to buy • Unequal Distribution of Wealth between rich and poor • Lower economic class makes up for this buy buying items with credit cards • Advertising convinces consumers that thrift is old fashioned • Personal debt rises from $3.1 billion to $6.9 billion from 1921 to 1929

9. Underconsumption Causes Farm Failures, Bankruptcies, and Layoffs • Underconsumption: People were not buying as much as the economy was producing • Farmers got loans to buy land and equipment to produce as much as they could during WWI • When the war ended, demand decreased • Farmers can’t store excess products, they go bad • Prices go down, but farmers still need to repay loans

10. Underconsumption Impacts Industry • By late 1920s underconsumption began to impact business • Manufacturers cut back production • Example: auto and steel industry cuts back production by 38% in 1930 • Businesses begin to lay off workers • Between 1929 and 1933, unemployment goes from 3% to 25%

11. Government Actions Make a Bad Situation Worse • Federal Reserve loans money to member banks to control the supply of money • The “Fed” kept the amount of money in the economy high during the 1920s by lowering the discount rate • Discount Rate is the rate of interest a bank pays to borrow money from the government. • Lower rate = more money in supply • Higher rate = less money in supply • Fed raised the discount rate in 1931 – businesses couldn’t get money for capital and therefore laid off workers

12. Government Actions Make a Bad Situation Worse • Tariffs Cause Trade Troubles • Remember the Treaty of Versailles (Ver-sigh)? • The peace treaty of WWI • European nations owed us money for all the weapons we sold them. Germany owed them money (reparations) • In order to pay us, those nations need to make money buy taxing income from businesses. Businesses need to sell products to make money. • So, they try to sell goods to Americans

13. Hawley-Smoot Tariff Act • Congress is worried that Americans won’t buy goods made by American companies if they can get cheaper goods from Europe • So, they pass a tariff (tax on imported goods) on all European made goods • Made European countries angry so they raised tariffs on American made goods • US companies were unable to sell excess goods to other countries • Great Depression spreads throughout the world