Causes of The Great Depression The Great Depression
Causes of The Great Depression The Great Depression is one of the most misundersto od events in 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. The Great Depression was not the countrys first depression, though it proved to be the longest and most severe.
In the first four years of the Depression, real economic output (Gross Domestic Product) fell by 30% from 1929 to 1933. The U.S. Stock Market lost 90% of its value.
Percent Change in Real GDP 15 10 5 0 -5 -10 -15 1929
1930 1931 1932 1933 1934
1935 1936 1937 1938 1939
1940 Many did not realize how severe the downturn was until 1932, when the economy had technically hit bottom. But the human
misery continued long into the late 1930s Brother Can You Spare a Dime? Once I built a railroad, I made it run I made it race against time Once I built a railroad, now it's done Brother, can you spare a dime?
Once I built a tower, up to the sun Bricks and mortar and lime Once I built a tower, now it's done Brother, can you spare a dime? 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. Average output per worker increased 32% in manufacturing and corporate profits rose 62%. 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. 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 didnt have enough cash to buy all they wanted * There still existed an uneven distribution of wealth and income. 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
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. So, to summarize it, HIGH DEMAND for consumer goods and agricultural products led to
OVERPRODUCTION . 2. Banking & Money Policies The uneven distribution of wealth didnt stop
the poor and middle class from wanting to possess luxury items, such as cars But, wages were not keeping up with the prices of those goodsand that created
problems! One solution was to let products be purchased on credit. The concept of buying now and paying later caught on quickly.
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 nations economy. It had the power to set the interest rate for
loans issued by banks. In the 1920s, the Fed set very low interest rates 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.
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. 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.) 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!
George Olsen and his Music "I'm In The Market For You I'll have to see my broker Find out what he can do. 'Cause I'm in the market for you. With margin I'm all through. 'Cause I want you outright it's true. We'll count the hugs and kisses, When dividends are due,
'Cause I'm in the market for you. 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 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 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. The Stock Market Crash of 1929 was only a symptomnot 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 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. However,the Fed had
lowered its requirement of cash reserves to be held by banks. Many banks didnt 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. Bank Failures
1944 1942 1940 1938 1936
1934 1932 1930 1928 1926
1924 1922 4500 4000 3500 3000 2500 2000
1500 1000 500 0 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. 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. The greatest mistake of the Hoover administration was passage of the SmootHawley 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 tradeit is a two-way street; If foreigners cant sell their goods here, they will shut off our exports there!
Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934 7 Billions of Nominal Dollars 6 5 4 Exports
20 Unemployment Rate Total Federal Outlays Other fiscal policies of FDRs include the creation of a
Social Security tax and the Agricultural Adjustment Act. For example, to raise the price of agricultural
products, the AAA attempted to reduce overproduction by paying farmers to destroy some of their crops. Between 1933 and
1936, government expenditures rose by more than 83% and the deficit skyrocketed. 10 9 8 Federal Government Expenditures
6 5 State and Local Government Expenditures 4 3 2
1 1940 1939 1938 1937
1936 1935 1934 1933 1932
1931 1930 0 1929 Billions of Dollars 7
Another tool for the U.S. government is Monetary Policy and is conducted by the Federal Reserve System, a quasi-government agency.
Monetary Policy is the deliberate regulation of the nations money supply and interest rates. There is a direct relationship between the
nations money supply and the level of business activity. If the supply of money and credit increases too rapidly, the result will be a period of rising prices known as inflation.
During inflationary periods, the purchasing power of the dollar falls, meaning that people get less for what they spend. It is the role of the Federal Reserve to
watch the supply of money in circulation, altering it when necessary to avoid rapid inflation. FDR worked with two types of reform for monetary policy; He wanted to
stabilize both the stock market & the banking system. The Securities & Exchange Commission (SEC) was created to regulate the
stock market. The Federal Deposit Insurance Corporation (FDIC) was created to insure individual deposits at banks. Eventually, the economy
showed some signs of life. Unemployment dropped to 18% in 1935, but three years later returned to 20%. But the stock market continued to slump through 1938
On the eve of Americas entry into World War II and 12 years after the stock market crash of Black Tuesday, ten million Americans were still jobless. Along with World War II came a revival of trade
with Americas allies. Government investment in war-related businesses fueled a powerful post-war boom. And the Great Depression Did the Great
Depression Forever Change the American Economic Policy? What is the role of the government in preventing (or solving) economic downturns? Recall FDRs New Deal (1933-36)
1. Banking Act: FDIC 2. Federal Farm Mortgage Corporation & Home Loan Corporation 3. Agricultural Adjustment Act 4. TVA 5. Public Works Administration 6. Works Project Administration 7. Securities Act 8. National Industry Recovery Act 9. Social Security Act
10. Wagner Act 11.Fair Labor Standards Act The Great Depression 1929 - 1941 PowerPoint Presentation created by Pam Merrill, Social Studies Coordinator, Edmond Public Schools
References Mary Oppegard, OCEE Field Representative, Oklahoma Baptist University. Dr Sue Lynn Sasser, OCEE President, University of Central Oklahoma. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States: 1857-1960, Princeton University Press, 1963. Chapter 7 & 8. Bennett T. McCallum, Monetary Economics: Theory and Policy, Macmillan, 1989. R.A. Mundell, AA Reconsideration of the Twentieth Century,@ American
Economic Review, July 2000, pp. 327B339. Gene Smiley, Rethinking the Great Depression, Ivan R. Dee, 2002. Gary M. Quinlivan and Brian Surkan, For Freedom and Prosperity: Philip M. McKenna and the Gold Standard League, Center for Economic and Policy Education, 1999. Dr. Gary Quinlivan, Saint Vincent College.
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