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Unit 5
Essay 1
Why did the U.S. economy go “bust”
in the late 1920’s and lead into the
Great Depression ?
Economic Depression =
a sustained, LONGTERM downturn in
economic activity.
Large INCREASES
in unemployment;
lack of availability of
CREDIT
often due to some
kind of BANKING or
FINANCIAL crisis.
I. What caused the Great
Depression ?
The worst “depression” ever = massive
unemployment, banks closed,
homes/businesses lost,
hunger(starvation), etc.
Answer: ????
“The stock market crashed”????
Wrong – The stock market crash did NOT
cause the Great Depression
What really caused the Great
Depression ?
“Booming 20’s” =
Growing economy
(new jobs, businesses)
Like a great, towering
skyscraper – the
“Prosperity Building”
However…you may not
notice something…
What really caused the Great
Depression ?
..in the FOUNDATION ?
“CRACKS” ! Weaknesses in
the structure –
not noticed at first – but as
time goes by, cracks bigger
– weaknesses get worse
The Real Causes of the Great
Depression
1st Crack/Weakness:
“Income GAP Grows between
the RICH and WORKING
Class”
As 1920’s go by, amount made
by the Upper Class
EXPANDS,
While income for WORKERS
stays about the same
1st Crack/Weakness – the “Income Gap”
Interactive Notes Q&A’s
1. What is the “trend” in
the graph for the “top
20%” ? What is the
trend for the “bottom
20%” ?
2. Each group is
compared, based on
their average income in
1967 and 2002.
By how much did the top
20% grow between 19672002? Bottom 20%?
The “Income Gap” Today
2nd Crack/Weakness – “UNDERCONSUMPTION”
• Workers wages do not keep up
with INFLATION =
• over time, money loses VALUE
• Workers need RAISES to keep
up with rising PRICES
• but they’re not getting much in
raises (income gap)
• What would you do?
2nd Crack/Weakness – “UNDERCONSUMPTION”
• Workers BORROW more money
(credit), but eventually…..
• Workers cannot BUY as much
as the factories are making
(producing) =
• UNDER-CONSUMPTION
LEADS TO:
1) Factories REDUCE
production (aren’t
SELLING as much)
2) Businesses LAYOFF
workers = more
UNEMPLOYMENT
***If Workers do not (or cannot) buy
GOODS or PRODUCTS = UnderConsumption slow-down in economic
growth
3rd Crack/Weakness – Low Supply of
Money =
Not Enough money for
CREDIT:
• Federal Reserve BANK
(“The Fed”)
• decides how much MONEY
will be in supply
• how much to make (PRINT)
• how much to have in the
ECONOMY
3rd Crack/Weakness – Low Supply of
Money =
• Fed also decides
INTEREST rates
• In 1920’s, The Fed is
worried about INFLATION
• So it starts to RAISE
interest rates
• and lowers “SUPPLY of $$”
in econ.
• Result =
• Less money for CREDIT
• Consumers cannot buy
stuff, BUSINESSES cannot
grow
***Low Supply of Money Businesses cut
Production Businesses LAYOFF workers
“slow down” in the “CIRCULAR flow” of economy
4th Crack/Weakness: Reduced
Foreign Trade
LEADS TO:
1) Factories reduced
production
2) Businesses lay off
workers
• In 1920’s, EUROPEAN
nations borrowed from US
banks to Buy US GOODS
• Great for USA Economy but
in the late 1920’s, The Fed
raises……
• INTEREST rates –
• Foreigners cannot AFFORD
to borrow $$
• US businesses see SALES
to foreigners, decline
***Reduced Foreign Trade Businesses sell
less to FOREIGNERS businesses cut
production layoff workers “SLOW DOWN”
in the Circular Flow of economy
Review
What is a depression?
A long period of low
production and high
unemployment”
What caused the “Great
Depression?
4 Cracks (weaknesses
in the economy)
II. Stock Market Crash of October
1929 (Earthquake)
II. Stock Market Crash of October
1929
The Crash – when the VALUE of US company’s STOCK
fell by 40-70% --This did not CAUSE the Great
Depression
Why did it happen ?
1. Excessive SPECULATION = a lot of very RISKY
investment in the stock market
Stock Market Crash of October 1929
Why did it happen ?
2. People buying stock on MARGIN =
buying stock with only 5% down payment, the rest is
BORROWED
Stock Market Crash of October 1929
What led to the Crash ?
So much stock is bought “on margin” (on CREDIT) that
the VALUE of shares are INFLATED (like a “bubble”),
meaning that shares are not WORTH the prices
IF…
Stock Values go UP
Brokers/Investors can re-pay margin
loans when they SELL the Stock
Brokers/Investors PROFIT from the
DIFFERENCE of the higher price for their
stock
IF…
Stock values go DOWN
BANKS re-call loans made to
BROKER/INVESTOR.
Then brokers SELL the stock to recover as
much money as possible
If….Stock values go down MORE
PANIC
This causes people to SELL, sell, sell, sell
more stocks.
C. How did the Crash Affect people ?
Only a TINY number of people speculated –
so why did the Crash affect so many others?
1. $30 BILLION was lost on
BLACK Tuesday people lost
CONFIDENCE in the economy
Few were willing to RISK
investing again.
Without that money,
companies go BANKRUPT or
cut back
C. How did the Crash Affect people ?
2. BANKS had speculated
with people’s money
800 banks FAILED after
the Crash
9 MILLION people lost all
their SAVINGS
consumer SPENDING
drops, weakens economy
“Bubbles” in the Economy =
inflated values