Transcript File - MS. Hines` Classroom!

Cause #1-Overproduction:
The “Roaring Twenties” was
an era when our country
prospered tremendously.
Average output per worker
increased 32% in
manufacturing and corporate
profits rose 62%.
* 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.
Americas’ farms were
overproducing, as well.
During
World War I,
with European
farms in ruin,
the American
farming was a
prosperous
business.
Increased food
production during
World War I was
an economic
“boom” for many
farmers, who
borrowed money
to enlarge and
modernize
their farms.
So, to summarize it,
HIGH DEMAND
for consumer goods
and
agricultural products
led to
OVERPRODUCTION.
Cause #2 - Uneven Distribution of Wealth
• During the 1920s, income was distributed very unevenly, and the
portion going to the wealthiest Americans grew larger as the decade
proceeded.
• While businesses showed gains in productivity during the 1920s,
workers got a small share of the wealth this produced.
• Between 1923 and 1929, manufacturing output per person-hour
increased by 32 percent, but workers’ wages grew by only 8 percent.
• Corporate profits shot up by 65 percent in the same period, and the
government let the wealthy keep more of those profits.
• The Revenue Act of 1926 cut the taxes of those making $1 million or
more by more than two-thirds.
• In 1929 the top 0.1 percent of American families had a total income
equal to that of the bottom 42 percent.
The uneven
distribution
of wealth
didn’t stop
the poor and
middle class
from wanting
to possess
luxury items,
such as cars
and radios…
Uneven Distribution of Wealth Led to
Overuse of Credit - “Buy Now, Pay Later”
• Many people who were willing to listen to the advertisers
and purchase new products did not have enough money to
do so.
• To get around this difficulty, the 1920s produced another
innovation—“credit,” an attractive name for consumer
debt.
• People were allowed to “buy now, pay later.”
• This only put off the day when consumers accumulated so
much debt that they could not keep buying up all the
products coming off assembly lines.
• That day came in 1929.
Although wages were not keeping up
with the prices of those
goods…”buying on credit”
offer a solutions!
By the end of the 1920s,
60% of the cars and 80% of
the radios were bought on
installment credit.
Why could this situation
be dangerous?
• Credit system
– People didn’t really have
the money they were
spending
• WWI
– The U.S. was a major
credit loaner to other
nations in need
– Many of these nations
could not pay us back
Check for Understanding #4
• How could overproduction,
uneven distribution of wealth
and overuse of credit be harmful
and dangerous to economy?
Cause #3 – Banking and
Monetary Policies
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.
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.
The Federal Reserve was
also established to prevent
bank closings.
It was suppose to serve
as the “last resort” loaner
to banks on the verge of
collapsing.
In early 1930, there were
60 bank failures per month.
Eventually, 9,000 banks
closed their doors between
1930 and 1933.
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…
Check for Understanding #4
• As I have already described, the banking sector faced enormous
pressure during the early 1930s. . . . The Federal Reserve had the
power at least to ameliorate [improve] the problems of the banks.
For example, the Fed could have been more aggressive in lending
cash to banks (taking their loans and other investments as collateral),
or it could have simply put more cash in circulation. Either action
would have made it easier for banks to obtain the cash necessary to
pay off depositors. . . . In the end, Fed officials decided not to
intervene in the banking crisis, contributing once again to the
precipitous fall in the money supply. —Be n S. Bernanke, Federal
Reserve Governor, 2004
According to the excerpt above, how did
Federal Reserve policy contribute to the
onset of the Great Depression?
4. STOCK MARKET
Speculations
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.
Small investors were
more apt to invest in
the Stock Market
in large numbers
because the
“margin requirement”
was only 10%.
Speculation in The
Stock Market
• People bought stocks on
margins
– If a stock is $100 you can
pay $10 now and the rest
later when the stock rose
• Stocks fall
– Now the person has less
than $100 and no money
to pay back
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…
•
With
people
panicking
And then…. about their money investors
tried to sell their stocks
–This leads to a huge
decline in stocks
–Stocks were worthless
now
• People who bought on
“margins” now could not pay
• Investors were average people
that were now broke
Buying on Margin
was a
risky market
practice.
Bank loans for
stock purchases
was an
unsound practice.
Check for Understanding #5
• What is “Buying on Margin”?
• How could it be risky and harmful
to the stock market and the
overall economy?
Cause #5 – Poor Leadership 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...
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.
Hoover did
take action
to intervene
in the
economy,
but it was
too little
too late-
The greatest mistake of the
Hoover administration was
passage of the Smoot-Hawley
Tariff, passed in 1930.
(It came on top of the FordneyMcCumber Tariff of 1922, which
had already put American
agriculture into a tailspin.)
Officials believed that raising trade
barriers would force Americans
to buy more goods at home, which
would keep Americans employed.
Billions of Nominal Dollars
Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934
7
6
5
4
Exports
Imports
3
2
1
0
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
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 were
forced to curtail their
purchase of
Americans goods.
For example,
American
farmers lost
1/3
of their
market.
Farm prices
plummeted and
thousands
of farmers
went bankrupt.
Three years later,
international trade
plummeted to 33% of its
1929 level.
The loss of such trade was
devastating and had ripple
effects, similar to the
bank failures.
In summary,
The Smoot-Hawley Tariff
created trade wars
and worsened
world economic conditions.
Huge increase in taxes
hurt companies and
individuals.
Check for Understanding #6
• How did the Smoot-Hawley
Tariff cause the Great
Depression?
Let’s Review the
MAJOR CAUSES
for the
Great Depression:
1. Overproduction
(responding to high demand for goods)
2.Uneven Distribution of Wealth
overuse of credit
3. Banking & Money Policies
and
(low interest rates, buying on credit,
raise in interest rates, low reserve rates for
banks.)
4. Stock Market Speculation
(buying on margin, bank loans for stock purchases)
5. Political decisions
(Smoot-Hawley Tariff, Increase Income Tax)
Check for Understanding #7
• What underlying economic problems did
the nation face in the last years of the
1920s? Why do you think so many
allowed these problems to worsen?
• How did government economic
policies during the 1920s lead to
the Great Depression?