Transcript L - Mystery What Caused the Great Depressionx

Your task is to analyze the
clues about what caused the
Great Depression.
Y
Follow your teacher’s
instructions about completing
the activity.
Use the Clues that you
have been given to
determine causes of
the Great Depression
and their impact.
Record your findings on
the word document
provided in the lesson.
First, a little
economics
background info!
Economic Business Cycle
The Business Cycle is a graph that shows the ups and downs of the
economic cycle.
Recovery—when economic activity is increasing; consumers are buying
and workers are employed
Peak—economic activity has reached a high point
Recession—this is a time of economic slowdown; consumers are buying
less and workers are being laid off; prolonged recession becomes a
depression
Trough—the bottoming out of a recession; worst of the economic
slowdown is ending
Business Cycle in 1929
peak
peak
recession
recovery
Using the economic
characteristics
below, decide
where on the
Business Cycle the
economy of the
U.S. was in 1920.
trough
• previous years of growth and prosperity
• consumer demand for some products begin to fall
• business investment declines
• more goods are being produced than purchased
• unemployment began to increase
Now, use the rest
of this
presentation and
your word
document to gather
clues about the
causes of the
Great Depression
and their impact.
So what is
stock?
Stock Market Crash of 1929
During the 1920s, the stock market was doing great. Business was
booming and people were buying shares of those businesses called
“stocks” hoping to make fortunes as they watched stock prices go
higher and higher. Many made millions on the stock market, and more
people invested their money every day. Some even took out loans to
buy stocks—called buying on margin. This type of investment is called
speculation-- hoping stock prices would continue to rise.
But on October 24, 1929, stock prices began to fall and people
scrambled to sell their shares of stock to avoid losing money. By
October 29, stock prices had fallen to all time lows and the market
had crashed.
End of the Party
Stock Market—Standard & Poor Composite—
measures buying and selling of stocks
35
Sept. 1929
30
25
20
15
10
5
July 1932
0
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Courtesy of Federal Reserve of St. Louis
Jan-31
Jan-33
Jan-35
Jan-37
Jan-39
•Soon, over $30 billion in stock values
had disappeared.
•Within six months the number of
unemployed in the US had doubled.
Overproduction
The rapid economic growth after World War I
had caused businesses to expand. With this
expansion came efficiency and increased
production. Many people could not afford the
goods being produced, so soon businesses were
making more than people could buy. This
caused a chain of economic events.
For example:
Farmers used bank loans
to buy better equipment.
·They produced more
crops than ever before.
·Demand for crops went
down and so did the prices
the farmers got for their
crops.
Homeless family, tenant
farmers in 1936
·Farmers became unable
to pay off their bank
loans and some of the
banks foreclosed on the
farmers and took their
farms.
Installment
Buying
Debt or credit becomes popular in the 1920s.
People bought on installment plans (dividing the
prices out into smaller payments with interest
charged over time)
· For example, 3 out of every 4 radios were
purchased on credit along with 60% of all
automobiles and furniture.
Consumers' income did not keep up with their
spending, so they cut back on spending.
·That cutback in buying contributed to lower
retail and manufacturing profits, which
eventually led to higher unemployment.
Banking Problems
During the 1920s, banks did three things that
made the financial system shaky.
Reason 1.
They made lots of loans to farmers. As the
farmers overproduced, the prices fell and they
could not pay back their loans. The bank had to
foreclose on the farmers.
Reason 2.
Many banks practiced
good business during the
20s, but some invested
their depositors’ money in
risky investments. Also,
there was no government
regulation at this time.
When the stock market
crashed, some banks had
little money in the bank.
Reason 3
Many people had gone
into debt during the
20s, and when they
heard of banking
problems, they began
to panic. There were
“runs on banks” of
people wanting to
withdraw their money.
Many banks could not
pay the people back.
"Runs on Banks": people waiting outside of bank
•Over 7,000 banks failed -- many
during “runs on banks”
• Number of banks fell from
25,000 in 1929 to 15,000 by
1934
•When banks fail, people lose $
Federal Reserve Mistakes
•Remember, the Federal Reserve was formed
in 1913 during the Progressive Era to regulate
the money supply.
•But, Federal Reserve officials did not have
experience monitoring the overall economy.
Newly
appointed
leader of the
Federal
Reserve
So, the Federal Reserve . . .
Kept interest rates low throughout the 1920's which
supported growth in the stock market.
Keeping the interest rates low also encouraged the banks to
make risky loans.
The low interest rates also led businessmen to think the
economy was expanding so they borrowed more money to
expand production.
That led to overproduction at a time when prices were already
falling. Then they had to lay off workers to cut costs.
Then the Fed made another mistake; it raised interest rates,
which made it more expensive to borrow money.
Collapse of World
Trade
•U.S. tariffs (taxes on
foreign goods) had been
used to protect American
businesses.
•The more tariffs and
trade restrictions, the
less international trade.
•Congress approved the
Hawley-Smoot Tariff of
1930 which raised tariffs.
Impact:
•brought an end to international trading
•European nations who borrowed money
from us to fight WWI, could not sell their
goods and, therefore, could not pay us
back (defaulted on their war loans)
•the Europeans got mad at us, raised their
own tariffs and stopped buying American
goods which led to higher U.S.
unemployment
•partly because of the gold standard, if
one country had an economic collapse,
other countries felt the effects
What’s a
gold
standard?
Now that you have gathered the clues,
complete your word document by evaluating
each clue #1-6.
Place a—
next to the clue(s) that hurt global trade
next to the clue(s) that hurt the U.S. money supply
next to the clue(s) that cost Americans jobs
next to the clue(s) that wiped out wealth
Finally, review your clues and
information you have gathered and
answer the following question on
your word document:
What caused the Great
Depression?