Transcript The Causes of the Great Depression

The Causes of the Great
Depression
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
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
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.
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
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
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
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
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
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%
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
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
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