Causes of the Great Depression

The Great Depression Defined

• Total collapse of the US economic system of Capitalism, laissez faire and everything we believed in as a country.

• Our democracy and way of life was threatened.

• Worse economic calamity in the US • Part of a world-wide economic

depression

THE BUSINESS CYCLE: The UP’s & DOWN’s of the Economy

The Business Cycle—PEAK

• HIGH DEMAND= –Desire For More Profits = •Greater Investment = –More Production = »Higher Employment = •More Demand =

Higher Prices (INFLATION)

The Business Cycle—CONTRACTION

• INFLATION/OVERPRODUCTION = –LESS PRODUCTION = • LAY OFFS = –LESS SPENDING = »LOWER CONFIDENCE = • LESS INVESTMENT =

HIGHER UNEMPLOYMENTUNTIL SURPLUSES ARE USED UP

• HIGHER DEMAND

–Surplus Reduction = •More Production = –Recall of Workers = »More Purchasing = • Increased Investments =

Economic Growth

The Business Cycle—RECOVERY

RECESSION • 2 successive quarters (6

months) of declining GDP ($ of gov’t, consumer, and business spending)

DEPRESSION • Unemployment greater

than 12%

Business Cycle Troughs

Document A1. According to this document, between what

years did the US economy experience its longest and deepest fall?

2. What event marks the fall?3. Where there any fluctuations in the business

cycle within the depression?4. What event seems to have pulled the

economy out of this depression?

Laissez Faire Economic Policy• Prior to the Great

Depression the US. Government ignored the business cycles of the US economy.

• The Government until FDR believed that the American Economy could fix itself.

The Great Depression is a turning Point in US History!

Laissez-Faire… “Hands Off”

Historians disagree as to the causes of the Great Depression.

Most scholars would include:

Causes of the Great

Depression

HIGH TARIFF & WAR DEBT

Stock Market Crash &

Financial Panic

OVERPRODUCTION• INDUSTRY• AGRICULTURAL

MONETARY POLICY

UNEQUAL DISTRIBUTION

OF WEALTH

1920s—An Age of Prosperity?• Installment buying allowed

people to buy cars, radios and other new products of the 1920s.

• Farmers, however, were in a depression throughout the whole decade.

RURAL POVERTY IN THE 1920’S

Disposable income is money remaining after the necessities of life have been paid for.

Unequal Distribution of Wealth• Top 1% received a 75%

increase in their disposable income while the

• Other 99% saw an average 9% increase in their disposable income.

• 80% of Americans had no savings at all

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1929

TOP 1%

BOTTOM 99%

The chart shows that 99% of the population received a 9% increase in their income, while the top 1% saw their income rise by 75%.

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941

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Wages of Unskilled Workers

Document B

1. According to the note in this document, what was the poverty line for the average American family?

2. What percentage of the American families lived at or below that line in 1929?

3. How might uneven distribution of income helped to cause the depression?

Overproduction in Industry

• Factories were producing products

• Wages for workers were not rising enough for them to buy them.

• The surplus products could not be sold overseas due to high tariffs and lack of money in Europe.

Document C

1. What does Elmer Davis mean by the phrase “quantity prosperity”?

2. Why does Davis say that quantity prosperity will defeat its own purpose?

Surplus ears of corn

Farm Overproduction• Farm incomes dropped

throughout the 1920’s. • Price of farm land fell from

$69/acre in 1920 to $31 in 1930. • In 1929 the average annual

income for farm families it = $273. – For an American family was $750

• Agriculture was in a depression which began in 1920, lasting until the outbreak of World War II in 1939.

Document D

1. What does the cartoon say was a big problem for the farm industry?

2. What happens to prices when surpluses are high?

3. Why do falling prices hurt the economy and help cause a depression?

Agricultural product

1912-1913 1932-1933

Corn (per bushel) 0.56 0.20

Wheat (per bushel) 0.88 0.41

Oats (per bushel) 0.34 0.17

Butter (per lb) 0.21 0.13

Butterfat (per lb) 0.25 0.16

Wool (per lb) 0.24 0.10

Hogs (per cwt) 7.50 3.80

Milk (per cwt) 1.79 0.90

Decline in Farm Prices

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1929 1932

Farm income inbillions

Farmers, who had been suffering during the 1920s, suffered further declines during the Great Depression. Wholesale food prices collapsed, which led to a lack of money to purchase new equipment and many could not

pay for their mortgages and lost their farms.

YEAR WHEAT CORN OATS POTATOES PEANUTS

1919 216.3 150.7 76.7 191.1 9.33

1920 182.6 61.0 53.8 133.2 5.26

1921 103.0 52.7 32.2 113.5 3.99

1922 96.6 75.2 37.4 68.6 4.68

1923 92.6 83.5 40.7 91.5 6.78

1924 124.7 105.3 47.8 71.5 5.68

1925 143.7 69.9 38.8 166.3 4.56

1926 121.7 75.3 40.1 136.3 4.97

1927 119.0 84.9 47.1 108.9 5.04

1928 99.8 84.3 40.7 57.2 4.90

1929 103.4 79.8 41.9 131.5 3.83

1930 67.0 59.4 32.2 91.5 3.54

1931 39.0 32.1 21.3 46.4 2.09

1932 37.9 31.8 15.7 38.8 1.53

U.S. Department of Agriculture’s yearbook from 1934 shows the unstable prices of foodstuff

1910 1918 1932

Average gross receipts

2177 3837 1512

Average expenditures

770 1655 1019

Balance 1407 2182 493

Unable to afford new equipment, and their mortgages, led to the hundreds of thousands

of foreclosures on farms.

Per Capita Farm Income

High Tariffs & War Debts• At the end of World War I, European nations owed over $10

billion ($115 billion in 2002 dollars) to the United States. – Their economies had been devastated by war and they had no

way of paying the money back.

• The U.S. insisted their former allies pay the money. – This forced the allies to demand Germany pay the reparations

imposed on her as a result of the Treaty of Versailles. – Later led to a financial crisis when Europe could not purchase

goods from the U.S. – This debt contributed to the Great Depression.

• In 1922, the U.S. passed the Fordney-McCumber Act– Instituted high tariffs on industrial products. – Other nations soon retaliated = world trade declined helping bring

on the great depression.

Document E

1. What is a tariff?2. Who is the tariff wall protecting?3. Whose boats are being blocked?4. Is there anyway a tariff wall might hurt

American business?

Document F

1. What does Leuchtenburg mean when he says the US was a creditor nation?

2. How could a protective tariff hurt a creditor nation?

3. Did the protective tariffs help cause or at least deepen the depression?

WALL STREET ON THE DAY OF THE CRASH, OCTOBER 1929

Stock Market Crash & Financial Panic

Document G

1. What does it mean to buy stock on margin?2. How could an investor who bought stock on

margin go broke in a stock market crash?

Document H

1. What happened to the value of American Telephone & Telegraph stock?

2. If the stock market falls what happens to:a) Spending by rich people? Why?b) Spending by poor people? Why?

Reasons for the Crash• Stocks were

overpriced due to speculation = not worth their sale price

• Massive fraud and illegal activity occurred due to a lack of regulation and rules

• Margin buying, or buying using credit

Effects of the Crash

Businesses lose profits

Consumer spending drops

Businesses cut investments &

production

Workers are laid

off

Business cannot repay bank loans

Banks run out of money

Savings accounts are wiped out

Investors lose

millions

Document I

• What was the unemployment rate for all civilian American workers in 1929?

• In what year were more than one-quarter of American workers without jobs?

• For how many years did America experience double-digit unemployment?

• Were high unemployment figures simply an effect of the depression or were they also a cause?

Document J1. What does the author mean when he says

the structure of American banks in 1929 was weak?

2. What happens if a bank makes lots of loans to stock buyers buying on margin?

3. If many banks fails…a) What happens to consumer consumption?b) What happens to investment?

Federal Reserve Monetary Policy• Created in 1913 to help

stabilize the economy by establishing a central banking system for the U.S.

• Goal to deal with bank panics.• Manipulates the money supply

to help strengthen the economy

• At the beginning of the Great Depression…– Did not address failing banks– Many scholars argue their

idleness worsened the situation.

Poor Monetary Policy

Fed. Reserve INCREASED interest rates– Money/Borrowing

MORE EXPENSIVE & Saving MORE ATTRACTIVE

Should Have: LOWERED interest rates

to give the economy a “JUMP START”

• Changes in interest rates and money supply to expand or contract aggregate demand.

• In a recession, the Fed will lower interest rates and increase the money supply.

• In an overheated expansion, the Fed will raise interest rates and decrease the money supply.

Poor Fiscal Policy

Hoover Admin. & Congress CUT SPENDING & RAISED TAXES to balance the budget

Should Have: INCREASE SPENDING &

CUT TAXES to “JUMP START” the economy– EX: Temporary Deficit

Spending

• Changes in the taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand.

• In a recession, an expansionary fiscal policy involves lowering taxes and increasing government spending.

• In an overheated expansion, a contractionary fiscal policy requires higher taxes and reduced spending.