Causes of the Great Depression

Stocks Throughout the 20s the stock market went up continuously (Bull Market) and people gained a sense of invincibility when it came to investing Many bought stock “On Margin” paying small down payment with the stock broker paying for the rest  stock broker would be repaid from the earnings  if a stock bought on margin showed it was going down there would be a “Margin Call” where stock would need to be paid back in full immediately Many began to use Speculation to buy stock  they would look at a company and guess that it’s stock would go up or down to determine if they would buy it

The Crash With underlying problems in the economy the stock market began to decline in mid 1929 Oct. 24 (Black Thursday) the market plummeted  Margin Calls were issued en masse  with stocks falling people could not sell their stocks (nobody wanted to buy a falling stock) and could not pay back loans Oct 29 (Black Tuesday) market had biggest drop of the crisis By mid Nov stock market lost between 10 and 15 Billion in value

Banks and the Crash Banks had a major problem after the Crash They had borrowed money to many who played the market who could not repay these loans Banks also took some of their money and played the market and lost this money As people found out that banks were losing money they rushed to get their money out of the banks  banks usually keep a small fraction of the money people have invested on hand so when everybody came in they could not pay out all of the money When banks ran out of money those who had not gotten their money out lost it all

Internal Deliberations Thinking about the basic ideas of the Supply Side model (spending leads to economic growth) why will the Stock Market Crash of 1929 and the problem with the Banks impact the economy?

Real Causes of the Depression There were 5 major causes of the Depression Much like the lead up to WWI these were issues that were man made and together created an environment that if sparked would lead to a bigger problem

Overproduction/ Underconsumption These are two opposing theories that were held by the “right” and the “left” respectively (OP) With Mass Production companies made too much that they could not sell  cut jobs when people stop buying (UC) Some economists said that the companies were making huge profits while the workers were receiving less money  this led to less people buying stuff (underconsumption) which led to the economic decline  this led to job cuts

Poor Foreign Policy US gov’t passed Smoot Hawley Tariff  giant tariff created to protect American businesses foreign countries responded with tariffs on US goods hurting US businesses  American businesses who depended on foreign sales lost business  American businesses who depended on foreign resources paid more for resources I.D.: What is the impact of Smoot Hawley on many American Business’ Smoot Hawley was not passed until 1930, but it became evident that it would pass in Oct  this was just before the stock market crash and some believe that this led to the stock market crash

Poor Federal Reserve Policy The Fed regulates money supply to “protect” the economy  use interest rates to make sure that there is enough money in the economy to prevent an economic problem Late 1920s the Fed believed there was inflation (too much money in the system)  by raising interest rates they hoped to stop inflation by taking money out of the economy The Fed was also concerned with the ballooning stock prices From the Fed raised the basic interest rate from 3.5% to 6%  By taking money out of the economy the Fed was taking money out of the hands of consumers and businesses Fed policies helped create a period of deflation (not enough money in the system) which made the economic downturn at the end of the 1920s more severe

Hoover and Taxes Hoover was a supply-sider and could not run a deficit When gov’t tried to provide relief he raised taxes to pay for it  raised taxes when people did not have enough money to start with This left less money for people to buy or invest with  businesses were hurt by this Because business did not know how they would be impacted they did not hire/fired workers  this raised the unemployment rate

UNCERTAINTY With the recession of 1930 there was much instability created  How would the gov’t respond?  How would gov’t try to reign in the problem that caused the recession?  How would business respond?  What would happen to taxes?  What would happen to banks?  What would happen to the value of our currency? All of these questions created uncertainty and instability With the uncertainty and instability there was natural lack of investment and spending