The Causes of the Great Depression

What was the Great Depression? The Great Depression ( ) Period of great unemployment Collapse of banking systems Slowdown of world trade

Contributing Factors Debt cycle Wall Street bubble Protectionism Return to gold standard

The Debt Cycle German reparations Britain and France owed money to the US Expected to pay US and fund reconstruction with German debt Germany couldn’t afford it US forced to loan money to get paid back

Wall Street Bubble During the Roaring Twenties the stock market soared People began to believe that stock prices would continue to rise They began to borrow money to buy stocks, called “buying on margin” What is a stock? How much is a stock “worth”? What happens when price exceeds the value? Bubble bursts

Collapse of Banks Poor investments and over speculation Banks loan the money they take in as deposits When people can’t pay their loans they default When too many debtors default then banks run out of money

Money expands as it circulates. I have $100. I am going to save it in a bank. The bank, assuming everyone won’t want their money at the same time lends out $90 of my money to someone who wants to buy a car. It saves 10% of my money and everybody else’s money as “reserve.” That’s ok with me. Because if they can make money off the loan, they pay me interest for my money. I still have $100 (in the bank) but now the car dealer also has $90, so the money supply has expanded. If he puts the money in the bank, they will “reserve” $9 and lend out $81 to someone who wants to pay for their daughter’s college education. The college wants to “save” that money so they put it in the bank. The bank “reserves” $8.10 and lends out $72.90 to someone who wants to start a business. $100 $190 $

Money expands as it circulates. I have $100. I am going to save it in a bank. The bank, assuming everyone won’t want their money at the same time lends out $90 of my money to someone who wants to buy a car. It saves 10% of my money and everybody else’s money as “reserve.” That’s ok with me. Because if they can make money off the loan, they pay me interest for my money. I still have $100 (in the bank) but now the car dealer also has $90, so the money supply has expanded. If he puts the money in the bank, they will “reserve” $9 and lend out $81 to someone who wants to pay for their daughter’s college education. The college wants to “save” that money so they put it in the bank. The bank “reserves” $8.10 and lends out $72.90 to someone who wants to start a business. $100 $190 $

If people take their money out in a predictable way, there will always be enough money from the reserve to cover. If one person takes all their money out in one day, there will not be enough of their own money in reserve, but there will be enough in the total reserve pool But what if EVERYONE wants all the money at once?

When you take out a loan (mortgage) to buy a house, you promise to pay it back bit by bit over 20 or 30 years. You can’t just turn around and pay it faster – the bank will have to wait. If the depositors get nervous and demand their money, the bank has to admit it doesn’t have it – it is out on loan. The depositor knew that all along, but now they are unhappy. They don’t want to put their money in banks, so they keep it at home. There is no money for mortgages or car loans, or college tuition. The money supply shrinks to half (or less) of what it was before. The person selling cars is making no money. He stops eating in restaurants, The restaurant owner economizes by giving up his apartment and moving in with her mother. The mother economizes by buying potatoes instead of ordering out pizza. The pizza delivery boy can no longer afford college and drops out to look for a full time job.

What did governments do?!? Borrowed money Deficit spending –Infrastructure –Military buildup –Nationalization of industry –Welfare state/socialism

Which countries were most affected? Australia: heavy dependence on agriculture and exports led to major suffering (unemployment at 29%) Canada: Dust bowl and general economic crisis led to unemployment of 27% and drop of industrial output by as much as 58%, restricted immigration

Which countries were most affected? Chile: labeled by the League as the hardest hit nation, GDP dropped 14%, became protectionist France: not largely affected but led to the election of left leaning governments

Which countries were most affected? Germany: unemployment at 30%, led to the rise of the Nazi Party Japan: used stimulus to head of Depression, used stimulus to build up military, industrial production doubled

Which countries were most affected? Soviet Union: isolated from Capitalist nation, not largely affected, seemed to validate claims of the self- destruction of Capitalism United Kingdom: unemployment of 20%, some places as high as 70%, led to strikes, rise of fascist parties, and spread of socialism

How did the Great Depression end? Historians and economists disagree: –Deficit spending –Revised monetary policy –World War II

The Great Depression in Historical Context