The Great Depression: Causes & Effects

History of Economic Recessions Overproduction and business failures periodically caused economic downturns measured in months Followed by recovery and eventual prosperity These depressions and recessions were thought to be a natural part of the U.S. business cycle in a free market economy Depressions that included widespread bank failures, collapse of investment and credit systems often resulted in long-term, deeper depressions extending several years 1837, 1873, 1893

The Great Depression The depression of the 1930s was much different than anything before Lasted far longer Caused more business failures and unemployment Affected more people Two presidents, Hoover and FDR, would devote 12 years to seeking a path to recovery

The Wall Street Crash Stock prices rose steadily through the boom years of the 1920s Went up for 18 straight months between March 1928 and September 1929 September 3, 1929- Dow Jones Industrial Average reached an all-time high of 381 The average investor who bought $1,000 worth of stocks at the end of 1928 would have doubled his or her money in less than a year Millions invested in the boom market of 1928, and millions lost their money in October 1929 when it collapsed…

Black Thursday Stock prices had fluctuated for weeks preceding the crash The true panic began on Thursday, October 24, 1929 Unprecedented selling of stocks- stock prices plunged as no one bought the stocks being sold A group of bankers bought millions of dollars of stocks to try and stabilize prices, which only worked for one business day that Friday The frenzied selling resumed the next Monday

Black Tuesday Tuesday, October 29, 1929- the bottom fell out as millions of investors sold off their stocks, but almost no buyers could be found From this day on, stock prices continued to fall In three years, stock prices fell to 1/9th of their peak value

Causes of the Crash: Uneven Distribution of Income Wages had risen very little compared to large increases in productivity and corporate profits Economic success was not shared by all Top 5% received over 33% of all income in the country When demand for their products dropped off, businesses laid off workers Contributed to a downward spiral in demand (laid-off workers couldn’t afford to spend money on products) and as a result, even more layoffs

Causes of the Crash: Stock Market Speculation Many people began speculating about the prices of stocks Had insider information or anticipated that the price of a stock would rise so they could sell it for a quick profit Buying on margin allowed people to borrow most of the cost of the stock they wanted to buy Could make down payments to pay off these loans People who bought on margin depended on the price of the stock to increase so they could repay their loans as well as still gain profit from their stock When prices continued to drop during and after the crash, people not only lost their own money but also the money they borrowed and were supposed to pay back, which only increased their debts

Causes of the Crash: Excessive Use of Credit Low interest rates and the belief the economic boom was permanent led to a lot of people borrowing and paying on credit People who were already in debt would default on their loans when the economy got worse, which would cause many banks to fail

Causes of the Crash: Overproduction of Consumer Goods Business growth, increased industrial productivity, and use of credit produced a volume of goods that workers with stagnant wages could not continue to purchase Too many products on the market and not enough people to buy them

Causes of the Crash: Weak Farm Economy Prosperity of the 1920s never reached farmers Suffered from overproduction, high debt, and low prices ever since the end of WWI Severe weather and a long drought only worsened farmers’ problems in the 1930s

Causes of the Crash: Government Policies In the 1920s, Congress enacted high tariffs that protected U.S. industries but hurt farmers and the international economy Instead of trying to stabilize banks, the money supply, and prices, the FEDs tried to preserve the gold standard Without depositors’ insurance, people panicked to get their money out of the banks, which caused more bank failures

Causes of the Crash: Global Economic Problems Nations became more interdependent because of international banking, manufacturing, and trade Europe never fully recovered from WWI and the U.S. failed to recognize its post-war struggles U.S. insistence on loan repayments and high tariffs weakened Europe and contribute to the worldwide depression

Effects of the Great Depression The Great Depression’s influence on American thinking and policies has extended beyond the lifetimes of those who experienced it U.S. GDP (value of all goods and services produced by the nation in one year) dropped from $104 billion in 1929 to $56 billion in 1932 Nation’s income declined by over 50% Some 20% of all banks closed- wiped out 10 million savings accounts Money supply contracted by 30% By 1933, 13 million people were unemployed 25% of the workforce (not including farmers)

Effects of the Great Depression The crash ended Republican domination of government Those who never shared in the prosperity of the 1920s were hit hardest Farmers and African Americans Homelessness, mortgage foreclosures, and evictions became commonplace Homeless traveled in box cars and lived in shantytowns mockingly called “Hoovervilles”