Roots of the Great Depression H-SS 11.6.2- Understand the explanations of the principal causes of the Great Depression and the steps taken by the Federal Reserve, Congress, and Presidents Herbert Hoover and Franklin Delano Roosevelt to combat the economic crisis.

Farmers

Farmers did well during WWI, and were encouraged to produce more for the war effort many bought new equipment with credit After war demand lowered and prices for their crops went down. Many failed.

Farmers did not share in boom of 1920s Prices dropped for the goods that they produced. Farms became mechanized resulting in overproduction of crops which caused surpluses on the market resulting in lower prices.

Mechanization Hurt Farmers Farm mechanization increased crop output and created surpluses. This hurt farmers their success in producing more glutted the market and lowered the price for the crops. Mechanization Hurt Farmers

Uneven Distribution of Wealth The rich got richer and working class people stayed the same.

In 1929 the top 5% of households earned 30% of the country’s income In 1929 the top 5% of households earned 30% of the country’s income. More than two-thirds of the nation’s families earned less than $2,500 a year.

This uneven distribution of wealth added to the country’s economic problems. The result was overproduction and under consumption. There were too few dollars and too many goods. Factories produced too much and average Americans had no money to buy the goods available.

Efficient machinery led to overproduction of goods, and Americans could not afford to buy all the goods produced. If there is a surplus of goods on the market the price of the goods will go? Down.

Low consumption added to the economic problems Low consumption added to the economic problems. Worker’s wages did not increase fast enough to keep up with the quick production of goods. As sales decreased, workers were laid off, resulting in a chain reaction that further hurt the economy.

Easy Credit Hides Problems Americans bought on the installment plan, making a down payment and paying the rest in monthly installments. This drove the economy for awhile but soon people were left will little extra money to purchase new goods, staling the economy further.

Much of the economic boom of the 1920s was caused by people buying “new” appliances like refrigerators, vacuums, etc. and automobiles. Problem was they bought them with credit and these items last, so they stopped buying “new” items, as they paid off their loans.

Tariffs Intensified the Depression The Hawley-Smoot Tariff raised the tax on imported goods. Americans bought fewer imported goods. The result- foreign countries countered us and raised their own tariffs on American goods imported to their countries, which caused fewer goods to be sold overseas.

The Long Bull Market The stock market was established as a system for buying and selling shares of companies. A long period of rising stock prices is known as a bull market. Prosperity of 20s caused many Americans to invest heavily in the stock market.

In the 1920s many investors bid prices up on stocks without considering the value of the company they invested in. Speculation occurred when investors bet that a stock’s price would continue up then they could sell and make a quick profit.

As bull market continued up, investors bought stock on margin, making a small cash down payment and barrowing the rest from the brokers, who in turn barrowed from the banks. This was allowed by federal regulators. The problem was that if prices of stocks fell the broker would issue a margin call demanding the investor to repay the loan immediately.

Black Tuesday October 29, 1929 By late 1929, lack of new investors in the stock market caused stock prices to drop and the bull market ended. Stockbrokers made margin calls, customers responded by putting their stocks up for sale, causing the market to plummet further.

On Oct 29, 1929 Black Tuesday, stock prices crashed resulting in a 10 to 15 billion loss in value. This did not cause the Great Depression, it undermined the economy’s ability to hold out against its other weaknesses. The stock market crash weakened the nation’s banks. Banks lost money when speculators could not repay their loan on stock bought on margin.

Stock Market Crash Causes Banks to Fail In the 1920s, the government did not insure bank deposits. If a bank closed then its customers lost all the money held by the bank. Bank runs resulted, people panicked a rushed to the bank to withdrawal their savings, this caused the banks to collapse.