Causes of the Great Depression

Terms and People Herbert Hoover – President during the time of the stock market crash speculation – risky stock purchases made by investors with the hope of high returns Black Tuesday – October 24, 1929, the day the stock market crashed business cycle – periodic expansion and contraction of the economy

Terms and People (continued) Great Depression – The collapse of the United States and world economies beginning in 1929 Hawley-Smoot Tariff – high protective tariff passed in June 1930 that contributed to a worldwide depression 3

How did the prosperity of the 1920s give way to the Great Depression? During the 1920s, many Americans enjoyed what seemed like an endless era of prosperity. But in 1929, the stock market crashed. Production fell, unemployment rose, and the economy went into a period of dramatic decline. Years after the Great Depression began,the United States economy moved through periodic contraction which was seen as part of the business cycle.

The Republicans took credit for the strong economy The Republicans took credit for the strong economy. Consumption was up, gross national product was up, and the stock market was going up. Their presidential candidate was Herbert Hoover. He believed in voluntary cooperation between business and labor. In the 1928 presidential race, the Republican Party was confident.

Farmers could not afford to buy goods or repay their loans. Despite Hoover’s confidence, some saw signs of weakness in the economy. Farmers experienced an early depression in the 1920s. The prices of crops and livestock were falling. To keep up with the crop demands of WWI, they had increased production and bought more land. They also bought more farm equipment. Farmers went into debt. After the war, demand went down so farmers had surpluses of goods which they failed to sell. Farmers could not afford to buy goods or repay their loans.

Rising wages masked an uneven distribution of wealth. While factory workers’ wages rose 8%, factory output increased by 32%. As a result, worker incomes rose modestly, while rich investor incomes went up a lot. The rich were getting richer and the poor were simply becoming less poor. 60% of Americans made less than $2000 per year 24,000 of the country’s wealthiest families had incomes of more than $100,000 which was 50 times more than what most families were earning.- This uneven distribution of wealth helped lead to the depression because wealthy people were getting wealthier and had money to spend on consumer products, but this spending was not enough to keep the economy booming. A healthy economy needed more people to buy more products which would create wealth.

The economic problems of the 1920s were kept hidden by many Americans who were buy9ing many consumer goods on credit. . By 1929, Americans racked up more than $6 billion in personal debt — more than double the 1921 level.

Until September 1929, the stock market continued to rise. Many people borrowed money to buy stock, assuming prices would continue to go up. Some economists feared that stocks were over-priced. Sept 3, 1929 – stock market began to fall – prices began to slide downward October 23, 1929 – Investors concluded the boom was over when the Dow Jones fell 21 points in one hour. October 24, 1929 – Black Thursday – Stock prices plunged – investors began to lose confidence and rushed to pull their money out of the stock market. October 29, 1929 – Black Tuesday – 16 million shares were sold as the stock market collapsed in the Great Crash. Billions of dollars were lost, whole fortunes were wiped out in hours. People lost all the money they had.

President Hoover tried to make Americans feel better and responded cautiously because he though the business cycle would correct itself. He told Americans – the “business of the country is on a sound and prosperous basis. 10

In growth periods, workers are hired, wages rise, and demand for products increases. In contraction periods, workers are fired, wages drop, and demand for products falls. The Great Crash was a hallmark of the nation’s business cycle. The economy periodically grows and then contracts. 11

The stock market crash didn’t start the Great Depression by itself The stock market crash didn’t start the Great Depression by itself. Instead, it quickened the collapse of the U.S. economy. 12

The banking system felt the effects of the crash first The banking system felt the effects of the crash first. People feared that their money would be lost so they run to the bank and attempt to withdraw their funds. But banks didn’t have enough of their money on hand as cash. These bank runs cause banks to fail. 1929 – 641 banks fail 1930 – 1350 banks fail 1931 – 1700 banks fail 1932 – Americans unsure if banks would be left standing. 1929 – Federal Reserve – which regulates how much money is in circulation – limited the money supply to discourage lending. As a result, there was too little money in circulation . 13

Factories closed, causing worker layoffs. This lowered demand for goods. Unemployment in urban (cities) areas increased dramatically By 1933, the unemployment rate reached 25%.

Congress passed the Hawley-Smoot Tariff to protect American manufacturers from foreign competition. Raised prices on foreign imports to such a level that they could not compete in the American market. The strategy was a mistake. Other nations retaliated and raised tariffs as well. The resulting drop in world trade only made the glut of American factory and farm products harder to sell. 15

As international trade falls, a global drop in business leads to a worldwide depression. The international economy had largely been funded by American loans to Europe but the crisis in the US led to the US drastically curtailing (putting a stop to) those loans, therefore bring the world into a worldwide depression. 16

hardships in Europe and rural America There were several causes of the Great Depression. There is still disagreement over which are most important. John Maynard Keynes – the lack of government interference in the economy led to the depression. Critical problems in money supply, distribution of wealth, stock speculation, consumer spending, productivity, and employment could have been controlled by proactive government policies. hardships in Europe and rural America Each of the following contributed to dangerous economic conditions: uneven distribution of wealth speculation in the stock market increased personal debt 17