Unit 5 Essay 1 Why did the U.S. economy go “bust” in the late 1920’s and lead into the Great Depression ?

Economic Depression = a sustained, LONG-TERM downturn in economic activity. Large INCREASES in unemployment; lack of availability of CREDIT often due to some kind of BANKING or FINANCIAL crisis.

I. What caused the Great Depression ? The worst “depression” ever = massive unemployment, banks closed, homes/businesses lost, hunger(starvation), etc. Answer: ???? “The stock market crashed”???? Wrong – The stock market crash did NOT cause the Great Depression

What really caused the Great Depression ? “Booming 20’s” = Growing economy (new jobs, businesses) Like a great, towering skyscraper – the “Prosperity Building” However…you may not notice something…

What really caused the Great Depression ? ..in the FOUNDATION ? “CRACKS” ! Weaknesses in the structure – not noticed at first – but as time goes by, cracks bigger – weaknesses get worse

The Real Causes of the Great Depression 1st Crack/Weakness: “Income GAP Grows between the RICH and WORKING Class” As 1920’s go by, amount made by the Upper Class EXPANDS, While income for WORKERS stays about the same

1st Crack/Weakness – the “Income Gap” Interactive Notes Q&A’s What is the “trend” in the graph for the “top 20%” ? What is the trend for the “bottom 20%” ? Each group is compared, based on their average income in 1967 and 2002. By how much did the top 20% grow between 1967-2002? Bottom 20%?

The “Income Gap” Today

2nd Crack/Weakness – “UNDER-CONSUMPTION” Workers wages do not keep up with INFLATION = over time, money loses VALUE Workers need RAISES to keep up with rising PRICES but they’re not getting much in raises (income gap) What would you do?

2nd Crack/Weakness – “UNDER-CONSUMPTION” Workers BORROW more money (credit), but eventually….. Workers cannot BUY as much as the factories are making (producing) = UNDER-CONSUMPTION LEADS TO: Factories REDUCE production (aren’t SELLING as much) Businesses LAYOFF workers = more UNEMPLOYMENT

***If Workers do not (or cannot) buy GOODS or PRODUCTS = Under-Consumption  slow-down in economic growth

3rd Crack/Weakness – Low Supply of Money = Not Enough money for CREDIT: Federal Reserve BANK (“The Fed”) decides how much MONEY will be in supply how much to make (PRINT) how much to have in the ECONOMY

3rd Crack/Weakness – Low Supply of Money = Fed also decides INTEREST rates In 1920’s, The Fed is worried about INFLATION So it starts to RAISE interest rates  and lowers “SUPPLY of $$” in econ. Result = Less money for CREDIT Consumers cannot buy stuff, BUSINESSES cannot grow

***Low Supply of Money  Businesses cut Production  Businesses LAYOFF workers  “slow down” in the “CIRCULAR flow” of economy

4th Crack/Weakness: Reduced Foreign Trade In 1920’s, EUROPEAN nations borrowed from US banks to Buy US GOODS Great for USA Economy but in the late 1920’s, The Fed raises…… INTEREST rates – Foreigners cannot AFFORD to borrow $$ US businesses see SALES to foreigners, decline  LEADS TO: 1) Factories reduced production 2) Businesses lay off workers

***Reduced Foreign Trade  Businesses sell less to FOREIGNERS  businesses cut production  layoff workers  “SLOW DOWN” in the Circular Flow of economy

Review What is a depression? A long period of low production and high unemployment” What caused the “Great Depression? 4 Cracks (weaknesses in the economy)

II. Stock Market Crash of October 1929 (Earthquake)

II. Stock Market Crash of October 1929 The Crash – when the VALUE of US company’s STOCK fell by 40-70% --This did not CAUSE the Great Depression Why did it happen ? 1. Excessive SPECULATION = a lot of very RISKY investment in the stock market

Stock Market Crash of October 1929 Why did it happen ? 2. People buying stock on MARGIN = buying stock with only 5% down payment, the rest is BORROWED

Stock Market Crash of October 1929 What led to the Crash ? So much stock is bought “on margin” (on CREDIT) that the VALUE of shares are INFLATED (like a “bubble”), meaning that shares are not WORTH the prices

IF… Stock Values go UP Brokers/Investors can re-pay margin loans when they SELL the Stock Brokers/Investors PROFIT from the DIFFERENCE of the higher price for their stock

IF… Stock values go DOWN  BANKS re-call loans made to BROKER/INVESTOR. Then brokers SELL the stock to recover as much money as possible If….Stock values go down MORE  PANIC This causes people to SELL, sell, sell, sell more stocks.

C. How did the Crash Affect people ? Only a TINY number of people speculated – so why did the Crash affect so many others? $30 BILLION was lost on BLACK Tuesday  people lost CONFIDENCE in the economy Few were willing to RISK investing again. Without that money, companies go BANKRUPT or cut back

C. How did the Crash Affect people ? BANKS had speculated with people’s money  800 banks FAILED after the Crash  9 MILLION people lost all their SAVINGS  consumer SPENDING drops, weakens economy

“Bubbles” in the Economy = inflated values