From Prosperity to Great Depression A Look at the Causes of the Great Depression

1920’s seen as the Jazz Age…. Prosperity Inventions accessible to more Growing wealth of the middle class Flapper culture Jazz

Causes of the Great Depression Inequality of Wealth A. Between Rich and Poor in U.S. B. Between industries C. Between the U.S. and Europe

Inequality between rich and poor Top 25% control 55% of national income. 80% have no savings Middle class and working classes wages rise slowly compared to that of rich. 4. Poor and farming communities left out of prosperity of Jazz Age. a. This creates a very unstable economy as total demand cannot Possibly keep up with total supply. 1. How was demand maintained? a. Credit: buy with installment buying. 1. 60% of cars/80% of radios 2. borrowing triples 1925-8 b. artificial demand puts off the day of reckoning, but the downfall will be worse. 2. Luxury investment and spending: wealthy spend and invest, but this is based upon confidence in the economy.

II. Inequality of industrial wealth A. most spending on auto and radio industries. 1. related industries also thrive and drive the prosperity of the 1920’s. B. U.S. economy is not balanced as too much emphasis and importance placed on these new industries. 1. Farmers left out, no help from gov.t. as prices collapse. 2. When these industries slow, the entire economy will slow. .

III. International Inequality of wealth A. Europe struggles to restore economies after WWI. 1. Mass borrowing from U.S. banks a. 10 billion by 1920, 1.25/yr from 1925 to 1928. b. Germany borrowing after 1924. 2. Money used to buy U.S. goods to repair nations, restore economies. a. they can’t repay b/c 1. war damages 2. U.S. tariffs close U.S. market 3. Onset of Depression=loss of Eur. market.

IV. Speculation A. 1928-29 market doubles its price 1. investors want in, and don’t check out health of company before hand. 2. RCA 85-420 in one year!!!! B. Middle class buys stock on margin 1. By mid 1929-7 billion in stock loans, 1.5 b more in next 3 mos. 2. This is all done based on confidence that market will keep going up.

What did the middle class do with extra money in the late 20’s? Invest in the market of course…good way to double money. Buy stock on margin (put up 10% and repay loan after 15 days) Credit was easy (Federal Reserve policy of cheap money) Market was rising (due to increased credit and increased margin buying)

Dies Irae or Day of Wrath The market crumbles amid widespread recalling of loans by America’s banks. What to do with those stocks that were bought on margin? But wait, the Federal Reserve has just made it harder to get credit (loans at favorable rates.) Where will money come from? Uh oh…..

banks close, factories shut, massive unemployment But what happens when the confidence is rocked? The crash (Sept. and Oct. 1929-see reading on this. middle class and poor stop buying on margin and installment for due to fear of job loss Rich stop spending and speculating industrial production slows inventories pile up in the factories Jobs cut and people default on loans radios and cars purchased on credit returned to dealer industries related to car and radio crumble massive job losses tariffs go up to protect U.S. factories more job loss banks close, factories shut, massive unemployment GREAT DEPRESSION

Why did the Great Depression Happen? 1. Inequality between rich and poor. If the rich aren’t spending, and the working class can’t afford goods (or are worried about layoffs) the demand decreases. 2. Depressed farm economy: No purchasing power for a large segment of the American population. 3. Federal Reserve tightens credit: wrong policy, should have expanded credit to get spending going again. 4. Weakness of international trade after WWI: Foreign nations depend on American loans. A spiraling cycle due to decreased spending, loss of wealth due to stock market, bank failures (overextended credit), layoffs all mean one thing No one is spending…..no need for workers…fewer people spending.. You get the point.