Causes of the Great Depression

Prosperity Hides Trouble The Roaring Twenties had been a Republican decade. Harding and Coolidge Both Presidents watched the country grow increasingly prosperous. Consumption went up and the stock market went up. Republicans took credit for the economy and Americans agreed.

Herbert Hoover 1928 Republican National Convention Nominated Herbert Hoover He was born in Iowa but orphaned. Went to Stanford and earned a degree in Geology. He became a mining engineer and traveled the world. He became wealthy and retired from engineering and devoted the rest of his life to public service. He was first noticed during WWI. He coordinated the Belgium relief program and then as head of the Food Administration. He served as Secretary of Commerce in the Harding and Coolidge administrations.

Problems Plague Agriculture Farmers made up ¼ of the American workforce during the 1920’s. To meet demands during WWI, they increased food production and harvest and bought more land to farm. They sunk money into tractors and other mechanized equipment. Huge debts loomed over their heads. After the war, crop demands fell dramatically. Farmers were failing to sell their crop surpluses and pay the debts they owed to banks. The result was a rural depression. Farmers did not share in the good times of the 20’s. The majority lived on credit month to month.

Wealth is Distributed Unevenly More than 60% of all American families had yearly incomes of less than $2000. 24,000 of the country’s wealthiest families enjoyed annual incomes of more than $100,000, which was 50% more than what most families were earning. Since there was so few wealthy, there was no way they alone could buy enough consumer goods to keep the economy booming. A healthy economy needs more people to buy more products, which in turn creates even more wealth. From the overproduction of the farmers to the undersconsumption of the lower-income industrial worker, created instability.

Easy Credit Hides Problems Americans bought cars, appliances, radios, etc. on credit. By the end of the decade, 80% of radios and 60% of cars were purchased on installment plans. Americans bought stocks on credit. With each year, Americans were accumulating more debt. Too many people were living beyond their means for too long.

The Stock Market Crashes Early 1929, stock prices soared. Many economists agreed that too much money was being poured into stock speculation. Investors were risking their money that stock increases would turn into quick profits. Sept. 3, 1929- the stock market began to lag. Prices peaked and then started going down. By the end of Oct. the decline gave way to a free fall. Dow Jones average dropped 21 points in 1 hour on Oct. 23 People and investors lost confidence and that very attitude kept the market up for so long.

The Stock Market Crashes Oct. 24-investors became nervous and began selling their stocks. Stock in General Electric once sold for $400/share and was now worth $283/share. Oct. 29, Black Tuesday-more than 16 million shares were sold and the market collapsed. Billions of dollars were lost Fortunes were wiped out in a just a few hours People who bought stock on installment plans were financially ruined.

The Great Depression Begins 1929-1941-economy faltered and unemployment soared. The stock market crash did not start the depression by itself, it did spark a chain of events that collapsed the U.S. economy.

The Banks Collapse The crisis in confidence continued as frightened people tried to withdraw their money from their banks. Run- requests by the majority of a bank’s depositors to withdraw money. 1929- 641 banks failed. 1930- 1,350 failed. 1931- 1,700 went under. Federal Reserve-regulates the amount of money in circulation. During the 20’s, the “Fed” cut interest rates in order to stimulate economic growth. 1929- the Fed limited the money supply to discourage lending but there was too little money in circulation to help the economy come back up after the crash. When stock prices fell, investors went to their banks to secure whatever hard money they had left, the banks were cleaned out of currency and were forced to close.

Businesses Close and Unemployment Rises Reduced consumer spending Production is cutback to maintain price levels. Layoffs to reduce payroll. Company stock fell forcing companies to close plants and layoff workers. August, 1931- Henry Ford closed several Detroit factories, putting nearly 75,000 people out of work. Americans lost their jobs. No jobs= No $= Spending less $. 1933, 25% of Americans had no job.

Tariffs Government wanted to protect American business from foreign competition. 1930-Congress passed the Hawley-Smoot Tariff which raised prices of foreign imports to such a level that they could not compete in the American market. European countries retaliated and did the same thing. The H-S Tariff only added to the problems. It hurt international trade which was disastrous to the global economy.

Depression Goes Global 1930-Germany stops paying reparations which violates the Treaty of Versailles that ended WWI. European countries experienced the same cycle of business failures, bank collapses, and high unemployment rates. U.S. profits plummet. Europeans cannot afford American goods. U.S. investors have little or no money to invest abroad. Worldwide Depression European production plummets. European nations cannot pay off war debts.

What Caused the Great Depression? Historians and Economists disagree on the exact causes. John Maynard Keynes-believed the lack of gov’t. interference in the economy was the reason. He thought the gov’t. should spend more money to keep people employed when the economy slows. Milton Friedman- believed that the reason was a contraction in the money supply. The twin events of the stock market crash and the run on banks left too little money in circulation. Problems with consumption, coupled with an uneven distribution in wealth and overspeculation in the stock market, created the conditions which with poor or misinformed economic decisions by Congress and President Hoover resulted in the Great Depression.