The Great Depression

Essential Questions: 1) What led to the stock market crash of October 1929? 2) What were the effects of the crash on investors, banks, and businesses? 3) What were the roots of the Great Depression?

Definition of Depression A depression is a long-term downturn of economic activity They are characterized by: Large increases in unemployment Banking crisis Shrinking output Decrease in demand Bankruptcies and foreclosures Significantly reduced amounts of trade

What is a stock? One way companies grow is by selling stock, or portions of their company. People like to purchase stocks because they can make a profit.

1920s Stock Market Boom Leads to Overconfidence From 1922 to 1929, the Stock Market rose dramatically (Bull Market) “foolproof” way to get rich Investors bought stocks on margin (borrowed $) Pay $1 upfront for $10 worth of stock, counting on Stock Market rise to pay for loan

Day of the Crash: Black Tuesday Black Thursday: October 24, 1929  rumors began that the market was on the verge of collapse, a few nervous investors began selling stocks, others followed stock prices fell as selling continued and the market flooded with stocks  PANIC! Black Tuesday: October 29  stock values fell $10-15 billion

Talk to your neighbor: What led to the stock market crash of October 1929?

The Effects of the Crash on Investors Investors who bought stocks on margin lost original investment AND could not repay loans Many lost their fortunes overnight

Effect of the Crash on Banks Investors borrowed from banks to buy stocks Crash  banks could not collect from investors Depositors rush to withdraw their savings (run on banks)

Effect of the Crash on Businesses Banks were unwilling/unable to lend money to businesses Consumers stopped purchasing goods Companies shrink and lay off workers

Talk to your neighbor: What were the effects of the crash on investors, banks, and businesses?

Seeds of Decline 1920s Cruel Illusion Production boomed, but prosperity bypassed many groups More than 40% lived well under poverty line in 1929 Indirect Causes: Decline in farming Unequal distribution of wealth Overuse of credit Protective trade tariffs (taxes)

Decline in Farming during 1920s After WWI, European farming revived and drove down prices Farmers defaulted on loans, and farms were seized by the banks

Unequal Distribution of Wealth Richest 5% received 34% of income Disposable income decreased for poorest 93%

Overuse of Credit 1920s consumers bought on credit  credit bills mounted Consumers stopped spending in order to pay off credit This led to decreased demand Businesses lay off workers which led to unemployment Less consumer spending because less income Vicious cycle!

Protective Tariffs (taxes) Taxes on foreign made products Congress passed Hawley-Smoot Tariff Foreign countries responded with their own protective tariffs decrease in US sales abroad International trade decreased 30% by 1933!

Talk to your neighbor: What were the roots of the Great Depression?