Causes of the Great Depression ( )

Roots of Depression The Great Depression was spawned by great prosperity. The boom after WWI was so great that it caused unsustainable growth

The Business Cycle

Business Cycle after WWI

Bubble Definition: “A speculative scheme that comes to nothing: lost money in the real estate bubble.” People tied up wealth SPECULATING on future earnings, which seemed unlimited due to credit. Overproduction AND overconsumption become very American.

Farms and Depression During WWI, the US provided nearly all the food for the allied nations. For US farmers, regardless of food crop, they could guarantee they would sell ALL of it.  Leads to taking out loans to buy modern equipment and more land to plant  Leads to higher overall production

When the Bubble Popped… As Europe recovered from the war, they needed less American crops.  Farm prices dropped severely due to a lack of demand and surplus of supply  Farmers were caught in a trap – maximize profits to pay back loans without further driving down prices.  America’s farm market collapses

Consumer Goods All the trendy new conveniences were available to all through credit. REAL purchasing power was MUCH HIGHER than REAL wages. As the postwar economy in Europe began to recover, demand for American goods slowed As the American economy slows, wages slow, people cannot purchase as much Credit taken becomes credit due

Stock on Margin Famously, everything was for sale on credit, even investments. It was possible to become a millionaire with only a few dollars to bet on the market with the rest due when the big payday hit As people realized their stocks were overvalued, they dumped them, causing panic.

Keynesian Theory Stated that supply and demand on the individual level was too simple AGGREGATE demand for a country or economy should be looked at rather than demand for specific goods and services The government should promote demand when the aggregate demand gets too low Indicates a problem with “trickle down economics”

Coolidge’s Economic System Calvin Coolidge believed tax breaks for the rich would spur investment and growth. As businesses began to lose money, costs had to be cut. Often, these were in the form of wage reductions. Money failed to trickle well.

Slippery Slope As wages declined, buying power declined. Thus, aggregate demand declined. The Keynesian view is the most widely accepted theory of the cause of the Great Depression of the 1930s

The Evil Industrialist Theory Business owners and Bankers are often blamed for intentionally overinvesting in an undercomsuming society, inflating their stock and then cashing out.  While this may have some merit in some cases, the roots are far deeper for the overall collapse.

Hardest Hit Countries with heavy industry were hit the hardest by the worldwide depression  Building suppliers and industries like lumber were also hit as construction basically stopped everywhere  If construction is stopped, there are no construction jobs. People are laid off. The dominoes are set in motion.

Ripple Effect Economics has established the Ripple Effect When one segment of the economy has a significant change, it will change other segments significantly

Severity of Ripple?