Causes of the Great Depression

Overview Crash of 1929 is considered the start of the Depression in the US Worldwide, effects of the Depression were caused by broader factors, including –the reparations of WW1 –unchecked speculation –trade tariffs made to protect economies –and insufficient banking laws

Rise in Share Prices Dow Jones Industrial Average 1920 = = Between 1920 and 1929 DJIA averaged +21.4% gain per year. (Historical average is about +9%) Share prices rose because of 1.Economy did well after expectations of increasing performance: speculation 3.Idea that the NYSE was the best investment 4.NYSE attracted all money and savings in economy, so stock crash would affect entire economy

Crash of 1929 October 1929 share prices far exceeded their “true” value Purchases “on margin” (with borrowed money) let people invest more When prices began to fall: margin investors panicked and sold en masse Stock Crash continued after 1929 as broad decline 1929 DJIA high = DJIA low = 41.22

Lack of Regulation 1929 laws did not regulate investment Banks had invested in stocks, so ordinary people lost savings Corporations lost savings that had been invested in stock Pensioners lost pensions that had been invested in stock

The Great Depression Affected virtually all nations Banks, to preserve confidence, needed cash: “called in” loans Foreclosures: cancellation of loan through sale of collateral –Farm foreclosures –House foreclosures –Corporation foreclosures

The Great Depression Banks unable to lend further funds: need to preserve cash “Runs” on banks caused banks to “fail” Results: –Unemployment –Deflation –Lowering of interest rates –Continued stock collapse until 1932 –Political shift in USA: Democrats elected to presidency 1932

The Dust Bowl: Years of severe dust storms Major ecological and agricultural damage to prairie lands Displaced 100s of thousands of farmers Causes: –Severe drought –Decades of extensive farming without crop rotation, fallow fields, or cover crops –Deep plowing of topsoil displaced natural deep-rooted grasses