1. Causes of the Great Depression

2. Myths and Misconceptions
Many people believe that the crash of the stock market was the cause of the Depression. Not so, it was only a symptom.
Many people also believe that Herbert Hoover’s laissez-faire economic philosophy prevented the federal government from taking steps to prevent the crisis. Hoover was proactive in trying to ease the impact of the depression, it was too little, too late.
Many people think that the Great Depression was the only major economic crisis in U.S. history. Nope, but it was the worst.
Many people do not realize that the Depression was global and affected almost every capitalist economy on earth
Some believe that FDR and the New Deal ended the Depression. Wrong again, WWII ended he Depression

3. The Facts
In September of 1929 the U.S. economy began showing signs of contraction (decline from the growth of the 1920’s)
August 1929, recession begins, GDP falls by and unemployment rises.
Automobile sales fall 30% in 1929.
By 1929 farm incomes fall more than 50%
September stock prices begin to fall, the market crash on Black Tuesday October 29th losing 90% of its value by 1932.
By 1932 US GDP fell 30%
US factory production fell 46%
US wholesale prices fell 32%
US exports fell 70%
US unemployment will reach 25% (33% in some regions)

4. US Unemployment
Abstract of the US Department of Labor

5. Many did not realize how severe the downturn was until 1932, when the economy had technically “hit bottom.”

6. There are four obvious causes of the Great Depression
Overproduction
Banking and Money Policies
Stock Market Actions
Political Decisions

7. # 1 Overproduction
Mass advertising fed mass consumption to satisfy the needs of mass production.
Wages for labor remained stagnant (mechanization of labor, Taylorism, suppression of union collective bargaining). Businesses were investing profits in the stock market and not in workers wages. So….
The uneven distribution of wealth grows % of the population owns 36.7% of the nations wealth by 1929 it has grown to 44.2%
Eventually business produced more than consumers could purchase. You can only own so many radios, cars, and appliances.
August 1929 Recession begins, two months before the stock market crash. During this two month period, production fell 20%, wholesale prices at 7.5 %, and personal income fell 5%.

8. The 1920’s were an era of prosperity in the United States
High availability of consumer goods
Electric appliances, automobiles
Americans felt they deserved to reward themselves following WWI

9. Availability led to high demand for goods
Companies began to produce more and more
Attempts to meet demand

10. In Reality…… Under-consumption:
Although people wanted the items, they didn’t have enough cash to buy everything they wanted
Uneven distribution of wealth and income

11. American Farmers Face Problems First
Were also overproducing
Increased production during WWI
Government subsidized (paid higher prices for grain and wheat)
Farmers often borrowed money to enlarge and modernize farms

12. Following the war- subsidies were cut
Became difficult of farmers to pay debts
Many began to lose farms

13. To Summarize…..
HIGH DEMAND for consumer goods and agricultural products led to OVERPRODUCTION

14. # 2: Banking and Money Policies

15. The uneven distribution of wealth didn’t stop the poor and middle class from wanting to possess luxury items, such as cars and radios…

16. Wages were not keeping up with prices of goods
Solution was to buy on credit
By end of 1920’s- 60 % of cars and 80% of radios bought on installment credit
First time for personal consumer credit

17. The Federal Reserve Board
Created by Congress in 1907 in response to Banking Crisis
Meant to be protective “Watchdog” of economy
Set the interest rates for loans issued by banks

18. The Federal Reserve Board
In 1920’s- The “Fed” set interest rates very low
Encouraged people to buy on “installment” or credit
More buyers meant more profit, which meant companies produced more (even more surplus!)
1929- Fed worried growth was too rapid
Decided to raise interest rate and tighten supply of money
Purchase of consumer goods slowed

19. To Summarize…..
Buying on Credit Increased personal debt Higher Interest Rates Caused less demand for goods

20. # 3: Stock Market Actions

21. The Stock Market was an indicator of national prosperity.

22. Buying on Margin
Just like one could buy goods on credit, it was easy to borrow money to invest in the stock market
Called “margin investing” or “buying on margin”
Small investors more likely to invest in stock market in large numbers because the “margin requirement” was 10%
$1000 worth of stock could be bought with 10% down

23. Buying stocks on margin functioned like buying a car on credit
1920’s- Business booming
Stock prices rising
Growing profits
Buying stocks on margin functioned like buying a car on credit
Speculation: “experts” predict which stocks will do well
Causes prices to rise

24. So…what went wrong? Banks began to loan money to stock-buyers
Allowed to use the stock as collateral
What does this mean for banks if the stock loses value?

25. The Crash Stock Market Crash
October 29, 1929
Over 16 million shares sold as prices dropped
Loses exceeded $26 billion
The Crash was a symptom- NOT the cause of the Depression

26. To Summarize…..
Buying on Margin Was a risky market practice Bank Loans For stock purchases was an unsound practice

27. But there are more bad banking practices!
Loss of confidence in stocks led to loss of confidence in security of money being held by banks
Customers raced to banks to withdraw savings

29. The Federal Reserve Should Have Helped!
The Federal Reserve was established in part to prevent banks from closing
was supposed to be the “last resort” loaner to banks on the verge of collapsing
However, Fed had lowered requirement of cash reserves to be held by banks
Many banks didn’t have enough cash to match amount of money in customer accounts

30. 1930
60 bank failures per month
9,000 bank closures

31. A downward spiral…. When banks fail- money disappears from economy
No insurance for depositors: many lost life savings
As more banks close, people lose money, more fear of banks and more runs
Businesses lose money
Many go bankrupt, close their doors, leaving workers unemployed

33. # 4: Political Decisions

34. The Depression could have been less severe had policy makers not made certain mistakes…

35. Leaders in govt. and business relied on poor advice from economic and political experts
“The sole function of the government is to bring about a condition of affairs favorable to the beneficial development of private enterprise.”
Herbert Hoover (1930)

36. But did Hoover really believe in a “hands-off” free market philosophy?

37. Hoover did take action to intervene....
Dramatically increased govt. spending
Millions to cotton and wheat farmers
Too Little, Too Late

38. Within a month of the crash, Hoover met with key business leaders
Within a month of the crash, Hoover met with key business leaders. - urged to keep wages high, even though prices and profits were falling.
Biggest mistake of Hoover administration- Hawley-Smoot Tariff (1930) - raised tariff on imports
to 50%
- believed trade barriers
would force Americans
to buy American goods,
producing jobs

39. Leaders ignored that trade is two way street
If foreigners can’t sell goods here, they will shut off our exports there!

40. To Summarize…..
The Hawley-Smoot Tariff created trade wars and Worsened world economic conditions Huge increases on taxes Hurt companies and individuals

41. Let’s Review the MAJOR CAUSES for the Great Depression:

42. 1. Overproduction (responding to high demand for goods) 2
1. Overproduction (responding to high demand for goods) 2. Banking & Money Policies (low interest rates, buying on credit, raise in interest rates, low reserve rates for banks.) 3. Stock Market Practices (buying on margin, bank loans for stock purchases) 4. Political decisions (Smoot-Hawley Tariff, Increase Income Tax)