1. Causes of the Great Depression

2. What is a depression? One phase in a larger business cycle.
Characterized by a vicious cycle of:
Low consumer/trust/confidence → Low demand for goods.
Low prices of low profits → layoffs and rising unemployment.
Lower incomes → reduced consumer buying power.

4. Causes of the Great Depression
The worst depression in U.S. history.
Easy credit created an “Illusion of Prosperity” in the 1920’s.
Installment plans allowed purchases without cash.
Created an unnatural demand for goods and eventual overproduction.
Problems arose when consumer credit was exhausted.
What is easy credit?
Think layaway

5. Farmer’s Debt Overproduction led to a crop surplus:
S>D= low prices (deflation)
Lost war-time markets, especially in Europe
Countries in Europe weren’t importing American crops.
Many faced foreclosure: the loss of property because of mortgage default.
More supply than there is demand.

6. Industrial Overproduction/Overexpansion and Growing Unemployment
The post-war buying boom slowed down, but production did not.
Isolationism was caused by a reduction in trade.

7. Maldistribution of Wealth
5% of the population controlled 33% of wealth.
During the 1920s, the average worker output increased, but wages did not keep up.
Conclusion: workers were working harder for less.
Huge profits went to expansion instead of higher wages for workers.
Conclusion: the trickle-down theory was not working.
What is trickle down theory

8. Stock Market Problems
Stock Market problems (sent false signals about the economy)
Wild speculation: too much buying “on margin” caused inflation.
October 29, 1929: “Black Tuesday”
There was a selling panic, but there weren’t any buyers.
Share prices deflated and margin loans were due.
What were the false signals
On margin
What is black Tuesday

9. Bad Banking Systems Banks were independent and unregulated.
Risky loans were issued; FDIC protection did not exist for depositors.
Many banks played the stock market with consumer deposits.
The Stock Market Crash→ bank runs = bank failures (11,000 closed).
Wasn’t the FDIC created because of the great depression?

10. Government Inaction
Laissez-faire policies towards banks and the stock market.
A bad tariff policy
Increases backfired, causing a “trade war”.
What was the bad tariff policy
What is a trade war