1. Or why the economic depression of the 1930s was so severe…
The Economic Collapse
Or why the economic depression of the 1930s was so severe…

2. So why is the economic depression of the 1930s known as the Great Depression? There were a number of factors that made this depression/panic/recession especially severe.

3. A. The Stock Market stock prices dropped – why?
October 24, "Black Thursday”
stock prices dropped – why?
A few investors decided that stock prices had gone as high as they would, and that it was a good time to sell
Other, less experienced, investors panicked and started trying to sell all their stocks before the prices fell too much.
What happens to prices when there’s a huge supply (of stocks) and little demand (to purchase)?
A record 12,894,650 shares were traded on the New York Stock Exchange that day.

4. A. The Stock Market October 29, 1929 - "Black Tuesday"
same as the previous Thursday (but worse)
16,410,030 shares traded on the New York Stock Exchange
Prices collapsed (from a peak reached in August 1929) amid panic selling.
Thousands of investors were wiped out (lost everything).

5. A. The Stock Market
The Stock Market Crash was not the cause of the Great Depression.
Instead, it was an indicator of the problems in the economy.
However…

6. A. The Stock Market Buying on margin was a major factor
(def) buying stocks by paying a small percentage up front then borrowing the rest from a broker
the intent was to pay the broker from profits made once the price of the stock increased
Investors counted on prices going up to pay off their debts
When prices started to drop, many brokers tried to collect on their loans
The investors didn’t have the money and defaulted on the loans (didn’t pay them back).
Brokers, unable to collect what was owed to them, were the biggest losers when the market crashed
In short, too many stocks were purchased on credit!

7. B. Banking Issues
Banks took money from their accounts to invest in the stock market without telling their customers.
When the market collapsed, bank reserves (cash money in the banks) were wiped out.
Without reserves, banks could not return money that customers had deposited in their accounts.
In other words, even those people who played it safe and put their money in the bank instead of speculating in the stock market lost all their money.
Video clip

8. B. Banking Issues Banks were making unwise loans
Many major purchases were made on credit.
Loans were made to people who couldn’t pay them back.
Farmers are the best example
War loans to England and France were not being paid back, so the US created the Dawes Plan
Germany was unable to pay reparations to England and France, so England and France couldn’t pay their debts to the U.S.
The U.S. banks loaned money to Germany to pay England and France so England and France could pay the U.S.

9. C. Production Issues (think supply & demand)
Lack of diversification
manufacturing focused on a limited number of products
Most of these products were durable goods (long-lasting products, for example, motor vehicles and large appliances such as stoves and refrigerators).
Once purchased, these items do not need to be purchased again for several years  demand goes down.

10. C. Production Issues (think supply & demand)
Overproduction
Farming
Farmers continued to produce crops at war-time levels well into the 1920s.
Europe had recovered and no longer needed American crops
Overproduction resulted in a surplus (a supply that is too great for the demand)
When the supply is high the demand is low, so prices…
drop!
No matter how much the farmers produced they could never make a profit (and pay off their debts) because prices were so low.

11. C. Production Issues (think supply & demand)
Overproduction
Manufacturing
Same problem happened with industry, even though manufacturers didn’t drop their prices much.
New advances in technology added to the problem
New machinery was able to produce goods faster and cheaper.
Produced more than was being purchased (supply & demand)
The factories had to slow production which meant laying off (firing) workers.

12. D. Low Labor Wages
New technology also resulted in a reduced need for labor – many were laid off.
Wages did not keep up with prices
78% of families earned less than $3,000 / year in the 1920s
3 out of 4 families were unable to put any money into savings.
1924 – industrial unemployment was already around 25% in some areas.
Many families relied on credit, not just to get luxury items and purchase stocks, but to survive day to day.

13. E. Poor Distribution of Purchasing Power
Disparity (inequality) of income
Miners earned about $10/week ($520/year)
Henry Ford paid roughly $2,609,000 in income tax each year.
27,000 of the wealthiest families had as much money as the 12,000,000 poorest families.
The 5% with the highest income in the country made about 33% of all the money earned.

14. The 1920s was an era where there was excitement, materialism and commercialism but in reality the economy could not support the excess. All of the previous factors added together to create a very weak economy, especially when the multiplier effect is taken into consideration.

15. F. The Multiplier Effect
Remember in the early part of the 1920s:

16. F. The Multiplier Effect
A decrease in
business revenues
A decrease of income
& employment
consumer demand
A decrease
in spending
When the stock market crashed in 1929, the multiplier effect started to work in reverse:

17. So how severe was it?
$2 billion in bank deposits disappeared
,000 banks failed
the Gross Domestic Product declined by 10% each year (it usually increases by about 3-5% each year)
farm prices fell by 53%
industrial stocks lost 80% of their value
By the unemployment rate was at 25%
1 million were unemployed in New York City alone
By hourly wages had dropped by 50%
By 1933 more than 90,000 businesses had failed