1. The Causes of the Great Depression

2. Speculative Boom = Spectacular Crash
Business was thriving in the 1920s
Businesses making money
Americans thought they could make easy money by investing
Seemed like there was no limit to the Bull Market
Buying from Brokers: people who bought and sold stocks
Brokers let investors Buy on Margin

3. Buying on Margin
Buying stocks was easy in the 1920s. You didn’t even need to have the full amount to buy stocks.
Example: buying on margin allowed you to only pay 10% of the stocks price up front. You could be loaned the other 90%
Someone with only $1,000 could borrow $9,000 and get $10,000 worth of stocks
Led to Stock Speculation: buying not to invest in a company because you think it will do well, but buy today so you can sell tomorrow and make a quick profit.
Leads to inflated prices of stocks (stock is worth more than it should be

4. A House without a Strong Foundation
The market was unstable because of speculation
As the market went down, brokers wanted their loans to be paid
Because stock prices were falling, investors couldn’t pay back the loans
Individuals had to sell homes, cars, furniture to repay debts
Businesses had invested profits in the market and had to close – people lost jobs.

5. The Crash Market hits its peak on September 3, 1929
Prices drop after this
Sometimes in small amounts, sometimes in tumbles
October 29, 1929: Black Tuesday
Bear Market – market in which prices decrease steadily
By the end of 1929 investors had lost $30 Billion

6. Banking Crisis Wipes Out Savings
During the 1920s banks were a part of the speculation boom
Loaned money to brokers who loaned money to investors
Banks used money from people’s savings accounts for the loans
Banks began calling in their bad loans, when people couldn’t pay the bank back people got nervous

7. Runs on the Bank
As the economy went down, people lost confidence in the safety of their banks holding on to their money.
This led to Bank Runs – panicked depositors lining up around the block to try to withdraw their money from the bank
Those who got there first usually got their money back
But if the bank ran out of cash, the bank closed and depositors lost their investments
3,800 banks close in 1931 and 1932

8. Banking and Stocks Aren’t the Only Problem Causing the Great Depression
Too much for sale, too little to spend
New technology in manufacturing and farming create a 32% increase in production
Overproduction: More products are available than people can afford to buy
Unequal Distribution of Wealth between rich and poor
Lower economic class makes up for this buy buying items with credit cards
Advertising convinces consumers that thrift is old fashioned
Personal debt rises from $3.1 billion to $6.9 billion from 1921 to 1929

9. Underconsumption Causes Farm Failures, Bankruptcies, and Layoffs
Underconsumption: People were not buying as much as the economy was producing
Farmers got loans to buy land and equipment to produce as much as they could during WWI
When the war ended, demand decreased
Farmers can’t store excess products, they go bad
Prices go down, but farmers still need to repay loans

10. Underconsumption Impacts Industry
By late 1920s underconsumption began to impact business
Manufacturers cut back production
Example: auto and steel industry cuts back production by 38% in 1930
Businesses begin to lay off workers
Between 1929 and 1933, unemployment goes from 3% to 25%

11. Government Actions Make a Bad Situation Worse
Federal Reserve loans money to member banks to control the supply of money
The “Fed” kept the amount of money in the economy high during the 1920s by lowering the discount rate
Discount Rate is the rate of interest a bank pays to borrow money from the government.
Lower rate = more money in supply
Higher rate = less money in supply
Fed raised the discount rate in 1931 – businesses couldn’t get money for capital and therefore laid off workers

12. Government Actions Make a Bad Situation Worse
Tariffs Cause Trade Troubles
Remember the Treaty of Versailles (Ver-sigh)?
The peace treaty of WWI
European nations owed us money for all the weapons we sold them. Germany owed them money (reparations)
In order to pay us, those nations need to make money buy taxing income from businesses. Businesses need to sell products to make money.
So, they try to sell goods to Americans

13. Hawley-Smoot Tariff Act
Congress is worried that Americans won’t buy goods made by American companies if they can get cheaper goods from Europe
So, they pass a tariff (tax on imported goods) on all European made goods
Made European countries angry so they raised tariffs on American made goods
US companies were unable to sell excess goods to other countries
Great Depression spreads throughout the world