THE CAUSES OF THE GREAT DEPRESSION

WAIT… WHAT’S THE GREAT DEPRESSION?

THE GREAT DEPRESSION

Date: 1929-1939

Definition: a period of economic depression in the United States and the rest of the world

Economic depression occurs when an economy produces fewer goods and services and employs fewer people

Significance

Huge cost to human well-being

Transformed the role of the US federal government in people’s daily lives

FIVE LONG-TERM CAUSES OF THE GREAT DEPRESSION

Monetary policyOverproduction Inequality SpeculationTrade

Day 1

Day 2

Day 3

Day 4

DAY 1: OVERPRODUCTION AND INEQUALITY

OVERPRODUCTION

In your notes: Is it possible for an economy to produce too much stuff? What might be the positive and negative consequences of producing too much?

MARKET SIMULATION

Some of you are producers – your job is to sell golf pencils (provided by me) for as much profit as possible

Some of you are consumers – your job is to buy golf pencils from the producers for as little money as possible

Some of you are observers – be ready to answer questions on the worksheet

ROUND 1

One producer with one golf pencil to sellFive consumers, with budgets of 20 cents each

ROUND 2

Two producers with five golf pencils eachFive consumers with budgets of 20 cents each

ROUND 3

Ten producers with ten pencils eachThree consumers, with budgets of 5-25 cents each

ROUND 4

Two producers with five golf pencils eachTen consumers

Eight consumers get two cents eachTwo consumers get 50 cents each

ROUND 5

Five producers with five golf pencils eachTen consumers

Eight consumers get two cents eachTwo consumers get 50 cents eachBut consumers are going to get some bad news

before buying begins…

SO WHAT DOES THIS HAVE TO DO WITH THE DEPRESSION?

BASIC ECONOMIC PRINCIPLES

Prices are set by the combination of supply and demandWhen demand > supply, prices go upWhen supply > demand, prices go down

The balance of power depends on the distribution of wealth When wealth is equally distributed, individual crises (like

tuition or medical bills) don’t hurt the economy much When wealth is heavily concentrated, a crisis for the rich

means a crisis for the whole economy

OVERPRODUCTION IN THE GREAT DEPRESSION

Agricultural overproductionFarmers increased production significantly during WWI – and

took on huge debts to do thisAfter WWI ended, demand fell sharply and farm prices crashed Individual farmers kept production high, since profits were low

Similar problem in industry – factory methods made production increase, but eventually Americans ran out of money for new goods

INEQUALITY IN THE 1920S

In the 1920s, the rich became far richer while the poor became only slightly less poor

Made worse by tax cuts for the rich under Herbert Hoover

Result: limited demand for consumer goods

EXIT TICKET

1.How did overproduction make the American economy unstable in the 1920s?

2.How did inequality make the American economy unstable in the 1920s?

DAY 2: SPECULATION

SOME KEY TERMS

Stock: partial ownership of a companyStock market: a place where shares of companies

are openly tradedSpeculation: investing in stocks or other ventures

in the hope of profit, but with the risk of loss

THE STOCK MARKET IN THE 1920S

Two trends in the 1920s:Stock prices went way up

– a boomMore and more Americans

invested in stockPeople saw the stock

market as a way to get rich quick

STOCK MARKET SIMULATION

It’s January 1, 1920You’ve pooled $200 with your friends to invest in the stock

marketYou will invest at least half of the money today and meet

periodically to reconsider your investmentsYou agree to sell everything on December 31, 1929 and

divide the profits equally

STOCK MARKET GAME, ROUND 1

AT&T: $20Ford Motors: $25General Electric: $15Montgomery Ward: $12US Steel: $40

STOCK MARKET GAME, ROUND 2

AT&T: $20 (no change)Ford Motors: $23 (-2)General Electric: $25 (+10)Montgomery Ward: $15 (+3)US Steel: $38 (-2)

STOCK MARKET GAME, ROUND 3

AT&T: $25 (+5)Ford Motors: $21 (-2)General Electric: $30 (+5)Montgomery Ward: $20 (+5)US Steel: $42 (+4)

STOCK MARKET GAME, ROUND 4

AT&T: $30 (+5)Ford Motors: $20 (-1)General Electric: $35 (+5)Montgomery Ward: $30 (+10)US Steel: $55 (+13)

STOCK MARKET GAME, ROUND 5

AT&T: $2 (-28)Ford Motors: $4 (-16)General Electric: $5 (-30)Montgomery Ward: $7 (-23)US Steel: $10 (-30)

MARGIN BUYING

Margin buying: the practice of borrowing money from a broker to purchase stock “You lend me money now, I’ll pay you back later when I sell my

stock at a profit”

Great way to take advantage of a boom market (prices going up)

1920s brokers allowed buyers to purchase stock with as little as a 10% down payment

But what do you think happens when the market goes down…?

DAY 3: MONETARY POLICY

SPECULATION REVIEW QUESTIONS FOR 11.1

1.What are the possible risks of investing in the stock market?

2.What are the possible rewards of investing in the stock market?

3.What are the advantages of margin buying (taking out a loan from your stockbroker in order to buy more stock)?

4.What are the disadvantages of margin buying?

FINAL NOTES ON SPECULATION

Investing in stock can be rewarding, but it always carries risksThe stock market was especially risky in the 1920s for two

reasons:Not much information about companiesNot much regulation from the government – for instance,

over the down payment required for margin buyingBy 1929, the market was overvalued and ready for a crash

KEY TERMS

Inflation: an increase in the general price of goods and services

Deflation: a decrease in the general price of goods and services

Money supply: the amount of money available in an economy

Purchasing power: the amount of goods or services that a given amount of money can buy; “the worth of a dollar”

THE FEDERAL RESERVE (“THE FED”)

Central bank of the United States, established 1913

Can choose to lend more or less money to banks (by varying the interest rate)

Influences inflation/deflation

WHAT CAN THE FED DO?

If the Fed lends more money to banks, what happens?

InflationIf the Fed lends less money to banks, what

happens?

Deflation

EXIT TICKET

Explain: what should the Fed have done to boost the economy, and why?

DAY 4: TRADE AND TARIFFS

REVIEW: WHY INFLATION WOULD HAVE HELPED

Inflation = prices going upPeople spend more during inflation, since they expect prices to riseTherefore, inflation stimulates demand

The government could have produced inflation by increasing the money supply

Instead, the government decided to keep the money supply stableResult: continued low demand, low wages, and high

unemployment

WHAT DID THE US NEED TO AVOID AN ECONOMIC DEPRESSION?

Key to economic recovery = more demand for American productsPrices would increaseWages would increase

One possible solution: demand could come from overseas

SO WHY DIDN’T OTHER COUNTRIES BUY AMERICAN?

After World War I, most European countries were economically devastatedPhysical devastationWar debts

Most countries, including the US, wanted to protect their economies by raising tariffs – taxes on imported goods

THE SMOOT-HAWLEY TARIFF

Date: 1930Definition: huge increase in tariffs (import taxes) charged on

goods imported to the USGoal: to protect US firms against competition from manufacturers

in other countriesResults:

Hurt European economies, so people could afford fewer US goods Encouraged other countries to raise tariffs, reducing demand for US

goods