The Great Depression

General Causes of the Great Depression

Global Depression European World War I debts went unpaid

Consumer debt Credit Lack of government regulation

Stock market crash/ over-speculation/ margin buying

“Less” Income Spending Employment Cycle Business failures Unemployment

Good Good Times!1920’sPublic Perception:

Economy would continue to grow No fear of unemployment Low taxation

CreditFaith in the stable economy

In having a job In a growing economy

Made people feel safe borrowing

BUT PEOPLE BORROWED TOO MUCH

Uh Oh…Easy credit means loans to people

who might not be qualified, or able, to pay loans back.

Little regulation by the government to make sure loans are only made to those who would be able to pay them back.

The Consumer Used credit (borrowed money)

Did not have the money to pay it back People wanted to buy things Banks wanted to lend (make money on loans) Government wanted credit to continue

Consumer spending = strong economy

People were in debt Eventually this debt had to be paid-off, then the

“less” cycle began.

The Stock Market Bull Market – upward trend in stock prices

1920’s was a continuous bull market

Bear Market – downward trend in stock prices

The Great Depression marked the beginning of a severe Bear Market

Stock Speculation Speculating “playing” the market. Buying and selling for quick profit.

Buy to create demand Demand means price goes up Sell stock at high price

(but the stock was not TRULY worth that high price)

Problem?

Over Speculation As long as demand continued there was no

problem with speculation – UNTIL DEMAND ENDED.

Once demand calmed, overinflated stocks dropped significantly in value.

People owned stock, but no one wanted to buy it.

When demand for a stock falls, what happens to the price?

Margin BuyingPurchasing stocks with borrowed

money

Believing one could take a loan, invest it, and make back the loans money plus profit.

The Stock Market CrashBlack ThursdayOctober 24, 1929Nervous investors begin to sell their

stocks No buyers Stocks fall in value

Black TuesdayOctober 29, 1929

16 Million shares of stock are dumped by investors.

Prices of stocks plunge.

Margin Buyers found themselves in severe debt.

Herbert Hoover “We have passed the worst and… shall

rapidly recover.”

Business leaders, public officials claimed:

Only a minor setback

Banking Crisis The Run on the Banks

Borrowers defaulted on loans Banks lost money Went out of business

Public saw the writing on the wall Individuals wanted to get their money out of

the banks before their bank closed for good!

The Banking Crisis1930-19325,000+ banks fail

Collapse of 1 large New York Bank Left 400,000 depositors without their

savings.

The Run on the BanksPeople ran to banks to withdraw money.

Money leaving the banks meant banks had no money to invest, or make loans with.

Therefore, banks had no means of making money.

Banks were forced to close.

Business Failures Less consumer

spending Less consumption of

products Less profit/money for

businesses.

Business Response: Trimmed inventories Scaled back production Laid off employees

Business Failures 1930:

26,000 Businesses went bankrupt

1931: 28,000

Factories and mines were empty.

GNP – Gross National Product Total value of goods and services produced in a given year

1929 $103 Billion 1933 $56 Billion

Unemployment1932 – 23.6% Unemployment

(for every 100 people, 23 were jobless)

Global DepressionMassive war debts of Europeans went

unpaid.

Foreign consumers were unable to purchase U.S. goods

Factories that sold to foreign countries were forced to shutdown.

Income Gap Growing income gap

Rich getting richer, poor getting more poor.

Farmers; Laborers Unable to repay loans

Farmers; Laborers Not getting a high enough wage to meet the

increasing cost of living.

CreditSome Americans used credit as a

means to bridge the income gap, or maintain themselves with the rising cost of living.

Many consumers found themselves unable to pay off their debts.

The (Good) Business CyclePeople spendSpending creates demandBusinesses have to hire more workers

to meet demandMore people spend.Demand creates jobs

The (Bad) Business CyclePeople do not spendNo demandBusinesses have to lay-off workers

because there is no demandLess people spendLess people have jobs

Review Buying on Margin Bull Market Bear Market Black Thursday Black Tuesday Explain how the Banking Crisis contributed to the

Great Depression. Explain how business failures contributed to the

Great Depression General Causes of the Great Depression

Essay QuestionState the 3 general causes of the Great

Depression, provide an EXAMPLE of each, how each contributed to the greatest economic slowdown in American history.