Aim: What were the major causes of the Great Depression?

Why was this situation so bad for the rest of the US economy?

20% still worked on farms in the 1920's. 44% of the population was still considered rural in 1930. The multiplier effect carried over into manufacturing

Why was the country so badly damaged?

As a company's stock lost value, it couldn't raise as much money to finance its expansion plans: this led to fewer jobs Many of the richest families owned stock. These people were bg spenders and business owners. Consumption is now dropped back Banks that had directly invested money or lent money to brokers also lost money By 1933, 11,000 out of the nation's 25,000 banks had closed The bank's poor investments and bank runs meant that millions of people lost their savings account There Was drying up of credit as loans to consumers and businesses for expansion ended The stock market crash severely damaged US' psychological well being. Its magnitude gave a visible signal that the US and world economies were in bad shape. This killed optimism and discouraged new investment and spending.

3.) irresponsible banking practices

Banks in the 1920's were overly optimistic. Loans were given to farmers, businesses, and individuals with poor collateral (something you put down as security for repayment of a loan) People and businesses were not saving enough and were living too much on credit Stockbrokers borrowed finance their customers "buying on margin": borrow some of the money needed to purchase stocks

2.) Uneven distribution of wealth

During the 1920's, nearly 50% of US families earned less than $1500 per pear Rich americans on contrast did very well. Between 1920-29, the richest 5% of american families earned 30% of the nation's income. The poorest 40% of the population earned only 10% of the nation's income

Overproduction in agriculture led to lower food prices for people in the city and off the farm - the majority of the population. Why was this a problem?

Farmers could not repay their loans and were forced off their farms in the 1920's. 1919-21: annual farm income dropped from $10 billion to $4 billion As food prices dropped, each farmer tried to make more money by producing more food thus lowering prices even further Thousands of farmers were bankrupted and lost their farms

What caused the Dust bowl?

Farmers in the Great Plains planted on fragile grasslands to produce more. When drought hit, the topsoil was blown away and the dust bowl occurred

How did this tariff backfire?

If the Europeans could not sell their exports to the US they could not get the dollars they needed to buy US exports or repay their loans

4.) the breakdown of international trade

In order for the allies to pay off their WWI debts and the Germans to pay reparations they had to borrow from US banks

Individuals had been buying stocks on the margins for years. Why did this practice help stock prices rise to unrealistically high levels?

Investors could easily enter the market and buy stocks; this drove up their value A bubble was created in which people assumed the value of stocks would just keep increasing forever. The problem was that they high price of stock had nothing to do with the real performance of the companies Value of stocks listed on the NYSE rose from $27 billion in 1925 to $67 billion in early 1929

Once the market began to drop on October 29, why did "panic selling" began?

Investors feared further drops and gave orders to sell at any prices 16.4 million shares are sold By November, stocks were at 1927 levels; investors lost $30 billion and by 1932, stockprices were 80% below the 1929 highs. Onces the market crashed, the investors could not repay the margin. The investor, the stockbroker, and the bank were ruined

Why was this bad for the overall US economy in the long term?

Overproduction in manufacturing led to a buildup of inventory. Prices and profits dropped. Companies then reduce their buying of raw materials and laying off their work force. This has a reverse multiplier effect on other industries

1.) Overproduction in industry and agriculture

Overproduction was the result of increased production and weak demand

Why was this a problem? stock

Stock: ownership in sheets of a company Companies sell stocks to the public because they use the money to invest and expand: individuals buy sticks to gain money Stock prices can go up and down If the company makes profits, stocks can be sold Investors who wanted to buy stocks but could not afford it started to buy on margin This created problems later on when the value of stocks began to drop and people started to sell. Bad investments in the stock market meant borrowers defaulted on their loans and banks struggled to pay back its depositors.

5.) The Stock Market Crash

The crash which began on October 29, 1929 was not the major cause of the Great Depression but it still had a significant impact

Why did the stock market crash in October 1929?

There was a buying frenzy. The stock prices were very over valued. By september 1929, stock prices reached an all-time high People got nervous and started to sell their stocks but this led to a further drop in stock prices

How could these countries raise the money to repay these loans to the US banks?

They could sell their exports: manufactured goods, commodities, etc. to the US to earn the dollars to repay their debts

But US farmers and manufacturers were being hurt by European imports. How could these industries react to these increased exports to the US?

They demanded protection in the form of higher tariffs: tax on imported goods They hawley-Smoot Tariff of 1930 raised US tariffs to their highest level in US history

How did Europeans react to these higher tariffs that kept their goods out of the US market?

They retaliated: they also raised their tariffs US companies exported less and European companies exported less. The net result was a 40% drop in total world trade which made everyone poorer

Why was this a problem?

This uneven distribution also led to under consumption. The rich spent more than the poor but they also save more There was not enough money in the majority's pocket to buy all the good produced

Farmers never had a Roaring 20's. Why was there also under consumption in agriculture?

US farmers hit hard times due to drying up of the post WWI European market

Why was there weak demand?

Wages in manufacturing did not rise as quickly as an increase in increase in productivity Factory production increased 49%in the 1920's but wages rose only 11% The result was that workers could not afford to buy these goods they produced