Download Lesson 1: Hooking Lesson

Major Causes of the Great Depression
1) Government Policies (Hoover’s “last eight years”):
A series of Republican presidents- Harding, Coolidge, and Hoover- believed in government-business
cooperation. During these years, government was more of a compliant coordinator than an active manager. In
other words, government policies helped protect the interests of businesses by cutting taxes on corporations and
wealthy individuals. Further, the Progressive-era anti-trust stance was largely abandoned. Furthermore, many
corporations successfully avoided regulatory legislation and government interference in the market economy.
2) Industries in trouble:
Numerous key basic industries such as textiles, steel, and railroads struggled to make profits. Mining and coal,
which had expanded to supply wartime needs during WWI, faced diminished demand for goods during
peacetime thus leading to a surplus of goods. Even “boom industries” of the 1920s such as automobiles,
construction, and appliances began to weaken as consumer demand decreased. One struggling industry could
create a chain reaction that would cause other industries to suffer. For example, construction of new houses
declined so demand for building materials, new furnishings and appliances, and construction workers declined
too. The health of these industries was important because prosperity of the economy depended excessively on
these few basic industries.
3) Agricultural issues:
This was the sector of the economy that was suffering the most. Agriculture was in a depression that began in
1920, lasting until the outbreak of WWII. Average annual income for an American family was $750, but for
farm families it was only $273. During WWI, international demand for crops like wheat and corn soared,
causing prices to rise. Farmers planted more crops and took out more loans to buy land and equipment in hopes
of capitalizing on Allies’ need for food. BUT, after the war ended, demand for farm products fell and
consequently crop prices fell too. Also, agricultural production in Europe began to recover. Essentially, farmers
have a surplus on their hands and no one to sell it to.
*Farmers strapped for cash cannot pay property taxes or mortgages or pay off their debts and are forced to
auction off their land. For example, in Mississippi, it was reported in 1932 that on a single day in April
approximately one-fourth of all the farmland in the state was being auctioned off to meet debts.
4) International Problems:
Following WWI, European demand for American goods began to decline because European industry and
agriculture were regaining their footing and becoming more productive. When the war ended, European nations
allied with the U.S. owed large sums of money to American banks. Their shattered economies couldn’t produce
this money so they insisted on reparations payments from Germany and Austria to help them pay of their own
debts. But, the economies of Germany and Austria were also in shambles and they could not pay reparations.
On top of all this, the U.S. passed the Hawley-Smoot Tariff Act, which established very high protective tariffs.
This made it difficult for European countries to sell goods in the U.S.
2
5) Consumers issues:
During the 1920s, most people enjoyed a higher standard of living relative to previous generations. Motivated
by advertising and buying on credit, Americans eagerly bought radios, automobiles, real estate, and stocks.
BUT, by the late 1920s, Americans were buying less. Why? Because they had less money to spend!
a) Prices kept rising while wages remained the same:
 Consumers spent less because incomes were not rising fast enough in comparison to prices. During the
1920s, nearly half of the nation’s families earned less than $1500/year (minimum amount for decent
standard of living). Even families earning twice as much could not afford many products manufacturers
produced. Average man/woman bought a new outfit of clothes only once a year. Scarcely half of the
homes in cities had electric lights or a furnace for heat. Only one in ten had an electric refrigerator.

In contrast, rich Americans were doing very well. Between 1920-1929, income of the wealthiest 1% of
the population increased by 75% compared with a 9% increase for Americans as a whole. In 1929, the
wealthiest 5% of families took in nearly a third of the nation’s income.
*Large increase in income (~$74 billion to $89 billion), but as shown in the previous graph, only a small
percentage of the population experienced a large increase in income. Contrastingly…
3
Consequently, unbalanced distribution of income emerging:

Unequal distribution of wealth meant that most Americans couldn’t participate fully in the economic
advances of the 1920s because they didn’t have the money to buy goods that factories produced. One
solution to this problem was buying on credit…
b) Overbuying on credit in the preceding years:
Although many Americans appeared prosperous during the 1920s, they were actually living beyond their
means. They frequently bought goods on credit- an arrangement in which consumers agreed to buy now and pay
later for purchases, often on an installment plan (usually in monthly payments) that included interest charges.
Credit was easily available, encouraging people to pile up a large consumer debt. People then struggled to pay
off this debt and often went bankrupt.
4
6) Stock Market:
Through most of the1920s, stock prices rose steadily and as a result more people bought stocks and bonds,
taking advantage of rising prices. However, several problems emerged:
1) More and more investors engaging in speculation: buying stocks and bonds on the chance that they
might make a quick and large profit, ignoring any risks.
2) Buying on margin: paying a small percentage of the stock’s price as a down payment and borrowing
the rest. Stockbrokers willing to lend buyers up to 75% of stock’s purchase price.
If stock price rose, could sell it to make a profit and pay back off debt. But if prices declined, no way to
pay off the loan you used to buy it in the first place.
*This graph demonstrates how stock prices rose steadily beginning around 1918 (with minor fluctuations throughout) and
peaked sharply in 1928 and ‘29. You can see a sharp decline toward the end of 1929. Stock prices began to decline and
confidence in the market begins to waver: some investors sell their stocks and pull out. In October, market takes a plunge
and panicked investors try to unload their stocks. Black Tuesday, October 29th, worst day in the crisis: people and
corporations frantically trying to sell their stocks before prices plunge even further. As stock prices drop, people are not
able to sell their stocks for the same price that they purchased them and are therefore losing money.
5
7) Black Tuesday
*Panicked crowds outside NY Stock Exchange on “Black Tuesday”.
*Bank run: people rushing to the bank to withdraw their savings.
October 1929: In September, declined and confidence in the market began to waver; in response, some investors
sold their stocks and pulled out. In October, the market took a plunge and panicked investors tried to sell all of
their stocks. Black Tuesday, October 29th, was the worst day in the crisisbecause people and corporations
frantically tried to sell their stocks before prices plunged even further. Individual investors who bought stocks
on credit acquired huge debts and people who put their savings into the market lost them. 16 million shares
were dumped that day. By mid-November, investors had lost $30 billion, an amount equal to U.S. expenditures
in WWI.
This event also caused banks to collapse because many Americans panicked and withdrew their money from
banks, forcing over 9,000 banks to go bankrupt or close to avoid bankruptcy. Many banks couldn’t cover
customers’ withdrawals because they had invested money in the stock market and lost it. 9 million individual
savings accounts were wiped out as banks closed.
By 1933, 100,000 businesses had closed down. As businesses failed or cut back, they laid off workers.
Unemployment leapt from ~3% (1.6 million workers) to ~25% in 1929 (13 million workers). One out of every
four workers was without a job. Those who managed to hold onto jobs had to accept pay cuts and reduced
hours.
6
*Examples of unemployed men eagerly looking for jobs.
7
Primary and Secondary Source Summaries
Name:_______________________
Period:___________
Title: _______________________________________________
Key Words:______________________________________________________________________________
_________________________________________________________________________________________
Summary:________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
Title: _______________________________________________
Key Words:______________________________________________________________________________
_________________________________________________________________________________________
Summary:________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
Title: _______________________________________________
Key Words:______________________________________________________________________________
_________________________________________________________________________________________
Summary:________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
8