Download The Causes of the Great Depression

The Causes of the Great Depression
WWI Changes the system



Countries overdeveloped their industrial sector
to produce wartime goods.
Higher tariffs were put into place to protect
their new industries.
1922 – U.S. began increasing their tariffs, and by
1930 the Hawley-Smoot Tariff had raised the
countries tariffs to an all-time high.
Currency




Wartime purchases had drained European
wealth.
Convertible currency was in short supply.
Many countries were barely able to import
goods.
To remedy this situation (1920s), the capital rich
countries (U.S. Britain, and France) invested a
great deal of money in the capital poor
countries (Germany).
Loans and Reparations




1920 – the ex-Allied nations owed the U.S. $10.3
billion.
The allies, who had lost a lot more men than the
U.S., wanted the U.S. to consider the money as
its contribution to the joint war effort.
U.S. refused.
As long as the U.S. gov’t demanded the loans to
be paid, the ex-allies would continue to demand
reparation payments from Germany.
Germany


This situation caused a steady depreciation in
the German currency. In 1921, one U.S. dollar =
65 German marks; and by 1923, it took 4.2
trillion marks to = one dollar.
This brought about rebellions from both the
communists and Nazi party. Both revolts failed.
A Solution to the German Problem





Charles Dawes – economic reconstruction of
Germany.
Reduced schedule of reparation payments and
sizable loans from the U.S.
U.S. $  German reparation $  European
countries loans $  back to the U.S.
Great Depression caused U.S. financial
institutions to stop making loans to Germany.
U.S. banks lost A LOT of money.
U.S. Economy






1920’s – U.S. economy is in bad shape since wages
lagged behind productivity.
Wages rose 2% and productivity rose 55%.
Corporate profits increased 65 % from 1923-1929, and
wages and salaries only increased 11%.
Income of farmers declined because prices were falling
and taxes and living costs were rising.
Income of farmers only 30% of a non-farmer.
20% of the U.S.’s population = farmers.
The Misdistribution of Wealth


42% of American families made less than $1,500
per year; 21% made less than $1,000 per year.
1/10 of 1% of the population made an annual
salary nearly equal to the bottom 42% of
American Families.
“Playing the Stock Market”



Less than 2.5 percent of the population owned
stock in 1928. No gov. control.
Many people bought stock on margin,
borrowing up to 90% of the price of the stock.
They would often mortgage their house as
collateral.
People bought stocks low, waited till the loan
was due, sold them at high prices, and paid off
their loan and made a profit.
The Problem




Sophisticated investors soon realized that stock prices
were worth more than the value of the corporation
selling them.
With the cut back of production they began to sell their
stocks.
“Black Thursday,” Oct. 24, 1929, a record 13 million
shares were sold. Market lost over $30 billion.
When brokers made their margin calls because the
worth of the stock fell below the amount of money
invested in it, many people could not pay their loans
and lost everything.
A Vicious Circle




As people lost money they bought fewer goods.
Factories then had to fire there workers, which
meant even less purchasing power on the
market.
5,000 banks failed in the U.S.
No gov. protection of money, so depositors lost
everything.
Lack of Production &
Unemployment




25% of U.S. labor force was unemployed and
those that had jobs saw their salaries and wages
reduced. (Today = 9.6%).
World industrial production fell 36%. Only fell
as high as 7% in previous depressions.
Trade shrunk from $69 billion to $24 billion
between 1929-1933.
22% of the worlds labor force was unemployed.
Causes of the Great Depression
Overdeveloped industry worldwide
 High Tariffs
 Maldistribution of Wealth
 Speculation in the stock market
 Lack of gov’t regulations
The interdependent nature of world-wide loans
caused the depression to become global.
