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Great Depression - Overview The Great Depression There are three main topics that are important when studying the Great Depression, which lasted from 1929 to 1941. These topics include: (1) how the Great Depression affected the U.S. standard of living, (2) how President Franklin D. Roosevelt’s New Deal programs were intended to counteract the effects of the Great Depression, and (3) how World War II brought an end to the Great Depression. Once the Depression began, businesses closed down, leading to an increase in unemployment, a drop in production, and a decrease in prices. About a fourth of all workers in the United States were unemployed as a result of this economic downturn. The overall U.S. standard of living declined drastically during the 1930s. Many people lost their homes. Farmers had a particularly hard time during the Depression. Many had gone into debt to buy farm equipment and had trouble making payments when crop prices fell. To make matters worse, a severe drought hit the Great Plains states from 1934 to 1937. Years of poor farming practices had exhausted the soil, leaving the region vulnerable to erosion. Winds blew away much of the topsoil during the drought, causing dust storms and making farmland unproductive. The region came to be called the Dust Bowl. Many farmers were forced to leave their farms and head to the West Coast to find work. Franklin D. Roosevelt became president in 1933. He began to expand the federal government's role in dealing with the Great Depression. His policies were collectively called the New Deal. Among its many achievements that are still part of our economic system today, the New Deal: ● supported the right of workers to form labor unions ● restricted the number of hours of work required of workers ● insured bank deposits to protect people’s savings ● aided farmers by stabilizing crop prices ● helped provide electricity for rural areas ● set rules to prevent abuses in the stock market ● created Social Security, a pension system for retired workers Other New Deal programs put people to work on public-works projects such as building bridges, fighting fires, and planting trees. Poor people were given financial aid to pay for food and shelter. While the New Deal programs brought some relief, it was World War II that finally lifted the United States out of the Great Depression. The war created a strong demand for weapons and supplies. Many factories that had previously made consumer products began manufacturing weapons. Most eligible men joined the military, but there remained a tremendous need for factory workers. Large numbers of women entered the workforce to fill these factory jobs. The economic situation of farmers also began to improve as the demand for food increased. Wartime research also led to the development of important new technologies. These included radar, jet engines, and synthetic fibers such as nylon. All these technologies had commercial uses after the war. The war left the European economy in ruins. This helped keep foreign demand for U.S. goods high and allowed U.S. businesses to thrive throughout the 1950s. ®SAISD Social Studies Department Page 1 Reproduction rights granted only if copyright information remains intact. Modern Connections Great Depression Although the political cartoon above is from 2009, how does it reflect the concept of a bank run or panic? ®SAISD Social Studies Department Page 2 Reproduction rights granted only if copyright information remains intact. Great Depression - Economics 101 - The Basics Law of Supply and Demand Supply = How much and how fast something can be provided. Demand = How badly consumers want a product. If Supply goes up and Demand does not = Prices Drop If Demand goes up and Supply does not = Price Increase They are supposed to balance each other out. Say’s Law Surplus = Having too much of a product that people do not show a high demand for. Surplus will eventually cease to exist since if the price of a product drops low enough, consumers will eventually buy out what is left over. Business Cycle The ups and downs of an economy are used to balance how people earn and spend money. In down cycles (troughs), unemployment goes up and spending goes down (contraction). If down cycles last for a few cycles, they can become recessions. If they last a long time, they can become depressions (very high unemployment). When cycles go up, they indicate a recovery (expansion) period with low unemployment and high spending. Stock Markets Stocks = Purchasing a “piece” of a company. When stocks go up, investors receive shared earnings. Investors can also make money by selling their stock in a company. When stocks go down, the value of the company goes down, losing money for investors. ®SAISD Social Studies Department Page 3 Reproduction rights granted only if copyright information remains intact. Great Depression - Economics 101 - The Basics Buying - Selling When investors buy stocks, they should know whether or not a company is worth investing in. If the company shows low profits, most investors will stay away until something changes. Sometimes people hold on to their stocks, hoping a bull market allows them to make a greater profit. In a bear market, investors will often sell off their shares in order to avoid losing more than their initial investment. When people buy stocks without know the condition of a company, it is called speculation. Bull Markets Bull markets are noted by a rise in stock value over time. While bull markets tend to make investors happy and profitable, sometimes they can lead to speculation and making companies more valuable than they actually are. Bull markets sometimes need to be corrected by a bear market. Remember: A Bull’s Horns Will Lift You Up Bear Markets Bear markets are noted by a lowering in stock value over time. Typically, increased selling of market shares is a trademark of a bear market. Investors watch bear markets carefully in order to avoid losing too much money. However, some hold on to their shares and hope that things get better quickly by a bull market. Remember: A Bear’s Claws Will Take You Down Stock Market Crash Crashes are noted by a dramatic, sudden sell off of stocks, causing the values of multiple companies to drop. Crashes occur for many different reasons including: over-speculation, conflict, natural disasters, and panic. ®SAISD Social Studies Department Page 4 Reproduction rights granted only if copyright information remains intact. Great Depression - Economics 101 - The Basics What It Is (Paraphrase and Give an Example) Stock Markets Business Cycle Say’s Law Law of Supply and Demand Looks Like ®SAISD Social Studies Department Page 5 Reproduction rights granted only if copyright information remains intact. Great Depression - Economics 101 - The Basics What It Is Stock Market Crash Bear Markets Bull Markets Buying-Selling Looks Like ®SAISD Social Studies Department Page 6 Reproduction rights granted only if copyright information remains intact. Causes of the Market Crash (Most Popularly Cited Reasons) Stocks were Overpriced Many people believe that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price/Earnings ratios and Price/Dividend ratios, argue that the share prices were not too high. Massive Fraud and Illegal Activity A number of people believe that fraud and illegal activity was one of the causes of the 1929 Crash. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. There are also suggestions of Ponzi schemes where people were tricked into investing into fake companies, sometimes losing millions. Margin Buying Margin buying is another scapegoat for the cause of the Crash. However, it is not the main reason because there was very little margin outstanding relative to the value of the market (the margin averaged less than five percent of the market value). Federal Reserve Policy The new President of the Federal Reserve Board Adolph Miller tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, starting from the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non- financial and other corporation that financed brokers and dealers. Public Officials' Repeated Statements Many public officials commented that the stock prices were too high. For example, the newly elected President of the United States, Herbert Hoover, publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover's statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the Crash. Unequal Distribution of Wealth and Income Despite rising wages overall, income distribution was extremely unequal. Gaps in income had actually increased since the 1890s. The 1% of the population at the very top of the pyramid had incomes 650% greater than those 11% of Americans at the bottom of the pyramid. The tremendous concentration of wealth in the hands of the few meant that the American economy was dependent on high investment or luxury spending of the rich. Unequal Distribution of Corporate Power From the late 1870s on, there had been an ongoing movement of consolidations and mergers. During World War I, many would-be competitors were merged into huge corporations like General Electric, making competition nearly nonexistent. In 1929 two hundred of the biggest corporations controlled 50% of the corporate wealth in America. This concentration of wealth meant that if just a few companies went under after the Crash, the whole economy would suffer. ®SAISD Social Studies Department Page 7 Reproduction rights granted only if copyright information remains intact. Causes of the Market Crash (Other Factors) Bad Banking Structure In the 1920s, banks were opening at the rate of 4-5 per day, but with few federal restrictions to determine how much start-up capital a bank needed or how much of its reserves it could lend. As a result, most of these banks were highly insolvent; between 1923 and 1929, banks closed at the rate of two a day. Until the stock market crash in 1929, prosperity covered up the flaws in the banking system. World War I had turned the U.S. from a debtor nation into a creditor nation. The Republican administrations of the 1920s insisted on payments in gold bullion, but the world's gold supply was limited and by Foreign Balance of the end of the 1920s, the United States itself controlled most of the Payments world's supply. Protectionism and high tariffs kept foreign goods out of the U.S.. This protectionism produced a negative effect on U.S. exports: if foreign countries couldn't pay their debts, they had no money to buy American goods. Limited or Poor State of Economic Intelligence Most American economists and political leaders in 1929 still believed in laissez-faire and the self- regulating economy. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses couldn't keep up high employment for long when they were not selling goods. The Gold Standard Another problem with economic practices of the day was the commitment of the Hoover administration to remain on the international gold standard. Many suggested increasing the money supply and devaluing the dollar by printing paper money not backed by gold, but Hoover refused. Going off the gold standard was one of the first actions of new President Roosevelt in 1933. Decrease in the Money Supply The decline in money supply between 1929 and 1933 dampened economic developments. It led to a sharp contraction in output and nominal income, and a extraordinary climb in unemployment. If the Federal Reserve had increased the money supply, the fall in the economic activity could have been moderated considerably. International Factors The Depression was a global event. The international monetary system of the time (the gold exchange standard) was a fixed-rate system. As long as the rules were observed, economic conditions in various countries would be closely related. Thus, problems in one large economy would be passed on to others, and ultimately, could transmitted back to the country of origin ®SAISD Social Studies Department Page 8 Reproduction rights granted only if copyright information remains intact. Great Depression - Economics 101 - The Basics Bull Market 30 22.5 15 7.5 0 January Bear Market April July October April July October April July October 30 22.5 15 7.5 0 January Crash 40 30 20 10 0 January Depression 8 6 4 2 0 Year 1 Year 3 Year 5 Year 7 Year 9 ®SAISD Social Studies Department Page 9 Reproduction rights granted only if copyright information remains intact. Business Cycles of The United States (1920-1940) - Visual A ®SAISD Social Studies Department Page 10 Reproduction rights granted only if copyright information remains intact. Business Cycles of The United States (1920-1940) - Visual B Wikimedia Commons ®SAISD Social Studies Department Page 11 Reproduction rights granted only if copyright information remains intact. Causes of the Great Depression Manufacturing Increased in the 1920’s Causing... Consumers Saw Businesses Making Money So They Decided... The Bull Market inspired more people to... Speculation and Buying on the Margin Caused... ®SAISD Social Studies Department Page 12 Reproduction rights granted only if copyright information remains intact. Causes of the Great Depression The Great Depression Federal Reserve Policies Stock Market Speculation Stock Market Crash Bank Failures World-Wide Tariffs ®SAISD Social Studies Department Page 13 Reproduction rights granted only if copyright information remains intact. 1929 At this time, nearly one in four Americans was unemployed. More than 13 million Americans had lost their jobs since 1929. Roughly 10,000 banks had failed since 1929. About $2 billion in deposits were lost since 1929. Per capita income fell from $681 in 1929 to $495 in 1933. ®SAISD Social Studies Department Page 14 Reproduction rights granted only if copyright information remains intact.