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The Causes of the Great Depression Speculative Boom = Spectacular Crash • Business was thriving in the 1920s – Businesses making money – Americans thought they could make easy money by investing – Seemed like there was no limit to the Bull Market – Buying from Brokers: people who bought and sold stocks – Brokers let investors Buy on Margin Buying on Margin • Buying stocks was easy in the 1920s. You didn’t even need to have the full amount to buy stocks. – Example: buying on margin allowed you to only pay 10% of the stocks price up front. You could be loaned the other 90% – Someone with only $1,000 could borrow $9,000 and get $10,000 worth of stocks • Led to Stock Speculation: buying not to invest in a company because you think it will do well, but buy today so you can sell tomorrow and make a quick profit. – Leads to inflated prices of stocks (stock is worth more than it should be A House without a Strong Foundation • The market was unstable because of speculation • As the market went down, brokers wanted their loans to be paid • Because stock prices were falling, investors couldn’t pay back the loans • Individuals had to sell homes, cars, furniture to repay debts • Businesses had invested profits in the market and had to close – people lost jobs. The Crash • Market hits its peak on September 3, 1929 – Prices drop after this – Sometimes in small amounts, sometimes in tumbles • October 29, 1929: Black Tuesday – Bear Market – market in which prices decrease steadily – By the end of 1929 investors had lost $30 Billion Banking Crisis Wipes Out Savings • During the 1920s banks were a part of the speculation boom • Loaned money to brokers who loaned money to investors • Banks used money from people’s savings accounts for the loans • Banks began calling in their bad loans, when people couldn’t pay the bank back people got nervous Runs on the Bank • As the economy went down, people lost confidence in the safety of their banks holding on to their money. • This led to Bank Runs – panicked depositors lining up around the block to try to withdraw their money from the bank – Those who got there first usually got their money back – But if the bank ran out of cash, the bank closed and depositors lost their investments – 3,800 banks close in 1931 and 1932 Banking and Stocks Aren’t the Only Problem Causing the Great Depression • Too much for sale, too little to spend – New technology in manufacturing and farming create a 32% increase in production – Overproduction: More products are available than people can afford to buy • Unequal Distribution of Wealth between rich and poor – Lower economic class makes up for this buy buying items with credit cards – Advertising convinces consumers that thrift is old fashioned – Personal debt rises from $3.1 billion to $6.9 billion from 1921 to 1929 Underconsumption Causes Farm Failures, Bankruptcies, and Layoffs • Underconsumption: People were not buying as much as the economy was producing – Farmers got loans to buy land and equipment to produce as much as they could during WWI – When the war ended, demand decreased – Farmers can’t store excess products, they go bad – Prices go down, but farmers still need to repay loans Underconsumption Impacts Industry • By late 1920s underconsumption began to impact business • Manufacturers cut back production – Example: auto and steel industry cuts back production by 38% in 1930 • Businesses begin to lay off workers – Between 1929 and 1933, unemployment goes from 3% to 25% Government Actions Make a Bad Situation Worse • Federal Reserve loans money to member banks to control the supply of money – The “Fed” kept the amount of money in the economy high during the 1920s by lowering the discount rate – Discount Rate is the rate of interest a bank pays to borrow money from the government. • Lower rate = more money in supply • Higher rate = less money in supply – Fed raised the discount rate in 1931 – businesses couldn’t get money for capital and therefore laid off workers Government Actions Make a Bad Situation Worse • Tariffs Cause Trade Troubles – Remember the Treaty of Versailles (Ver-sigh)? • The peace treaty of WWI • European nations owed us money for all the weapons we sold them. Germany owed them money (reparations) • In order to pay us, those nations need to make money buy taxing income from businesses. Businesses need to sell products to make money. • So, they try to sell goods to Americans Hawley-Smoot Tariff Act • Congress is worried that Americans won’t buy goods made by American companies if they can get cheaper goods from Europe • So, they pass a tariff (tax on imported goods) on all European made goods • Made European countries angry so they raised tariffs on American made goods • US companies were unable to sell excess goods to other countries • Great Depression spreads throughout the world