Download Causes of the Great Depression

Stock Market Crash
Risky Increase in Stock Market
• 1) Bull Market – soaring
stock prices encouraged
people to invest
• 2) Buying on the
margin– investors only
paid certain percentage
of stock purchased and
were loaned the
remainder from a
broker
Risky increase in Stock Market
• 3) Increased speculation
– Predictions that
stocks would continue
to rise
Risky increase in stock levels leads to
downfall of market
• 4) Hard to recruit new
customers to invest in
stock market
• 5) Credit begins drying
up so less people
buying companies’
product leading to
decrease sales
• 6) Professional investors
sense danger and begin
selling stocks
• 7) Brokers call in
margins from
investors
• 8) Investors who
bought on the margin
sold quickly so have
enough money to
repay loans
Result
• Black Tuesday –
October 29, 1929
• Market Lost 12% of its
value and by 1932
would lose 89% of its
value
• The 22% annual growth
from 1925-1929 was
over
Banks were loaning money to
stockbrokers who loaned it to the
investor who then played the stock
market. Investor bought on margin
(meaning they only had to pay a %
of what they invested at first) What
is the problem if the stock falls?
NYSE- Ford
New York Stock Exchange
Buy on margin
Federal reserve stepped in to tell
banks to stop loaning to brokers
so brokers then got money to
loan to investors from big
businesses. What happens if
stock prices fall?
NYSE- Ford
Why stock prices began to fall?
• Credit eventually
• Speculation:
dried up so people
Stocks were rising
weren’t buying as
to unrealistic
much causing
levels and when
industries to suffer
they began to fall
because they had
a
little
people
a large supply of
panicked and sold
product but no
out of fear
demand for it
BANK loans
you money
You pay back bank
with interest
Warehouses become
full of goods no on
can buy – drives down
stock
You use
money to
buy car
When no more
money to loan
(credit dried
up) you can’t
buy car
Other economic weaknesses
• Poor Distribution of
Wealth –
– owners and
managers
experiencing much
more prosperity than
workers – money not
being passed down
– Still wanted to
experience
prosperity so bought
on credit
• Federal Reserve did not
do much to stop
problems like banks and
businesses playing the
stock market
– So when stocks went
down banks and
businesses that
loaned money took a
big hit
Causes of the Great Depression
• The Stock Market Crash was a major
cause of the depression, but only an
estimated 4 million people (10% of
households) played the stock
market so what other factors led to
the Great Depression which affected
the entire world including 130
million Americans?
1) Federal Reserve Failure
Poor Monetary Policy by Federal
Reserve
• Federal Reserve Failures
– Federal Reserve is in charge of regulating Money Supply
– Did not raise interest rates early on to curb speculation in stock market
– Did not prevent banks early on from loaning to brokers and/or
investing in the stock market
– When crash occurred not enough money was in circulation to allow
the economy to bounce back
– When depression hit, raised interest rates, which tightened credit and
kept economy from expanding
•
2) Bank Failures
• Banks unable to get money back after crash
because corporations they invested in lost
value and brokers unable to pay back loans
Bank Failures –
Run on banks
• After the crash many
people rushed to
withdraw money from
bank
- Banks did not have
enough cash on hand
so they had to close Causing ordinary
citizens who did not
play the stock market
to lose ALL their
savings!!!
- Billions in savings
gone
3) Depressed Farms and
Industries/Overproduction
Farm Foreclosure
Line outside state employment agency
Farm Failures
• Many farms
foreclosed on due
to falling prices of
crops
– Foreclosure – bank
takes over
ownership of
property from an
owner who has
failed to make
loan payment
Industry Problems
• More efficient machinery
increased production
capacity of both factories
and farms.
•
Most Americans did not earn
enough to buy up the goods
they helped produce
• People not have $ causing
decreased orders - Prices had
to be lowered to meet low
demand but led to lower
profit, which causes:
1) lower wages
2) laid off workers
4) Uneven Wealth Distribution
Buying on credit
• Growing Gap between the rich and the poor
• Business profits that rose in the 1920s were
not being translated into higher wages for the
workers
– Thus workers were not able to buy new products
once their credit was dried up and at the end of
the 20s it was dried up
Owners profits up
60% but workers
only saw 8%
increase
5)Decline in Foreign Trade
Loss of Export Sales
• Why did it Decline?
1) High tariffs (tax on imported goods) also blocked
trade
2) Smoot-Hawley Tariff – raised average tariff rate to
highest in US history
1)
Foreign countries responded by raising their own tariffs causing
fewer foreign goods to be sold overseas
• Hurt US industry even more because their was too much
supply and little demand which causes what to happen to
the price of goods?
• 2) No more bank loans
– After WWI, banks loaning to foreign countries to
recover from WWI
– Banks started loaning more to stockbrokers rather
than foreign countries in the late 20s
– Banks also called in the loans to foreign countries
after the crash
– Foreign countries had a hard time paying back
causing unemployment and depression overseas
-Also making it impossible for foreign
countries to buy US products