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Causes of the Great
Depression (1919-1933)
Roots of Depression
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The Great Depression was spawned
by great prosperity.
The boom after WWI was so great that
it caused unsustainable growth
The Business Cycle
Business Cycle after WWI
Bubble
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Definition: “A speculative scheme that
comes to nothing: lost money in the real
estate bubble.”
People tied up wealth SPECULATING on
future earnings, which seemed unlimited
due to credit. Overproduction AND
overconsumption become very American.
Farms and Depression

During WWI, the US provided nearly
all the food for the allied nations. For
US farmers, regardless of food crop,
they could guarantee they would sell
ALL of it.
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Leads to taking out loans to buy modern
equipment and more land to plant
Leads to higher overall production
When the Bubble Popped…
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As Europe recovered from the war,
they needed less American crops.
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Farm prices dropped severely due to a
lack of demand and surplus of supply
Farmers were caught in a trap –
maximize profits to pay back loans
without further driving down prices.
America’s farm market collapses
Consumer Goods
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All the trendy new conveniences were
available to all through credit.
REAL purchasing power was MUCH
HIGHER than REAL wages.
As the postwar economy in Europe began to
recover, demand for American goods
slowed
As the American economy slows, wages
slow, people cannot purchase as much
Credit taken becomes credit due
Stock on Margin
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Famously, everything was for sale on credit,
even investments.
It was possible to become a millionaire with
only a few dollars to bet on the market with
the rest due when the big payday hit
As people realized their stocks were
overvalued, they dumped them, causing
panic.
Keynesian Theory
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Stated that supply and demand on the
individual level was too simple
AGGREGATE demand for a country or
economy should be looked at rather than
demand for specific goods and services
The government should promote demand
when the aggregate demand gets too low
Indicates a problem with “trickle down
economics”
Coolidge’s Economic System
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Calvin Coolidge believed tax breaks
for the rich would spur investment and
growth.
As businesses began to lose money,
costs had to be cut. Often, these were
in the form of wage reductions.
Money failed to trickle well.
Slippery Slope
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As wages declined, buying power
declined. Thus, aggregate demand
declined.
The Keynesian view is the most widely
accepted theory of the cause of the
Great Depression of the 1930s
The Evil Industrialist Theory

Business owners and Bankers are
often blamed for intentionally
overinvesting in an undercomsuming
society, inflating their stock and then
cashing out.

While this may have some merit in some
cases, the roots are far deeper for the
overall collapse.
Hardest Hit

Countries with heavy industry were hit
the hardest by the worldwide
depression
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Building suppliers and industries like
lumber were also hit as construction
basically stopped everywhere
If construction is stopped, there are no
construction jobs. People are laid off. The
dominoes are set in motion.
Ripple Effect
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Economics has
established the
Ripple Effect
When one segment
of the economy has
a significant
change, it will
change other
segments
significantly
Severity of Ripple?