Download File - Ryan Reynolds

Unit 5
Essay 1
Why did the U.S. economy go “bust”
in the late 1920’s and lead into the
Great Depression ?
Economic Depression =
 a sustained, LONGTERM downturn in
economic activity.
 Large INCREASES
in unemployment;
lack of availability of
CREDIT
 often due to some
kind of BANKING or
FINANCIAL crisis.
I. What caused the Great
Depression ?
The worst “depression” ever = massive
unemployment, banks closed,
homes/businesses lost,
hunger(starvation), etc.
Answer: ????
“The stock market crashed”????
Wrong – The stock market crash did NOT
cause the Great Depression
What really caused the Great
Depression ?
“Booming 20’s” =
Growing economy
(new jobs, businesses)
Like a great, towering
skyscraper – the
“Prosperity Building”
However…you may not
notice something…
What really caused the Great
Depression ?
..in the FOUNDATION ?
“CRACKS” ! Weaknesses in
the structure –
not noticed at first – but as
time goes by, cracks bigger
– weaknesses get worse
The Real Causes of the Great
Depression
1st Crack/Weakness:
“Income GAP Grows between
the RICH and WORKING
Class”
As 1920’s go by, amount made
by the Upper Class
EXPANDS,
While income for WORKERS
stays about the same
1st Crack/Weakness – the “Income Gap”
Interactive Notes Q&A’s
1. What is the “trend” in
the graph for the “top
20%” ? What is the
trend for the “bottom
20%” ?
2. Each group is
compared, based on
their average income in
1967 and 2002.
By how much did the top
20% grow between 19672002? Bottom 20%?
The “Income Gap” Today
2nd Crack/Weakness – “UNDERCONSUMPTION”
• Workers wages do not keep up
with INFLATION =
• over time, money loses VALUE
• Workers need RAISES to keep
up with rising PRICES
• but they’re not getting much in
raises (income gap)
• What would you do?
2nd Crack/Weakness – “UNDERCONSUMPTION”
• Workers BORROW more money
(credit), but eventually…..
• Workers cannot BUY as much
as the factories are making
(producing) =
• UNDER-CONSUMPTION
LEADS TO:
1) Factories REDUCE
production (aren’t
SELLING as much)
2) Businesses LAYOFF
workers = more
UNEMPLOYMENT
***If Workers do not (or cannot) buy
GOODS or PRODUCTS = UnderConsumption  slow-down in economic
growth
3rd Crack/Weakness – Low Supply of
Money =
Not Enough money for
CREDIT:
• Federal Reserve BANK
(“The Fed”)
• decides how much MONEY
will be in supply
• how much to make (PRINT)
• how much to have in the
ECONOMY
3rd Crack/Weakness – Low Supply of
Money =
• Fed also decides
INTEREST rates
• In 1920’s, The Fed is
worried about INFLATION
• So it starts to RAISE
interest rates 
• and lowers “SUPPLY of $$”
in econ.
• Result =
• Less money for CREDIT
• Consumers cannot buy
stuff, BUSINESSES cannot
grow
***Low Supply of Money  Businesses cut
Production  Businesses LAYOFF workers 
“slow down” in the “CIRCULAR flow” of economy
4th Crack/Weakness: Reduced
Foreign Trade
LEADS TO:
1) Factories reduced
production
2) Businesses lay off
workers
• In 1920’s, EUROPEAN
nations borrowed from US
banks to Buy US GOODS
• Great for USA Economy but
in the late 1920’s, The Fed
raises……
• INTEREST rates –
• Foreigners cannot AFFORD
to borrow $$
• US businesses see SALES
to foreigners, decline 
***Reduced Foreign Trade  Businesses sell
less to FOREIGNERS  businesses cut
production  layoff workers  “SLOW DOWN”
in the Circular Flow of economy
Review
 What is a depression?
 A long period of low
production and high
unemployment”
 What caused the “Great
Depression?
 4 Cracks (weaknesses
in the economy)
II. Stock Market Crash of October
1929 (Earthquake)
II. Stock Market Crash of October
1929
The Crash – when the VALUE of US company’s STOCK
fell by 40-70% --This did not CAUSE the Great
Depression
Why did it happen ?
1. Excessive SPECULATION = a lot of very RISKY
investment in the stock market
Stock Market Crash of October 1929
Why did it happen ?
2. People buying stock on MARGIN =
buying stock with only 5% down payment, the rest is
BORROWED
Stock Market Crash of October 1929
What led to the Crash ?
So much stock is bought “on margin” (on CREDIT) that
the VALUE of shares are INFLATED (like a “bubble”),
meaning that shares are not WORTH the prices
IF…
Stock Values go UP
 Brokers/Investors can re-pay margin
loans when they SELL the Stock
 Brokers/Investors PROFIT from the
DIFFERENCE of the higher price for their
stock
IF…
Stock values go DOWN 
 BANKS re-call loans made to
BROKER/INVESTOR.
 Then brokers SELL the stock to recover as
much money as possible
 If….Stock values go down MORE 
 PANIC
 This causes people to SELL, sell, sell, sell
more stocks.
C. How did the Crash Affect people ?
Only a TINY number of people speculated –
so why did the Crash affect so many others?
1. $30 BILLION was lost on
BLACK Tuesday  people lost
CONFIDENCE in the economy

Few were willing to RISK
investing again.

Without that money,
companies go BANKRUPT or
cut back
C. How did the Crash Affect people ?
2. BANKS had speculated
with people’s money 
800 banks FAILED after
the Crash 
9 MILLION people lost all
their SAVINGS 
consumer SPENDING
drops, weakens economy
“Bubbles” in the Economy =
inflated values