Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Cause #1-Overproduction: The “Roaring Twenties” was an era when our country prospered tremendously. Average output per worker increased 32% in manufacturing and corporate profits rose 62%. * Underconsumption of these goods here and abroad, because people didn’t have enough cash to buy all they wanted… * There still existed an uneven distribution of wealth and income. Americas’ farms were overproducing, as well. During World War I, with European farms in ruin, the American farming was a prosperous business. Increased food production during World War I was an economic “boom” for many farmers, who borrowed money to enlarge and modernize their farms. So, to summarize it, HIGH DEMAND for consumer goods and agricultural products led to OVERPRODUCTION. Cause #2 - Uneven Distribution of Wealth • During the 1920s, income was distributed very unevenly, and the portion going to the wealthiest Americans grew larger as the decade proceeded. • While businesses showed gains in productivity during the 1920s, workers got a small share of the wealth this produced. • Between 1923 and 1929, manufacturing output per person-hour increased by 32 percent, but workers’ wages grew by only 8 percent. • Corporate profits shot up by 65 percent in the same period, and the government let the wealthy keep more of those profits. • The Revenue Act of 1926 cut the taxes of those making $1 million or more by more than two-thirds. • In 1929 the top 0.1 percent of American families had a total income equal to that of the bottom 42 percent. The uneven distribution of wealth didn’t stop the poor and middle class from wanting to possess luxury items, such as cars and radios… Uneven Distribution of Wealth Led to Overuse of Credit - “Buy Now, Pay Later” • Many people who were willing to listen to the advertisers and purchase new products did not have enough money to do so. • To get around this difficulty, the 1920s produced another innovation—“credit,” an attractive name for consumer debt. • People were allowed to “buy now, pay later.” • This only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. • That day came in 1929. Although wages were not keeping up with the prices of those goods…”buying on credit” offer a solutions! By the end of the 1920s, 60% of the cars and 80% of the radios were bought on installment credit. Why could this situation be dangerous? • Credit system – People didn’t really have the money they were spending • WWI – The U.S. was a major credit loaner to other nations in need – Many of these nations could not pay us back Check for Understanding #4 • How could overproduction, uneven distribution of wealth and overuse of credit be harmful and dangerous to economy? Cause #3 – Banking and Monetary Policies The Federal Reserve Board was created by Congress in response to the Banking Crisis of 1907. The Federal Reserve was suppose to serve as a protective “watchdog” of the nation’s economy. It had the power to set the interest rate for loans issued by banks. So,to summarize, banking policies which offered “buying on credit” first with lower interest rates, then raising those rates, caused a dangerous situation in the economy. Buying on Credit increased personal debt. Higher interest rates caused LESS DEMAND for goods. The Federal Reserve was also established to prevent bank closings. It was suppose to serve as the “last resort” loaner to banks on the verge of collapsing. In early 1930, there were 60 bank failures per month. Eventually, 9,000 banks closed their doors between 1930 and 1933. Simply put, when a bank fails, a large amount of money disappears from the economy. There was no insurance for depositors at this time, so many lost their savings. As banks closed their doors and more people lost their savings, fear gripped depositors across the nation. Business also lost its money and could not finance its activities… More businesses went bankrupt and closed their doors, leaving more people unemployed… Check for Understanding #4 • As I have already described, the banking sector faced enormous pressure during the early 1930s. . . . The Federal Reserve had the power at least to ameliorate [improve] the problems of the banks. For example, the Fed could have been more aggressive in lending cash to banks (taking their loans and other investments as collateral), or it could have simply put more cash in circulation. Either action would have made it easier for banks to obtain the cash necessary to pay off depositors. . . . In the end, Fed officials decided not to intervene in the banking crisis, contributing once again to the precipitous fall in the money supply. —Be n S. Bernanke, Federal Reserve Governor, 2004 According to the excerpt above, how did Federal Reserve policy contribute to the onset of the Great Depression? 4. STOCK MARKET Speculations The Stock Market was an indicator of national prosperity. The Stock Market growth in the 1920s tells a story of runaway optimism for the future. Small investors were more apt to invest in the Stock Market in large numbers because the “margin requirement” was only 10%. Speculation in The Stock Market • People bought stocks on margins – If a stock is $100 you can pay $10 now and the rest later when the stock rose • Stocks fall – Now the person has less than $100 and no money to pay back As business was booming in the 1920s and stock prices kept rising with businesses’ growing profits, buying stocks on margin functioned like buying a car on credit. The extensive speculation that took place in the late 1920s kept stock prices high, but the balloon was due to burst… • With people panicking And then…. about their money investors tried to sell their stocks –This leads to a huge decline in stocks –Stocks were worthless now • People who bought on “margins” now could not pay • Investors were average people that were now broke Buying on Margin was a risky market practice. Bank loans for stock purchases was an unsound practice. Check for Understanding #5 • What is “Buying on Margin”? • How could it be risky and harmful to the stock market and the overall economy? Cause #5 – Poor Leadership Decisions: The Depression could have been less severe had policy makers not made certain mistakes… Leaders in government and business relied on poor advice from economic & political experts... Within a month of the crash, Hoover met with key business leaders to urge them to keep wages high, even though prices and profits were falling. Hoover did take action to intervene in the economy, but it was too little too late- The greatest mistake of the Hoover administration was passage of the Smoot-Hawley Tariff, passed in 1930. (It came on top of the FordneyMcCumber Tariff of 1922, which had already put American agriculture into a tailspin.) Officials believed that raising trade barriers would force Americans to buy more goods at home, which would keep Americans employed. Billions of Nominal Dollars Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934 7 6 5 4 Exports Imports 3 2 1 0 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 It virtually closed our borders to foreign goods and ignited a vicious international trade war. Europe had debts from World War I and Germany had reparations to pay. Foreign nations were forced to curtail their purchase of Americans goods. For example, American farmers lost 1/3 of their market. Farm prices plummeted and thousands of farmers went bankrupt. Three years later, international trade plummeted to 33% of its 1929 level. The loss of such trade was devastating and had ripple effects, similar to the bank failures. In summary, The Smoot-Hawley Tariff created trade wars and worsened world economic conditions. Huge increase in taxes hurt companies and individuals. Check for Understanding #6 • How did the Smoot-Hawley Tariff cause the Great Depression? Let’s Review the MAJOR CAUSES for the Great Depression: 1. Overproduction (responding to high demand for goods) 2.Uneven Distribution of Wealth overuse of credit 3. Banking & Money Policies and (low interest rates, buying on credit, raise in interest rates, low reserve rates for banks.) 4. Stock Market Speculation (buying on margin, bank loans for stock purchases) 5. Political decisions (Smoot-Hawley Tariff, Increase Income Tax) Check for Understanding #7 • What underlying economic problems did the nation face in the last years of the 1920s? Why do you think so many allowed these problems to worsen? • How did government economic policies during the 1920s lead to the Great Depression?