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Unit Two: Exercise Twenty-One: Causes And Consequences Of The
Great Depression
ANSWER KEY
Refer to the Student Workbook p. 67-70
How did the following factors cause the Great Depression?
1. Overproduction
The industrial capacity of the U.S.A. had expanded beyond the ability of the consumer to
consume. As factories closed, unemployment increased, which further reduced demand.
2. The Stock Market
Investors in the stock market engaged in excessive speculation and too much buying on
margin. They were buying stocks on borrowed money, with the hope that the stock would
rise in value so that they could re-pay the loan. When Wall Street collapsed in October
1929, the flow of American money to other countries was further slowed.
3. Economic Nationalism and Tariffs
The United States passed two tariff bills, the Fordney-McCumber Act and the Smoot-Hawley
Tariff Bill, which caused other countries to take protectionist measures and raise their own
tariff barriers. These actions made the problem worse by restricting trade even further.
4. International Debt after the First World War
When the United States lent money to foreign nations after the First World War, those
nations often depended on their ability to sell their products to the U.S. to raise the currency
to repay those loans. When the U.S. led the protectionist (tariffs) movement, international
trade was reduced and countries lost the ability to repay their loans.
Explain the following consequences of the Great Depression:
5. Unemployment
As the Depression deepened, unemployment worsened. High unemployment (approx.
25%) reduced demand. The effects of unemployment were very severe because
employment insurance and welfare payments were not yet in place.
6. Banking Failures
As businesses went bankrupt, so did the banks, in a sea of bad loans. This in turn hurt
depositors who lost their life savings.
7. Political Consequences
Americans began to doubt the validity of the American dream. In countries like Germany
the political system would not survive the Great Depression.
8. Change in Role of Government
Government would have to take a more active role in caring for the poor. Unemployment
insurance, sick benefits, child benefits, and welfare were developed during the Depression.
Laissez faire was dead. Governments began to manage the economy through tax policy,
monetary policy, and fiscal policy.
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