Causes of the Depression

Chapter 9, Section 1Content Standards 11.5.1, 11.6.1,

and 11.6.2

1928 Elections

In 1928, America votes Republican again. Former Secretary of Commerce Herbert Hoover becomes the President of the U.S.

“I have no fears for the future of our country. It is bright with hope.”

-Hoover

Not!

Roaring 20’s Paves way for the Depressing 30’s

Key Terms:Stock Market: system for buying and selling

shares of companiesBull Market: period of rising stock pricesMargin: buying on a margin means making a

small cash down payment

Key Terms cont.

Margin call: requires investors to repay their loans at once

*brokers issued a margin call to protect the money they loaned to people that bought stocks on a margin

Speculation: investing money with hopes that stock prices will rise

Invest: to put money into something

Stock Market Crash of 1929

The Stock Market Crash of 1929 caused the Great Depression. True or False?

False Contrary to popular belief, the stock

market crash was not the major cause of the Great Depression. It led the economy into a recession.

It played a huge part but it did not completely cripple the economy all on its own. Its immediate effects were felt by the national bank.

Banks Take a Beating

1. The banks lent money to investors2. Banks invested money into the stock market

in hopes for higher returnsOh crap… We are so screwed.

So what happened to the banks when the stock market crashed? 1.Banks were forced to cut back

on loans they made

2. Few people could borrow money

3. Some banks closed and customers lost their money (no FDIC insurance @ the time)

4.People freaked out and withdrew all their money all at once

Brain Teaser: What do you think happened to the banks as people began to pull out their money so suddenly?

Banks collapsed...

People deposit money into the bank Bank loans money

to other people. People pay them back with interest.

Bank

Stock Market

Causes of the Great Depression

Stock Market Crash

Bank Failures

Mistakes by the Federal Reserves

Uneven Distribution of Income

Loss of Export Sales

+

Great Depression

Silly Boys Make Ugly Ladies

Cause #1: Stock Market Crash

The crash led people to sell off their stocks as quickly as possible. With everyone selling and no one buying, within 1 week, the market lost 30 billion dollars.

Cause #2: Bank Failures

• Too many people began to withdraw huge sums of money from the bank

• Banks had to shut down• Big banks went down first. Then the little

ones followed.• Banks were not FDIC insured at this time

Cause #3: Mistakes by the Federal Reserve

What is the Federal Reserve? It is the central bank of the U.S. It is in

charge of setting monetary policy and controlling inflation, among other things.

It is NOT owned or controlled by the government. It is its own private entity

1. They kept interest rates lowa. encouraged banks to make risky loansb. encouraged people to buy stocks on

speculationc. Low interest rates caused businesses to

think that the economy was still expandinga. This caused businesses to produce more goods

with not enough people to buy themb. Overproduction = lay off workers to cut costsc. Unemployment = even less consumers to buy

goods

The Tale of Bob’s RadiosLow interest

rates??? Alright!

I should make more radios!

No one’s buying my radios

anymore. I have to fire

some guys to cut costs…

Now that I’m out of a job, I should stop buying things I don’t

need and start saving moneyGreat Depression

hits Bob’s Radios hard. The store has to close down…

1923

1925

1930

1931

Mistakes made by the Federal Reserve (continued)

2. They did nothing to alleviate the problems of bank failuresa. they could’ve bought government bonds

b. they could’ve lent money to the banks c. because they did none of the above, the

money supply shrank

Mistakes made by the Federal Reserve (continued)

3. The Gold Standarda. Prior to the 1930’s, the U.S. was on the gold standardb. This means that the Federal Reserve had to back up all bank notes (money) with goldc. There was only a limited amount of gold that they could give out to peopled. When they reached the limit, they stopped circulating money- hence the shortage of money

Cause #4: Uneven distribution of income

• The rich kept getting richer• The rest of the population made significantly less money

– So the lower middle class bought things with easy credit or on the installment plan

– They spent less money on other consumer goods to pay off debts

• Low consumption led to slower production which led businesses to lay off more people (remember the story of Bob’s Radios)

• Unemployed people couldn’t afford goods• Vicious cycle of unemployment and low production

begins

In sum, the problem was…

• The average Joe wanted to buy nice things and live like the big timers but they couldn’t afford everything they bought

• Everyone was in debt in some form• The average Joe stopped buying goods• Businesses went broke and laid off

employees

Cause #5: The Loss of Export Sales

• Congress passes the Hawley-Smoot Tariff in 1930– Raises tariffs on imported goods to an all-time

high– It is designed to protect American goods

against foreign competition– Americans buy less foreign goods because

they are now way too expensive

Foreign competitors react in kind by buying fewer American goods

Screw you Americans. I do not want to buy

your goods either…

In 1932, U.S. exports fell 80%. This was one of the worst years of the depression era.