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The Great Depression
General Causes of the Great Depression
Global Depression European World War I debts went unpaid
Consumer debt Credit Lack of government regulation
Stock market crash/ over-speculation/ margin buying
“Less” Income Spending Employment Cycle Business failures Unemployment
Good Good Times!1920’sPublic Perception:
Economy would continue to grow No fear of unemployment Low taxation
CreditFaith in the stable economy
In having a job In a growing economy
Made people feel safe borrowing
BUT PEOPLE BORROWED TOO MUCH
Uh Oh…Easy credit means loans to people
who might not be qualified, or able, to pay loans back.
Little regulation by the government to make sure loans are only made to those who would be able to pay them back.
The Consumer Used credit (borrowed money)
Did not have the money to pay it back People wanted to buy things Banks wanted to lend (make money on loans) Government wanted credit to continue
Consumer spending = strong economy
People were in debt Eventually this debt had to be paid-off, then the
“less” cycle began.
The Stock Market Bull Market – upward trend in stock prices
1920’s was a continuous bull market
Bear Market – downward trend in stock prices
The Great Depression marked the beginning of a severe Bear Market
Stock Speculation Speculating “playing” the market. Buying and selling for quick profit.
Buy to create demand Demand means price goes up Sell stock at high price
(but the stock was not TRULY worth that high price)
Problem?
Over Speculation As long as demand continued there was no
problem with speculation – UNTIL DEMAND ENDED.
Once demand calmed, overinflated stocks dropped significantly in value.
People owned stock, but no one wanted to buy it.
When demand for a stock falls, what happens to the price?
Margin BuyingPurchasing stocks with borrowed
money
Believing one could take a loan, invest it, and make back the loans money plus profit.
The Stock Market CrashBlack ThursdayOctober 24, 1929Nervous investors begin to sell their
stocks No buyers Stocks fall in value
Black TuesdayOctober 29, 1929
16 Million shares of stock are dumped by investors.
Prices of stocks plunge.
Margin Buyers found themselves in severe debt.
Herbert Hoover “We have passed the worst and… shall
rapidly recover.”
Business leaders, public officials claimed:
Only a minor setback
Banking Crisis The Run on the Banks
Borrowers defaulted on loans Banks lost money Went out of business
Public saw the writing on the wall Individuals wanted to get their money out of
the banks before their bank closed for good!
The Banking Crisis1930-19325,000+ banks fail
Collapse of 1 large New York Bank Left 400,000 depositors without their
savings.
The Run on the BanksPeople ran to banks to withdraw money.
Money leaving the banks meant banks had no money to invest, or make loans with.
Therefore, banks had no means of making money.
Banks were forced to close.
Business Failures Less consumer
spending Less consumption of
products Less profit/money for
businesses.
Business Response: Trimmed inventories Scaled back production Laid off employees
Business Failures 1930:
26,000 Businesses went bankrupt
1931: 28,000
Factories and mines were empty.
GNP – Gross National Product Total value of goods and services produced in a given year
1929 $103 Billion 1933 $56 Billion
Unemployment1932 – 23.6% Unemployment
(for every 100 people, 23 were jobless)
Global DepressionMassive war debts of Europeans went
unpaid.
Foreign consumers were unable to purchase U.S. goods
Factories that sold to foreign countries were forced to shutdown.
Income Gap Growing income gap
Rich getting richer, poor getting more poor.
Farmers; Laborers Unable to repay loans
Farmers; Laborers Not getting a high enough wage to meet the
increasing cost of living.
CreditSome Americans used credit as a
means to bridge the income gap, or maintain themselves with the rising cost of living.
Many consumers found themselves unable to pay off their debts.
The (Good) Business CyclePeople spendSpending creates demandBusinesses have to hire more workers
to meet demandMore people spend.Demand creates jobs
The (Bad) Business CyclePeople do not spendNo demandBusinesses have to lay-off workers
because there is no demandLess people spendLess people have jobs
Review Buying on Margin Bull Market Bear Market Black Thursday Black Tuesday Explain how the Banking Crisis contributed to the
Great Depression. Explain how business failures contributed to the
Great Depression General Causes of the Great Depression
Essay QuestionState the 3 general causes of the Great
Depression, provide an EXAMPLE of each, how each contributed to the greatest economic slowdown in American history.
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