Causes of the Great Depression

US History: Spiconardi

Underlying Causes

• Declining Demand• Industries like coaling, the railroads, and

textiles (clothing) saw steady declines in demand as well as agriculture• Economy didn’t suffer at first, as the

automobile and construction industries carried the economy

• By 1926,construction spending dips $2 billion dollars• How many homes does one need? How many

plants does a company need?• By 1929, automobile industry experiences

a 33% drop in sales• How long does a car last? How many did

consumers need to own in the 1920s?

Underlying Causes

Why the decline in demand? Distribution of Income

In the 1920s, the rich grew richer. Middle – and lower-income America experienced a slight growth in wages.

The average American saw a 9% increase in disposable income

The wealthiest 1% of Americans saw a 75% increase in disposable income.

Wealthy Americans invested their income in the stock market

The majority of Americans didn’t have enough disposable income to continue purchasing radios, cars, etc.

The Stock Market Crash

After stock prices soared in 1928, stocks prices plunged in 1929

Stocks had been overvalued October 24, 1929 – “Black

Thursday” 12.9 million shares of stock

were traded that day for a loss of $4 billion

Americans panicked To avoid further losses, J.P.

Morgan & Co. puts up $20 million and begins to buy stocks to restore confidence

The Stock Market Crash

While Morgan was able to help stocks rally the next day, many investors decided to sell their stocks rather than risk further losses.

Sell! Yes! All of it!

The Stock Market Crash

October 29, 1929 – “Black Tuesday” After losing 13% of its

value the previous day, 14 million shares traded for a loss of $14 billion

Rockefellers and others purchased large amounts of stock, as J.P. Morgan & Co. did, but the stock market continued to lose money all through November

Floor of the New York Exchange shortly after the crash.

The New York Stock Exchange would not recover its 1929 losses until 1954

How does a bank work?

DEPOSIT People put their money into a

bank The bank pays the

depositor(customer) 2% interest on the money you put into the bank

BORROW Banks loan the customer’s

money to people purchasing homes, cars, and either expensive items

The bank charges 6%-10% interest on consumer's loans (That’s how they are able to pay you interest on your account)

Banks loan depositors’ money to other consumers

Your Savings Acct.

The Banking Crisis

Millions of American investors lost all their invested money overnight Many had purchased stocks on margin

Investors still have to pay back their brokers Where do you get the money to pay them?

Bank savings account

Upon losing all his money, a White Plains man actually took his own life by jumping from this building on Westchester Avenue at Main Street.

The Banking Crisis

Everyone runs to the bank to withdraw their savings Recalling an earlier part of the lesson,

what does the bank do with your savings?

Loans it to consumers purchasing a car, home, etc.

If everyone runs to the bank to withdraw money, the bank will not have all that money on hand

Why not? No one was paying back their loans

The Banking Crisis

Bank Failures In 1929 659 banks folded In 1930 bank failures increased to 1,350 In 1931 2,293 banks closed In 1932 an additional 1,453 banks shut down

This goes on top of the overproduction, declining demand, and unequal distribution of wealth problems we discussed

Thank you, Andrew Jackson. You central bank killer!

Without assistance from a central bank, the local banks could not survive.

Decline in Worldwide Trade

Hawley-Smoot Tariff Act (1930) Raised tariffs on 20,000 imported goods to

record levels Europe responds by raising tariffs

 Exports decreased 61% from $5.4 billion to $2.1 billion

Unemployment was at 7.8% in 1930 when the Smoot–Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933*

* U.S. Bureau of the Census; Social Science Research Council (1960), Historical Statistics of the United States, Colonial Times to 1957, Washington, DC