Overview of the Causes of the Great Depression

1. THE GREAT DEPRESSION & NEW DEAL,
1929-1941
UNIT 7: CAUSES
OF THE GREAT
DEPRESSION

2. ORIGINS AND CAUSES
• Extreme wealth inequalities
• Big difference between rich and poor
• Ballooning stock market
• Over speculation and buying stock on margin would
lead to the Stock Market Crash (Black TUESDAY
10/29/1929)
• Over reliance on unprotected loans
• We still had countries paying debt from WWI
• Too much speculation & borrowing

3. STOCK MARKET CRASH
• 1920's had been a period of good economic times
• However on Tuesday Oct. 29th, 1929 - NYC Stock market crashed,
causing a depression that would last until 1940

4. HOW THE STOCK MARKET WORKED
• the public invests in
companies by purchasing
stocks; in return for this
they expect a profit
• b/c of booming 1920's
economy, profit was
plentiful, so banks were
quick to make loans to
investors
• Stock Market Rap

5. STOCK MARKET
• also investors only
had to pay for 10% of
the stock's actual
value at time of
purchase
• this was known as
BUYING ON
MARGIN, and the
balance was paid at a
later date

6. STOCK MARKET
• this encouraged STOCK SPECULATION - people
would buy and sell stocks quickly to make a quick
buck
• because of all this buying & selling, stock value
increased
• The prolonged Bull Market of the 1920's saw stock
prices rocket from an average of $50 per share in
1922 climbing to a massive $350 per share in 1929.
Stock prices began to rise sharply in 1926 - 1927.
The high point for the 1929 market was August
1929 at $350.
• this quick turnover didn't aid companies
• they needed long term investments so they could
pay bills (stock value was like an illusion)

7. INEQUALITY CAUSES A RIPPLE EFFECT
• a major problem: uneven distribution of wealth
• 42% of the population was below poverty line
• Top 1% owned most of the wealth
• of the 58% above the poverty line, most fell into
the middle class category
• they were not wealthy; they had jobs b/c of the
industrialization & consumerization of the American
marketplace

8. INEQUALITY CAUSES A RIPPLE EFFECT
• this middle class depended
on their salaries and when
productivity declined they
lost their jobs
• and because of low savings,
they had to cut back on their
purchases
• this decline in spending
among the middle class
ruined the whole country

9. PRESIDENT HOOVER
• Opposed direct federal
aid
• Instead he believed in:
• Self-help &
volunteerism
• Self-help cooperatives
• This means the
government did not think
it was their job to help the
people financially

10. PRESIDENT HOOVER’S RESPONSE
• He didn't believe that the gov't should play an
active role in the economy
• He persuaded bankers/business to follow his
policy of VOLUNTARY NON - COERCIVE
COOPERATION where he gave tax breaks in
return for private sector economic investment
• Hoover also organized some private relief
agencies for the unemployed
• Believed it was the Church's job to aid those in need not the
Government

11. HOOVER’S RESPONSE: RECONSTRUCTION
FINANCE CORPORATION
• Established in 1932 by Hoover
• Gave emergency loans to banks and
businesses because Hoover believed
cheap loans would spur business
• It granted over 2 billion dollars to the
local and state governments
• Hoover believed the money invested
would “trickle down” to average
Americans
• Too little, too late

12. PRESIDENT HOOVER’S RESPONSE
• He worked out a system with
European powers that owed
U.S. money as a result of WWI
debts = HOOVER
MORATORIUM
• put a temporary stop to war
debt & reparations payments
• European countries were to
purchase American goods
instead to stimulate American
economy

13. GOOD IDEA IN THEORY…
• In early 1931 these measures appeared successful, but
then......the TARIFF WARS began
• Democrats in Congress passed a high tariff (SMOOT-
HAWLEY) to protect U.S. industry (hoped to stimulate
purchasing of U.S. goods)
• this turned out to be a fatal error...
• Congress did not understand that the world had become a
GLOBAL ECONOMY
• In retaliation other countries passed high tariffs and no
foreign markets purchased American goods, so U.S.
productivity decreased again

15. FEDERAL RESERVE POLICY
• In the 1930s, the United States was on the gold standard.
• This means the U.S. government would exchange paper dollars for
gold at a fixed price
• Commercial banks and the Federal Reserve held a portion of
their reserve as gold coin and bullion.
• A decrease in gold reserves would lower the amount of
money in circulation
• Therefore, large withdrawals of gold from banks could
reduce bank reserves so much that banks would be forced
to call in their outstanding loans.

16. FEDERAL RESERVE POLICY
• During the 1920s the
Federal Reserve cut
interest rates to stimulate
economic growth
• In 1929 the Federal Reserve
worried investors were
speculating too much with
borrowed money so they
decided to limit the money
to supply to discourage
lending  THEY DID THIS
BY RAISING INTEREST
RATES
• As a result there was too
little money in circulation
to help the economy
after the stock market
crash

17. BANK FAILURES
• The failure of the Bank of the
United States, the failure of
other banks and the suspension
of operations by nearly 7,000
banks created a bank panic.
• If depositors lose confidence in
their banks, people will rush to
withdraw their money from the
bank to avoid losing their funds.
• When depositors remove
money from the system, banks
may be forced to reduce their
outstanding loans; requiring full
payment or foreclosure.

18. HOOVERVILLES

19. SEATTLE, 1931