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Standard 7.4 Causes and Effects of the Great Depression

Explain the causes and effects of the stock market crash of 1929 and the Great Depression, including the disparity in incomes, limited government regulation, stock market speculation, and the collapse of the farm economy; wealth distribution, investment,

Adam Powley

on 27 March 2012

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Transcript of Standard 7.4 Causes and Effects of the Great Depression

Standard 7.4 - Causes and Effects of the Stock Market Crash and the Great Depression
Julian Beever Swimming-Pool In The High Street
from one perspective the economics of the 1920s were like this picture. Pretty unbelievable.
but looking at it in other ways, it is pretty distorted. Just like the economy of the 1920s
The 1920s seemed prosperous
high employment
low inflation
lots of new stuff to buy
Like the picture it was an illusion (false prosperity)
In reality disparity of income was large and the distrubution of wealth was uneven
the gap between the haves and have nots widened
a majority of Americans lived under the $2,000 poverty line
Workers wages fell during the period even though production increased
companies made a profit but did not pass it onto the workers
Workers could not afford the products they were making (even with the increased supply)
Consumers also reached a limit on how much they could buy on installment
Anyway, consumers had bought all of the appliances they wanted or "needed"...
they had to or wanted to stop spending
a drop in consumer spending led to lay offs and even less spending
cyclical nature of decline
and don't forget the farmers!
7.1 reminded us of the troubles farmers were having.
banks were forced to foreclose on farmers mortgages
but this meant that the bank did not get back all of the money it loaned.
tension increased as the bank vaults were slowly drained
since there was less money to loan, there was less money for small businesses.
small businesses could not expand or hire new workers.
many banks just "failed" or ran out of money.
cyclical nature of the depression
Government Economic Policy Shifted after WWI
Progressive (government as referee) Policy Ends
Big Business increases in power once again
Supreme Court overturned Child Labor Laws and minimum wage
Income tax for the wealthy is slashed
The Tariff is Raised
So lets talk about the Wealthy
most spending went to luxury items or put into stocks
they could not offset the loss of spending by the poor.
They invested which drove up stock prices, but their was no innovation or infrastructure improvements
They invested in companies that could not make a profit (based on the less purchases)
Their investing created the illusion of wealth but when businesses failed or cut back, the stock prices dropped
Not only is this a problem, but the way stock was purchased was an issue
The Stock Market
A "Get Rich Quick" Mentality
More investors were able to participate as they were "Buying on Margin"
With stock prices increasing, more people want in.
Consumer Financing mentality works its way into the stock market
investors borrowed money to buy stocks. Usually paid about 10% and borrowed 90%. They could buy more stock and when they sold it for a profit they would pay the loan and make a profit.
The problem with buying on margin was the thought that stock prices always go up.
When stock prices dip, the brokerage firms that loaned the 90% wanted their money.
This forced investors to sell at whatever price they could get (increased supply of stock)
Caused Prices fell even further and public confidence in stocks shattered
The 1920s prosperity is over and the economy spiralled into depression
Individual Companies had relied too much on stocks.

Consumers had no money to spend and unemployment increased
The Fed loans money to banks
The Banks loan to businesses
Businesses hire workers
Workers can then buy products
more money to businesses and the economy can improve
During the 1920's the Fed allowed easy credit by charging low interest on its bank loans
Helped fuel speculation since wealthy could get more loans
in late 1920s the fed had a "tight" money supply which decreased the money available
after the crash, they tightened it even further, which meant there was less money to invest in business
If the Fed increased the money supply it is possible that the effects of the Great Depression would have been less severe since there would have been more money to invest and create jobs
The Fed (Federal Reserve, the nation's central bank) did not help matters
Government Policies at the Beginning of the 1920s
Congress Raised the Tariff
supposed to protect American businesses, but...
Depressed international Trade
Foreign Companies couldn't sell in the US so they had less money to buy US products!
Caused foreign nations put up barriors of their own which caused a WORLD depression
President Hoover advocated "Rugged Individualism"
(Thought "Prosperity was just around the corner")
(This is also that "Traditional Conservativism" in 7.3)
Tried to keep the government out of helping people
Asked companies to volunteer to keep wages and hours the same as pre-Crash.
They couldn't because of the lack of consumer purchasing
Companies started laying off and cutting hours
The Human Impact of the Great Depression
25% Unemployment
No Unemployment Insurance
Unemployed lost homes, wandered the streets and from town to town
Those with jobs had hours and wages cut.
Stopped buying non-essentials and caused economy to drop further
Bank Runs
people were afraid a bank might fail and their savings would be lost. People tried to withdraw their savings
This was a panicked rush of withdrawals and caused banks to collapse
then everyone DID lose their savings
There was no FDIC or savings insurance
The Dust Bowl
weather impacted the Depression
Caused by overgrazing and overplanting wheat
a draught during the 1910s led to the topsoil to be blown away
Tenant farmers were evicted and became "Okies" or migrant farmers roaming to find work
By the election of 1933 the US population was suffering and tired of "Volunteer" efforts. They were demanding help from the US Government
This is from 2009
"Black Tuesday" - Oct 29, 1929
Who Else Takes some Blame?
Economic Protectionism
Hoover's "Volunteerism"
The Crash and the 1930s
Full transcript