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What Caused the Great Depression?

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One mystery of the century is how the U.S. economy could have gone from unprecedented prosperity in the 1920s to unprecedented failure in the 1930s. Economists have debated a variety of factors that caused the Great Depression. You will be looking at clues and deciding what impact these clues had on the economy.


Your task is to analyze the clues about what caused the Great Depression.

Follow your teacher’s instructions about completing the activity.



Use the Clues that you have been given to determine causes of the Great Depression and their impact.

Record your findings on the word document provided in the lesson.


First, a little economics background info!

Economic Business Cycle

The Business Cycle is a graph that shows the ups and downs of the economic cycle.

Recovery—when economic activity is increasing; consumers are buying and workers are employed

Peak—economic activity has reached a high point

Recession—this is a time of economic slowdown; consumers are buying less and workers are being laid off; prolonged recession becomes a depression

Trough—the bottoming out of a recession; worst of the economic slowdown is ending


Business Cycle in 1929



Using the economic characteristics below, decide where on the Business Cycle the economy of the U.S. was in 1920.




  • previous years of growth and prosperity
  • consumer demand for some products begin to fall
  • business investment declines
  • more goods are being produced than purchased
  • unemployment began to increase

Now, use the rest of this presentation and your word document to gather clues about the causes of the Great Depression and their impact.



So what is stock?

Stock Market Crash of 1929

During the 1920s, the stock market was doing great. Business was booming and people were buying shares of those businesses called “stocks” hoping to make fortunes as they watched stock prices go higher and higher. Many made millions on the stock market, and more people invested their money every day. Some even took out loans to buy stocks—called buying on margin.Thistype of investment is called speculation-- hoping stock prices would continue to rise.

But on October 24, 1929, stock prices began to fall and people scrambled to sell their shares of stock to avoid losing money. By October 29, stock prices had fallen to all time lows and the market had crashed.


End of the Party

Stock Market—Standard & Poor Composite—measures buying and selling of stocks

Courtesy of Federal Reserve of St. Louis


Soon, over $30 billion in stock values had disappeared.

  • Within six months the number of unemployed in the US had doubled.



The rapid economic growth after World War I had caused businesses to expand. With this expansion came efficiency and increased production. Many people could not afford the goods being produced, so soon businesses were making more than people could buy. This caused a chain of economic events.


For example:

Farmers used bank loans to buy better equipment.

·They produced more crops than ever before.

·Demand for crops went down and so did the prices the farmers got for their crops.

·Farmers became unable to pay off their bank loans and some of the banks foreclosed on the farmers and took their farms.

Homeless family, tenant farmers in 1936



Installment Buying

Debt or credit becomes popular in the 1920s.

People bought on installment plans (dividing the prices out into smaller payments with interest charged over time)

· For example, 3 out of every 4 radios were purchased on credit along with 60% of all automobiles and furniture.

Consumers\' income did not keep up with their spending, so they cut back on spending.

·That cutback in buying contributed to lower retail and manufacturing profits, which eventually led to higher unemployment.



Banking Problems

During the 1920s, banks did three things that made the financial system shaky.

Reason 1.

They made lots of loans to farmers. As the farmers overproduced, the prices fell and they could not pay back their loans. The bank had to foreclose on the farmers.


Reason 2.

Many banks practiced good business during the 20s, but some invested their depositors’ money in risky investments. Also, there was no government regulation at this time.

When the stock market crashed, some banks had little money in the bank.


Reason 3

Many people had gone into debt during the 20s, and when they heard of banking problems, they began to panic. There were “runs on banks” of people wanting to withdraw their money. Many banks could not pay the people back.

"Runs on Banks": people waiting outside of bank



  • Over 7,000 banks failed -- many during “runs on banks”
  • Number of banks fell from 25,000 in 1929 to 15,000 by 1934
  • When banks fail, people lose $


Federal Reserve Mistakes

  • Remember, the Federal Reserve was formed in 1913 during the Progressive Era to regulate the money supply.
  • But, Federal Reserve officials did not have experience monitoring the overall economy.

Newly appointed leader of the Federal Reserve


So, the Federal Reserve . . .

Kept interest rates low throughout the 1920\'s which supported growth in the stock market.

Keeping the interest rates low also encouraged the banks to make risky loans.

The low interest rates also led businessmen to think the economy was expanding so they borrowed more money to expand production.

That led to overproduction at a time when prices were already falling. Then they had to lay off workers to cut costs.

Then the Fed made another mistake; it raised interest rates, which made it more expensive to borrow money.



Collapse of World Trade

  • U.S. tariffs (taxes on foreign goods) had been used to protect American businesses.
  • The more tariffs and trade restrictions, the less international trade.
  • Congress approved the Hawley-Smoot Tariff of 1930 which raised tariffs.


  • brought an end to international trading
  • European nations who borrowed money from us to fight WWI, could not sell their goods and, therefore, could not pay us back (defaulted on their war loans)
  • the Europeans got mad at us, raised their own tariffs and stopped buying American goods which led to higher U.S. unemployment
  • partly because of the gold standard, if one country had an economic collapse, other countries felt the effects

What’s a gold standard?


Now that you have gathered the clues, complete your word document by evaluating each clue #1-6.

Place a—

next to the clue(s) that hurt global trade

next to the clue(s) that hurt the U.S. money supply

next to the clue(s) that cost Americans jobs

next to the clue(s) that wiped out wealth


Finally, review your clues and information you have gathered and answer the following question on your word document:

What caused the Great Depression?