Causes of the Great Depression

1. Causes of the Great Depression

2. Economics of the 1920’s • Harding, Coolidge, and Hoover Administrations are good to business • Believe that business will regulate itself • Laissez Faire • Return to business practices like those prior to the Progressive Period (Corporations/Monopolies) Warren Harding (1921-1923) Calvin Coolidge (1923-1929) Herbert Hoover (1929-1933)

3. Economics of the 1920’s • Regulatory agencies are weakened and cannot regulate business. • Interstate Commerce Commission (ITC) • Federal Trade Commission (FTC) • Bureau of Corporations (BOC)

4. Economics of the 1920’s • Government allows mergers and consolidations of businesses • Holding companies borrow money to buy smaller companies • Eliminates Competition • Have to use majority of profits to pay huge loans

5. Economics of the 1920’s

6. The ‘Boom Industry’ Falters • New inventions fueled consumerism and raised standard of living to highest level in history • Factory production soars due to mass production and assembly line

7. The ‘Boom Industry’ Falters • Americans were buying more and more • Increased advertising • Buying on credit believing that the prosperity would never end!

8. The ‘Boom Industry’ Falters • By Early 1929 production outpaces demand • Most people didn’t need more than one car or radio • Consumers in debt and could not afford more have to cut back spending • Warehouses fill with unsold goods

9. The ‘Boom Industry’ Falters • Trouble in key industries • Railroads not making a profit due to competition with trucks, busses, and automobiles • Coal Mining loosing revenue to hydroelectric, fuel oil, and natural gas • Reduction from expanded demand during World War I • Textiles facing competition from Japan, India, China and Latin America • New Housing starts decrease between 1925 and 1929 by 25%

10. Consumer Market Drops American Consumers Buying Less Rising Prices Stagnant Wages Over-extension of Credit (Debt) People living beyond their means Production outpaced wages Growing poverty by late 1920s People already own products they need

11. Unequal Distribution of Wealth • 1920-1929: • Wealthiest 1% incomes increased by 75% • Average American income increased by 9% • One third of all personal income held by wealthiest 5% of the population • Poorest 40% earned 10% of all personal income

12. Farmers Plight • During WWI – Crop demand rose leading to higher prices, Farmers borrowed money to expand production and buy new machinery • More efficient technology = overproduction and increased supply • War Ends = Demand Drops = Prices Drop (50%) • President Coolidge vetoes McNary-Haugen Bill • Price Supports, Federal government buys surplus and sells on International market

13. The Stock Market Boom • Principle of Supply and Demand

14. The Stock Market Boom The more people bought the higher stock prices went • People made tremendous amounts of money • The more people made the more they wanted to invest

15. The Stock Market Boom • Buying on Margin • Borrow money to buy stock • Would repay loan when the stock prices increased • Millions of Americans do this = Speculation • Assuming stocks were going to raise (Gambling) Early 1929 Newspaper Headlines from the New York Times:

16. The Great Crash • Black Thursday (October 24, 1929) • Stock prices start to drop • Buyers on margin had to sell stocks • Selling = increased supply = lower prices = more selling = even lower prices… • Major banks buy up shares of stock and save the market • Downward spiral stops

17. The Great Crash • Black Tuesday –Oct 29,1929 • NY Stock Exchange worst day in history • 16.5 Million Shares sold • Prices spiral down • 50% average price drop • Average stock value fell $40 Billion • U.S. Steel $262/share in September falls to $22/Share in December

18. The Great Crash NY Times Headlines from the Great Stock Market Crash

19. Economic Collapse! • December 1929 - Run on Banks • Banks played the market and were loosing money • Deposits from foreign banks stop • Foreign governments can’t repay loans to American banks • Farmers can’t repay loans to banks • Stock holders can’t repay loans to banks

20. Economic Collapse • Banks begin to collapse • 1929: 642 Banks Collapse • 1931: 2298 Banks Collapse • 1933: 6000 Banks Collapse (1/3 of nation’s total)

21. Economic Collapse! • Cyclical Nature of Economic Collapse • Less Demand • = People laid off • =Less Money • = Less Spending • = Less Demand

22. The Great Depression: Summary of Causes • Over Expansion: Too much produced in industry and agriculture. Demand could not keep up with supply and prices must drop. Some Industries more interested in stock price than updating equipment = Less efficient, less competitive. • Reckless Spending: Easy Credit - Artificially inflated value of the market could not be sustained. Like a balloon it popped. • Unequal Distribution of Wealth: Wealthy few controlled the money. When the market crashed they got scared and quit spending.