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Causes of the Great Depression

Causes of the Great Depression. 1. A Depression is:. One phase in a larger business cycle Characterized by a vicious cycle of: Low consumer/trust/confidence – low demand for goods Low prices and low profits – layoffs and rising unemployment

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Causes of the Great Depression

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  1. Causes of the Great Depression

  2. 1. A Depression is: • One phase in a larger business cycle • Characterized by a vicious cycle of: • Low consumer/trust/confidence – low demand for goods • Low prices and low profits – layoffs and rising unemployment • Lower incomes – reduced consumer buying power

  3. 2. Causes of the Great Depression • Easy Credit created an “Illusion of Prosperity” in the 20’s • Installment plans allowed purchases without cash • Created an unnatural demand for goods and eventual overproduction • Problem arose when consumer credit was exhausted

  4. 2. Causes of the Great Depression • Farmers’ Debt • Overproduction – crop surplus; S > D = low prices (deflation) • Loss of war time markets, especially in Europe • Many faced foreclosures; loss of property (mortgage default) • Industrial Overproduction/Overexpansion • The post war buying boom slowed, but production did not • Isolationism caused a reduction in trade • Growing Unemployment

  5. 2. Causes of the Great Depression • Maldistributionof Wealth: (10% controlled 90% of the wealth) • 1920s – average worker output increased, but wages did not keep up • Conclusion: workers were working harder for less • Huge profits went to expansion instead of higher wages for workers • Conclusion: the trickle-down theory wasn’t working

  6. 2. Causes of the Great Depression • Stock Market Problems • Wild speculation: too much buying “on margin” caused inflation • October 29,1929: “Black Tuesday” • Selling panic, but no buyers • Share prices deflated and margin loans came due

  7. 2. Causes of the Great Depression • Bad Banking System (Banks were independent and unregulated) • Risky loans were issued; no FDIC protection existed for depositors • Many banks played the stock market with consumer deposits • The Stock Market Crash - “Bank Runs” = bank failures (11,000 closed)

  8. 2. Causes of the Great Depression • Government Inaction • Laissez-faire polices towards banks and stock market • Bad tariff policy (increases backfired causing a “trade war”

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