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Causes of the Great Depression

Causes of the Great Depression. Overview. Crash of 1929 is considered the start of the Depression in the US Worldwide, effects of the Depression were caused by broader factors, including the reparations of WW1 unchecked speculation trade tariffs made to protect economies

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Causes of the Great Depression

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  1. Causes of the Great Depression

  2. Overview • Crash of 1929 is considered the start of the Depression in the US • Worldwide, effects of the Depression were caused by broader factors, including • the reparations of WW1 • unchecked speculation • trade tariffs made to protect economies • and insufficient banking laws

  3. Rise in Share Prices • Dow Jones Industrial Average 1920 = 66.75 1929 = 381.17 • Between 1920 and 1929 DJIA averaged +21.4% gain per year. (Historical average is about +9%) • Share prices rose because of • Economy did well after 1921 • expectations of increasing performance: speculation • Idea that the NYSE was the best investment • NYSE attracted all money and savings in economy, so stock crash would affect entire economy

  4. Crash of 1929 • October 1929 share prices far exceeded their “true” value • Purchases “on margin” (with borrowed money) let people invest more • When prices began to fall: margin investors panicked and sold en masse • Stock Crash continued after 1929 as broad decline 1929 DJIA high = 381.17 1932 DJIA low = 41.22

  5. Lack of Regulation • 1929 laws did not regulate investment • Banks had invested in stocks, so ordinary people lost savings • Corporations lost savings that had been invested in stock • Pensioners lost pensions that had been invested in stock

  6. The Great Depression • Affected virtually all nations • Banks, to preserve confidence, needed cash: “called in” loans • Foreclosures: cancellation of loan through sale of collateral • Farm foreclosures • House foreclosures • Corporation foreclosures

  7. The Great Depression • Banks unable to lend further funds: need to preserve cash • “Runs” on banks caused banks to “fail” • Results: • Unemployment • Deflation • Lowering of interest rates • Continued stock collapse until 1932 • Political shift in USA: Democrats elected to presidency 1932

  8. The Dust Bowl: 1933-1936 • Years of severe dust storms • Major ecological and agricultural damage to prairie lands • Displaced 100s of thousands of farmers • Causes: • Severe drought • Decades of extensive farming without crop rotation, fallow fields, or cover crops • Deep plowing of topsoil displaced natural deep-rooted grasses

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