Presentation on theme: "The Great Depression A primary example of multiple causation."— Presentation transcript:
The Great Depression A primary example of multiple causation
Multiple Causation Long-term cause A cause that builds up over time to contribute to the occurrence of an event “Buying and loading the gun” Immediate (short-term) cause A cause that directly precedes the event in question “Pulling the trigger”
Causes of the Great Depression Long-term Government Policies Uneven Distribution of Income Business Failure Overproduction Weak Farm Economy Speculation Buying on Credit Global Financial Problems Immediate Stock Market Crash of 1929 Bank Runs Following Crash Dust Bowl (worsened matters beginning in 1931)
Government Policies Laissez-faire prevented oversight of business practices Tariff drove up import prices, created tension internationally
Uneven Distribution of Income Rich got richer, poor got poorer Wages for workers held steady despite rising prices Motivated widespread use of credit
Business Failure Post-war reductions in workforce and production New technologies made old businesses obsolete Efficiencies in production required less labor
Overproduction Food Wartime increase in production and profits led to overplanting, and new methods to increase yields Too much was being produced to be bought Lack of guaranteed pricing following war led to many farms going broke, deep debt Consumer goods Efficient production led to large inventories Loss of purchasing power resulted in too much stock Slowed or shut down new production, companies lost money, workers lost jobs
Weak Farm Economy Farmers went into debt to purchase new equipment during war or to remain competitive in terms of production Prices feel dramatically after fixed war- pricing Huge inventories kept prices low Land was ravaged by farming methods
Speculation Investing for profit, no basis on health or quality of company Buying on Margin 10% down to buy stocks Good when stocks going up, devastating when going down Large investors would run prices up, then sell to others at top of market Huge profits for few, staggering loss for many
Buying on Credit Less real income led to borrowing Credit easily available Cycle of borrowing to pay off loans Many required to purchase basic staples on credit “Keeping up with the Joneses” fueled widespread debt Farm debt
Global Financial Problems War debt from WWI, especially Germany Reaction to American tariff Closed market to American exports Furthered crisis on both sides Poor economies prevented purchase of American goods, particularly farm goods Many foreigners invested in American stock market
Good call… "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." - Irving Fisher, Ph.D. in economics, Oct. 17, 1929
Black Tuesday, 10/29/29 More than 16 million shares traded Loss of $14 billion Point of comparison – US Federal Budget = $3 billion Investors panicked, and didn’t want to lose more money as prices fell Despite low prices, no one wanted to buy (which is usually what happens to regulate the market) RCA – trading at $26, down from $114
Rich to poor overnight Groucho Marx - “All I lost was two hundred and forty thousands dollars. I would have lost more, but that was all the money I had.” Newspaper editor Herbert Bayard Swope began the week with $14 million. He ended the week $2 million in debt.
He only missed it by 3 years "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom." - R. W. McNeal, financial analyst in October 1929
Not so fast, my friend… "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930
Bank Failures Banks only keep as much cash as they think they will need for withdrawals or loans Invest or loan the rest Require new deposits to keep levels healthy Banks invested in stock market Crash wiped out many banks, and left others on the brink
Bank Failures (cont’d) Many banks closed without warning As news of insolvency (inability to pay debts) circulated, people ran to withdraw money Once cash on hand was exhausted, bank would close doors No protection for deposits If you didn’t get there first, you lost your savings
What is Hoover to do?
Essential Question #2 What is the role of the federal government during a time of national crisis?
Hoover’s Response This is not an issue as to whether people shall go hungry or cold in the United States. It is solely a question of the best method by which hunger and cold shall be prevented. It is a question as to whether the American people on one hand will maintain the spirit of charity and mutual self-help through voluntary giving and the responsibility of local government as distinguished on the other hand from appropriations out of the Federal Treasury for such purposes. My own conviction is strongly that if we break down this sense of responsibility of individual generosity to individual and mutual self-help in the country in times of national difficulty and if we start appropriations of this character we have not only impaired something infinitely valuable in the life of the American people but have struck at the roots of self-government. Once this has happened it is not the cost of a few score millions, but we are faced with the abyss of reliance in future upon Government charity in some form or other. The money involved is indeed the least of the costs to American ideals and American institutions.
Hoover’s Actions Conference for Continued Industrial Progress Agreement amongst business and labor Maintain current wage rates, Distribute available work to as many employees as possible Increase construction by business and government, Organize voluntary committees to assist the unemployed Lowered income tax to keep money in hands of earners Low initial rates meant not much relief
Hoover’s Actions (cont’d) Reconstruction Finance Corporation (RFC) Loans to state and local governments for public works projects Hayden Planetarium, Jones Beach, PA Turnpike, Bay Bridge (SF) Too limited in scope to effectively deal with national crisis Grain Stabilization Corporation Bought wheat at a high price in an effort to drive the price up
Hoover’s Actions (cont’d) Smoot-Hawley Tariff Record-high tariff spanning most commercial sectors Caused significant reduction in imports and exports U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932 Engendered feelings of animosity and mistrust between US and Europe