1. The causes of the great depression

2. Wait… what’s the great depression?

7. The great depression Date: 1929-1939
Definition: a period of economic depression in the United States and the rest of the world
Economic depression occurs when an economy produces fewer goods and services and employs fewer people
Significance
Huge cost to human well-being
Transformed the role of the US federal government in people’s daily lives

8. Five long-term Causes of the great depression
Monetary policy
Overproduction
Inequality
Speculation
Trade
Day 3
Day 1
Day 2
Day 4

9. Day 1: overproduction and inequality

10. overproduction
In your notes: Is it possible for an economy to produce too much stuff? What might be the positive and negative consequences of producing too much?

11. Market simulation
Some of you are producers – your job is to sell golf pencils (provided by me) for as much profit as possible
Some of you are consumers – your job is to buy golf pencils from the producers for as little money as possible
Some of you are observers – be ready to answer questions on the worksheet

12. One producer with one golf pencil to sell
round 1
One producer with one golf pencil to sell
Five consumers, with budgets of 20 cents each

13. Two producers with five golf pencils each
round 2
Two producers with five golf pencils each
Five consumers with budgets of 20 cents each

14. Ten producers with ten pencils each
round 3
Ten producers with ten pencils each
Three consumers, with budgets of 5-25 cents each

15. Two producers with five golf pencils each Ten consumers
round 4
Two producers with five golf pencils each
Ten consumers
Eight consumers get two cents each
Two consumers get 50 cents each

16. Five producers with five golf pencils each Ten consumers
round 5
Five producers with five golf pencils each
Ten consumers
Eight consumers get two cents each
Two consumers get 50 cents each
But consumers are going to get some bad news before buying begins…

17. So what does this have to do with the depression?

18. Basic economic principles
Prices are set by the combination of supply and demand
When demand > supply, prices go up
When supply > demand, prices go down
The balance of power depends on the distribution of wealth
When wealth is equally distributed, individual crises (like tuition or medical bills) don’t hurt the economy much
When wealth is heavily concentrated, a crisis for the rich means a crisis for the whole economy

19. Overproduction In the great depression
Agricultural overproduction
Farmers increased production significantly during WWI – and took on huge debts to do this
After WWI ended, demand fell sharply and farm prices crashed
Individual farmers kept production high, since profits were low
Similar problem in industry – factory methods made production increase, but eventually Americans ran out of money for new goods

20. Made worse by tax cuts for the rich under Herbert Hoover
Inequality in the 1920s
In the 1920s, the rich became far richer while the poor became only slightly less poor
Made worse by tax cuts for the rich under Herbert Hoover
Result: limited demand for consumer goods

21. How did inequality make the American economy unstable in the 1920s?
Exit ticket
How did overproduction make the American economy unstable in the 1920s?
How did inequality make the American economy unstable in the 1920s?

22. Day 2: speculation

23. Stock: partial ownership of a company
Some key terms
Stock: partial ownership of a company
Stock market: a place where shares of companies are openly traded
Speculation: investing in stocks or other ventures in the hope of profit, but with the risk of loss

24. The stock market in the 1920s
Two trends in the 1920s:
Stock prices went way up – a boom
More and more Americans invested in stock
People saw the stock market as a way to get rich quick

25. Stock market simulation
It’s January 1, 1920
You’ve pooled $200 with your friends to invest in the stock market
You will invest at least half of the money today and meet periodically to reconsider your investments
You agree to sell everything on December 31, 1929 and divide the profits equally

26. Stock market game, round 1
AT&T: $20
Ford Motors: $25
General Electric: $15
Montgomery Ward: $12
US Steel: $40

27. Stock market game, round 2
AT&T: $20 (no change)
Ford Motors: $23 (-2)
General Electric: $25 (+10)
Montgomery Ward: $15 (+3)
US Steel: $38 (-2)

28. Stock market game, round 3
AT&T: $25 (+5)
Ford Motors: $21 (-2)
General Electric: $30 (+5)
Montgomery Ward: $20 (+5)
US Steel: $42 (+4)

29. Stock market game, round 4
AT&T: $30 (+5)
Ford Motors: $20 (-1)
General Electric: $35 (+5)
Montgomery Ward: $30 (+10)
US Steel: $55 (+13)

30. Stock market game, round 5
AT&T: $2 (-28)
Ford Motors: $4 (-16)
General Electric: $5 (-30)
Montgomery Ward: $7 (-23)
US Steel: $10 (-30)

31. Great way to take advantage of a boom market (prices going up)
Margin buying
Margin buying: the practice of borrowing money from a broker to purchase stock
“You lend me money now, I’ll pay you back later when I sell my stock at a profit”
Great way to take advantage of a boom market (prices going up)
1920s brokers allowed buyers to purchase stock with as little as a 10% down payment
But what do you think happens when the market goes down…?

32. Day 3: monetary policy

33. Speculation Review questions for 11.1
What are the possible risks of investing in the stock market?
What are the possible rewards of investing in the stock market?
What are the advantages of margin buying (taking out a loan from your stockbroker in order to buy more stock)?
What are the disadvantages of margin buying?

34. Final notes on speculation
Investing in stock can be rewarding, but it always carries risks
The stock market was especially risky in the 1920s for two reasons:
Not much information about companies
Not much regulation from the government – for instance, over the down payment required for margin buying
By 1929, the market was overvalued and ready for a crash

35. Inflation: an increase in the general price of goods and services
Key terms
Inflation: an increase in the general price of goods and services
Deflation: a decrease in the general price of goods and services
Money supply: the amount of money available in an economy
Purchasing power: the amount of goods or services that a given amount of money can buy; “the worth of a dollar”

36. The federal reserve (“the fed”)
Central bank of the United States, established 1913
Can choose to lend more or less money to banks (by varying the interest rate)
Influences inflation/deflation

37. If the Fed lends more money to banks, what happens? Inflation
What can the fed do?
If the Fed lends more money to banks, what happens?
Inflation
If the Fed lends less money to banks, what happens?
Deflation

38. Explain: what should the Fed have done to boost the economy, and why?
Exit ticket
Explain: what should the Fed have done to boost the economy, and why?

39. Day 4: trade and tariffs

40. Review: why inflation would have helped
Inflation = prices going up
People spend more during inflation, since they expect prices to rise
Therefore, inflation stimulates demand
The government could have produced inflation by increasing the money supply
Instead, the government decided to keep the money supply stable
Result: continued low demand, low wages, and high unemployment

41. What did the us need to avoid an economic depression?
Key to economic recovery = more demand for American products
Prices would increase
Wages would increase
One possible solution: demand could come from overseas

42. So why didn’t other countries buy American?
After World War I, most European countries were economically devastated
Physical devastation
War debts
Most countries, including the US, wanted to protect their economies by raising tariffs – taxes on imported goods

43. The smoot-Hawley tariff
Date: 1930
Definition: huge increase in tariffs (import taxes) charged on goods imported to the US
Goal: to protect US firms against competition from manufacturers in other countries
Results:
Hurt European economies, so people could afford fewer US goods
Encouraged other countries to raise tariffs, reducing demand for US goods