What were the causes of the Great Depression?

Learning objective – to prioritise the main causes of the Great Depression. I can describe the main causes of the Great Depression. Grade D I can explain and make links between the main causes of the Great Depression. Grade B/C I can explain and analyse the causes of the Great Depression and can reach a substantiated judgement about their significance. Grade A/A*

Starter – during the prosperous years of the 1920s, what percentage of the US population were judged to be living below the poverty line in 1928?

According to a government survey in 1928, 60% of families were earning below $2,000 a year and therefore living below the poverty line.

What were the key causes of the Great Depression? Unequal distribution of wealth Overproduction and underconsumption The international economic situation Government policy and growing unemployment Culture of big business Weaknesses of the banking system and overconfidence The Wall Street Crash

Unequal distribution of wealth Not everyone benefitted from the prosperity of the 1920s. 5% of the population owned 33% of the country’s wealth. 60% of the population lived below the poverty line. Significant areas of society such as farmers and African-Americans missed out on prosperity. Because the economy was based on low wage earners, it lacked the demand to buy the large number of goods that were being produced.

Overproduction and underconsumption The mass production techniques adopted by businesses in US allowed many goods to be made. But there was not enough people able to buy them. Therefore, there was too many goods being made and too few people able to buy leading to unsold goods. Because businesses could not sell the goods they made, profits fell.

Overproduction and underconsumption From 1928, businesses cut down on production which led to laying workers off. With rising unemployment, less people were able to buy goods. This fall in consumerism, led to falling profits which in turn led to more workers being made unemployed.

The international economic situation The US international market was limited by its Fordney- McCumber tariff of 1922, which placed an extra charge on imported goods. Although this encouraged Americans to buy American produced goods, this blocked international trade as it put off other countries trading with the USA. This was exacerbated by the Hawley- Smoot tariff of 1930.

Government economic policy The government economic policy throughout the 1920s was called Laissez Faire – this means ‘Leave Alone’. This lack of government controls lead to excessive spending and share speculation. This meant that people were spending money they did not have as well as a false value of many businesses.

Rising unemployment Unemployment rose by over 2 million between 1926 and 1928 – a clear sign that prosperity was coming to an end. The main cause of this growth of unemployment was the rise of big businesses putting many smaller companies out of business and using mass production techniques which led to cuts in the workforce.

Control of big businesses Big businesses were given the freedom to set wages, working hours and working conditions not the government. Trade unions tried to challenge this but were in a weak position and failed in a series of strikes. Businesses during the 1920s lowered wages to cut costs and many workers accepted this as they feared unemployment. The government did little to challenge this exploitation of workers and wages continued to fall as unemployment continued to rise. Indeed, the government approved of big business culture of the pursuit of big profits at all costs.

Weaknesses of the banking system The banking system in America was made up of thousands of small, local banks rather than large nationwide banks. This meant that these smaller banks lacked cash reserves to survive a downturn in the economy and a run on the banks – lots of people wanting to draw their money out at the same time. Even before the depression, over 5,500 banks closed between 1921 and 1929, because they lacked cash reserves as well as ill-advised investments.

Difficulties repaying banks Banks had lent lots of money to groups – businesses to expand, people to buy consumer goods and shares and other countries to rebuild after the First World War. However, when these groups began to have economic difficulties they found it difficult to repay the bank loans they have taken out. Banks needed these repayments as they had invested in the stock market and relied on these shares to provide interest returns for their investors. However, this share speculation continued despite the signs of a bust. The boom years had encouraged over- confidence.

The Wall Street Crash Wall Street was the site of the largest stock market in America. It was also the site of the largest downturn in the US economy over a few days in October 1929 when the value of shares crashed and the Great Depression began.

Task Important Less important Draw the continuum line into your exercise books and mark on it the main causes of the Great Depression where you think it should be on this line. Write a two sentence explanation for each cause underneath the line. Unequal distribution of wealth Overproduction and underconsumption The international economic situation Government policy Rising unemployment Big business culture Weaknesses of the banking system and overconfidence The Wall Street Crash

Only connect four – line up the key terms vertically in groups of three and explain the link between each group underneath. OverproductionBig businessesBanksOverconfidence Laissez FaireUnemploymentThe Wall Street Crash International economics UnderconsumptionUnequal wealthFalling wagesMass production