Causes of the Great Depression

Economics of the 1920’s Harding, Coolidge, and Hoover Administrations are good to business –Believe that business will regulate itself Laissez Faire –Return to business practices like those prior to the Progressive Period (Corporations/Monopolies) Warren Harding ( ) Calvin Coolidge ( ) Herbert Hoover ( )

Economics of the 1920’s Regulatory agencies are weakened and cannot regulate business. –Interstate Commerce Commission (ITC) –Federal Trade Commission (FTC) –Bureau of Corporations (BOC)

Economics of the 1920’s Government allows mergers and consolidations of businesses –Holding companies borrow money to buy smaller companies –Eliminates Competition –Have to use majority of profits to pay huge loans

Economics of the 1920’s

The ‘Boom Industry’ Falters New inventions fueled consumerism and raised standard of living to highest level in history Factory production soars due to mass production and assembly line

The ‘Boom Industry’ Falters Americans were buying more and more –Increased advertising –Buying on credit believing that the prosperity would never end!

The ‘Boom Industry’ Falters By Early 1929 production outpaces demand –Most people didn’t need more than one car or radio –Consumers in debt and could not afford more have to cut back spending –Warehouses fill with unsold goods

The ‘Boom Industry’ Falters Trouble in key industries –Railroads not making a profit due to competition with trucks, busses, and automobiles –Coal Mining loosing revenue to hydroelectric, fuel oil, and natural gas –Reduction from expanded demand during World War I –Textiles facing competition from Japan, India, China and Latin America –New Housing starts decrease between 1925 and 1929 by 25%

Consumer Market Drops American Consumers Buying Less –Rising Prices –Stagnant Wages –Over-extension of Credit (Debt) –People living beyond their means –Production outpaced wages –Growing poverty by late 1920s –People already own products they need

Unequal Distribution of Wealth : –Wealthiest 1% incomes increased by 75% –Average American income increased by 9% –One third of all personal income held by wealthiest 5% of the population –Poorest 40% earned 10% of all personal income

Farmers Plight During WWI – Crop demand rose leading to higher prices, Farmers borrowed money to expand production and buy new machinery More efficient technology = overproduction and increased supply War Ends = Demand Drops = Prices Drop (50%) President Coolidge vetoes McNary-Haugen Bill –Price Supports, Federal government buys surplus and sells on International market

The Stock Market Boom Principle of Supply and Demand

The Stock Market Boom The more people bought the higher stock prices went –People made tremendous amounts of money –The more people made the more they wanted to invest

The Stock Market Boom Buying on Margin –Borrow money to buy stock –Would repay loan when the stock prices increased –Millions of Americans do this = Speculation Assuming stocks were going to raise (Gambling) Early 1929 Newspaper Headlines from the New York Times:

The Great Crash Black Thursday (October 24, 1929) –Stock prices start to drop –Buyers on margin had to sell stocks –Selling = increased supply = lower prices = more selling = even lower prices… –Major banks buy up shares of stock and save the market –Downward spiral stops

The Great Crash Black Tuesday –Oct 29,1929 NY Stock Exchange worst day in history –16.5 Million Shares sold –Prices spiral down –50% average price drop –Average stock value fell $40 Billion –U.S. Steel $262/share in September falls to $22/Share in December

The Great Crash NY Times Headlines from the Great Stock Market Crash

Economic Collapse! December Run on Banks –Banks played the market and were loosing money –Deposits from foreign banks stop –Foreign governments can’t repay loans to American banks –Farmers can’t repay loans to banks –Stock holders can’t repay loans to banks

Economic Collapse Banks begin to collapse 1929: 642 Banks Collapse 1931: 2298 Banks Collapse 1933: 6000 Banks Collapse (1/3 of nation’s total)

Economic Collapse! Cyclical Nature of Economic Collapse Less Demand = People laid off =Less Money = Less Spending = Less Demand

The Great Depression: Summary of Causes Over Expansion: Too much produced in industry and agriculture. Demand could not keep up with supply and prices must drop. Some Industries more interested in stock price than updating equipment = Less efficient, less competitive. Reckless Spending: Easy Credit - Artificially inflated value of the market could not be sustained. Like a balloon it popped. Unequal Distribution of Wealth: Wealthy few controlled the money. When the market crashed they got scared and quit spending.