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Causes of the Great Depression

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Presentation on theme: "Causes of the Great Depression"— Presentation transcript:

1 Causes of the Great Depression

2 BANKS ECONOMIC CIRCULAR FLOW DIAGRAM MARKET government (saving)
(investment) (consumption) HOUSEHOLDS BUSINESSES (wages)

3 Historian A – A Bunch of Stuff from the 1920’s
? Weak Industry ? Technological Unemployment DEPRESSION ? Unequal Wealth Distribution ? Foreign Trade Problems

4 Historian B – Unequal Wealth
Weak Industry Technological Unemployment DEPRESSION Foreign Trade Problems Stock Crash Businesses cut production, decline **Unequal Wealth Distribution Rich invest Others Spend Overproduction

5 Historian C – Stock Crash
Household Wealth Consumption Investment Money Investment Pessimism D

6 Historian D–Why Stock Crash Happened
Easy Credit / Margin Speculation Inflated stocks Stocks decline People sell D Stock Crash

7 Hist. E–Milton Friedman U Chicago (Money Supply)
No Deposit Ins. Reduced Money Supply*** Bank Panics Fed Actions 1931 Reduced Consumption Less sales D Business cuts production

8 Hist.F–Peter Temin MIT (Money Supply)
? Crash Reduced Consumption*** Less Wealth (Market is only small part of economy – isn’t big enough to be mysterious cause of reduced consumption) Reduced Money Supply Less investment D Business cuts production

9 D Depression Causes Margin Trading Speculative bubble
Stock Crash of 1929 Pessimism Decreased household wealth Easy Credit 1920s Debt Burden hoarding Bank Failures Bank Panics Unemployment US Agricultural Overproduction Low Food Prices Loan Defaults Decreased Consumption Businesses cut back & fail Decreased Production World War I ends More European Production Decreased Money Supply D Decreased Profits European Economy Collapses Fed Increases reserve requirement 1931 Hawley-Smoot Tariff Retaliatory Tariffs (other countries) Decreased exports Tax loopholes: rich pay little income tax Unequal wealth distribution US Industrial Overproduction Overinvestment

10 FDR and the Depression, 1932 “Say that civilization is a tree which, as it grows, continually produces rot and dead wood. The radical says: ‘Cut it down.’ The conservative says: ‘Don't touch it.’ The liberal compromises: ‘Let's prune, so that we lose neither the old trunk nor the new branches.’”

11 Hoover-FDR Comparison
Issue Hoover FDR Role of Government Economic Frame for Depression Political Appeal Values emphasized Political Spectrum

12 Fiscal Policy The use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.

13 John Maynard Keynes During a major recession, government is the only institution with the power to spend Government can “prime the pump” by funding public works This will increase purchasing power and stimulate the economy Deficits are OK Known as Keynesian Economics

14 BANKS BUSINESSES HOUSEHOLDS GOVERNMENT (investment) (saving)
MARKET (consumption) BUSINESSES HOUSEHOLDS (wages & salaries) (wages) (spending) GOVERNMENT (taxes) (taxes)

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