Causes of the Depression

Ch 9.1

Thursday, March 29, 2012

• Daily Goal: Understand how stock speculation, bank failures, overproduction and poor income distribution cause the Depression.

Herbert Hoover(Republican)

• Elected President 1928

• Promised continued prosperity but…

“We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.” 1928

Election of 1928

• Hoover easily defeated the Democratic candidate Alfred E. Smith because he was Catholic.

• Hoover promised Americans prosperity.

Black Tuesday (Great Crash)

• October 1929

• (panic) huge sell of of stocks

• stock prices plummeted

• Within 2 weeks – $30 bil lost = US spending WWI

The Crash

• Many investors confidently purchased stocks during the long Bull Market on margin.

• Speculation inflated stock prices far beyond their real value.

• When stocks dipped slightly margin calls went out which began the massive stock sell off which started a big market drop.

• Black Tuesday (10/29/29) marked the biggest single day drop in the market.

Bank Failures – run on banks (panic) • By 1933 – ¼ of all banks (9 million accounts) had failed

Discussion Questions

• What does a bank do with your money when you deposit it?

• How does it help the bank make money?

A Banking Crisis

• Banking problems:1. loaned money to speculators who could not repay

their loans2. invested depositors' funds in the stock market.• Bank failures caused Americans to not only lose their

life savings, but also their faith in the banking system.• People began a run on the banks withdrawing their

money because they feared they’d lose it, which resulted in more bank failures.

A vicious cycle

• An uneven distribution of income left the rich w/ most of the money and most families with little extra income to spend.

• Lower Spendingless productionmore layoffseven lower spending.

• As high tariffs restricted foreign demand for American goods and the Fed tightened available credit, the economy spiraled downward.

11

The Depression’s impact on the economy

1929 1933

Banks in operation 25,568 14,771

Prime interest rates 5.03% 0.63%

Volume of stock sold NYSE 1.1 billion 0.65 billion

Privately earned income $45.5 billion

$23.9 billion

Personal and corporate savings

$15.3 billion

$2.3 billion

Discussion Questions

• What encourages people to borrow more money-

• Low interest rates or high interest rates?• If America raised tariffs on Chinese goods how

do you think the Chinese gov’t would respond?

• How might this affect international trade?

Roots of the Depression

• Americans who had purchased on installment plans during the 20s could no longer afford to.

• Congress passed the Hawley-Smoot Tariff which raised tariffs and killed international trade.

• The Fed kept interests rates too low during the 20s causing the bubble, then raised them when the market needed more credit.