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Causes of the Great Depression
The superficial (fake) prosperity (wealth) that was present for most people before the Great Depression
The Roaring Twenties was a time when American industry was making a lot of products that cost a good amount of $$$ for your average person at the time. For example, automobiles were the leading industry. While they were really cheap to buy by today's standards (less than $300), there was a big difference between a small number of wealthy Americans and almost everyone else. More than 60% of the population was living below poverty levels, while the richest 1% owned 40% of the nation’s wealth. The average person was only able to afford these big ticket items due to readily available credit, allowing them to buy an expensive item now and pay it back (with interest) over the course of time. That would become a problem when people couldn't afford to make payments due to losing their jobs.
The Great Depression was brought about by World War I and occurred in Europe during the 1920s
While America seemed to prosper during the 1920s, most of Europe, still reeling from the devastation of World War I, fell into economic decline. America soon became the world’s banker and began to loan everyone $$$ (remember the Dawes Plan from Chapter 12?!). European countries, businesses, and people started not paying their loans back to American banks and bought less American products due to high tariffs all countries placed on each other. This all led to a very unstable economy in the U.S.
Speculation And Buying Stocks on Margin during the 1920s
With very few regulations (rules) in place before the Great Depression, investors were able to speculate wildly (guessing what the price would be in the future... most people thought prices would be a lot higher), buying stocks on margin (borrowing $$$ to buy stock... which means to become a part owner in the company) and normally only needing 10% of the price of a stock to be able to complete the purchase. Investors speculating that companies would continue to be successful led to falsely high stock prices, and when the stock market began to tumble in the months leading up to the October 1929 crash, investors couldn’t make their margin calls (simply put... when the value of the stock becomes 10% lower than what they bought it for), and a massive sell-off began. While the great rise in the stock market (The Dow Jones Industrial Average more than doubled from 180 points in early 1928 to 381 points in mid 1929) was fueled by optimism and false hope, the plunge was brought about by a combination of required selling (margin calls) and fear. For a better explanation of what the Dow Jones is and how it still exists today, click here
The Stock Market Crash
On September 3, 1929, the Dow Jones was at a high of 381 points, and on October 29, 1929, it had fallen to only 41 points after a week of panic selling.
Bank Failures after the Crash (and for the next several years)
Once the stock market crashed, fearful that banks would fail, millions of Americans began to withdraw their money. Almost overnight, thousands of banks were in trouble. The more money Americans withdrew, the more banks failed, and the more banks failed, the more money Americans withdrew. By 1933, more than 11,000 of the nation’s 25,000 banks had collapsed.
Lack Of Available Credit after the Crash (and for the next several years)
With massive draws on funds during the Great Depression, banks had no money to lend, and this lack of available credit led to a further worsening of economic conditions.
People Stopped Spending Money after the Crash (and for the next several years)
When the stock market crashed and the banks began to fail, many people lost access to their money and spending really slowed down. This caused demand for products and services offered by businesses to slow down severely
High Unemployment Rates
When consumer spending dropped, businesses could no longer afford to keep people employed since they weren't selling as much stuff. By 1933, 25% of the people that wanted a job were unemployed and many that maintained jobs had to take substantial pay cuts in order to keep them.
The Dust Bowl in Rural Areas
A drought that lasted from 1930 to 1936, known as the Dust Bowl, caused the problems of the Great Depression to spread outside of urban areas... where most of the damage had been done. More than a million acres of farmland became useless because of severe drought and years of overfarming during the 1910s and 1920s. This caused hundreds of thousands of farmers to join the ranks of the unemployed.
Agriculture in the U.S. during the 1920's
For a brief 2 minute clip discussing the problems that this sector of the economy was experiencing after WWI in the U.S., click here
Clip explaining the causes of the Great Depression
The 5 minute clip covers the expansion of the stock market in the 1920s due to people buying stock on margin, Black Tuesday and the effect that it had on many people, a lack of government regulations in the 1920s that allowed people and businesses to borrow all kinds of $$$ from banks they couldn't afford (which caused banks to eventually fail), the impact high tarrifs (Fordney-McCumber from last chapter and Hawley-Smoot in this chapter) had on our ability to trade agricultural and industrial products with other countries, and aging industries like railroads starting to suffer financially.
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