Presentation Transcript

1. The Causes of the Great Depression

   Chapter 11, Section 1
2. The Long Bull Market
3. Election of 1928 Coolidge declines reelection Republican party nominates Herbert Hoover Democrats chose Alfred E. Smith
4. Problems for Smith Smith was a Roman Catholic Faced claims that RCC funding election Fear that RCC would run US Prosperity of 1920s Republicans took full credit Democrats had little involvement in economic policies
5. Election Results
6. Stock Market Hoover’s optimism drove stock prices up Bull Market: long period of rising stock prices Margin: small cash down payments, rest comes as a loan Example: 10% margin means $1,000 buys $10,000 worth of stock Broker loans the other $9,000, making money on the sale commission and loan interest Stocks held as collateral
7. Stock Market cont. As prices rose, investors profited Ex: investors buying $10,000 only had to wait for the price to go up to $11,000, sell, and make $1,000. Issue came when prices fell Margin Call: broker issues this; demand for investor to repay loan at once Brokers sensitive to any price fall Investors had to quickly sell to pay loans
8. Stock Market Cont.
9. Stock Market cont. Pre-1920s: prices investors paid for stocks reflected true value Late 1920s: stock market became a casino Looking for quick money Speculation: bet market would continue to climb Able to sell stock and make quick money
10. Crash Simulation
11. January, 1926 The stock market is booming. Production and consumer spending is strong, and the value of most stocks continues to rise. Non-wealthy Investors – collect ten pieces of wealth for your group, but give five to the stockbrokers to pay off some of your loan Wealthy Investors – collect ten pieces of wealth and keep all of them Stock Brokers – collect five pieces of wealth from the non-wealthy investors, but give two to the bank to pay off some of your loan Bankers – collect two pieces of wealth from the stockbrokers Advisors to the President – collect ten pieces of confidence
12. April, 1928 Businesses and consumer spending begin to slow due to overproduction and under-consumption. The stock market declines slightly as people begin to sell some of their stock. Non-wealthy Investors – put one piece of wealth into “the pot” and give one piece to the stockbrokers to pay off some of your loan. Wealthy Investors – put one piece of wealth into “the pot.” Stock Brokers – collect one piece of wealth from the non-wealthy investors, but give it directly to the bank to pay off some of your loan Bankers – collect one piece of wealth from the stockbrokers Advisors to the President – put two pieces of confidence into “the pot.”
13. October 21, 1929 The stock market takes a big drop. People begin to lose confidence in the market and sell stock rapidly. The overall value of the market goes down. Stockbrokers recall the loans from non-wealthy investors, who cannot pay them. Banks call in their loans lent to stockbrokers. Non-wealthy Investors – put three pieces of wealth into “the pot.” Wealthy Investors – put three pieces of wealth into “the pot.” Stock Brokers – give one piece of wealth to the bankers and put two in “the pot.” Bankers – collect one piece of wealth from the stockbrokers Advisors to the President – put three pieces of confidence into “the pot.”
14. October 29, 1929 A selling frenzy makes many stocks worthless, and the overall value of the market declines drastically. Bankers invest in the market in an attempt to keep stock values up, and President Hoover assures the public that the market is still safe for investments. Wealthy Investors – put three pieces of wealth into “the pot.” Bankers – put two pieces of wealth into “the pot.” Advisors to the President – collect one piece of confidence.
15. December, 1929 The bankers’ attempts to save the market fail, and banks lose their investment. The value of the stock market continues to decline. Wealthy investors lose their investment since there are no buyers to buy their remaining stock. $3O billion of wealth is lost. Confidence in the stock market plummets and remains low throughout the early years of the Great Depression. Wealthy Investors – put three pieces of wealth into “the pot.” Bankers – put two pieces of wealth into “the pot.” Advisors to the President – put six pieces of confidence into “the pot.”
16. The Great Crash
17. Stock Market Crash Bull market only lasted as long as new money was put in September 1929 – professional investors sense trouble, sold off shares Caused prices to go down Prices drop, margin calls, other investors sell shares to pay brokerage loans
18. Stock Market Crash cont. 21 October 1929 – stock market plunges People begin selling trying to cover loans 24 October 1929 – market continues to drop “Black Thursday”
19. Black Tuesday 29 October 1929 – prices take steepest dive yet Not a major cause of the Great Depression Undermined economy’s ability to overcome weakness
20. Banking Crash weakened banks $6 billion loaned to stock speculators Invested depositor’s money in stocks Banks cut back on loans  recession Some banks could not recover, forced to close Deposits not insured Bank closures = savings lost Bank Run: many depositors withdraw their money all at once
21. Federal Deposit Insurance Corporation Created by the Banking Act of 1933 Began insuring on 1 January 1934 No depositor has lost insured funds as a result of a failure
22. The Roots of the Great Depression
23. Crash played major role in recession Would not have has the same effect without other factors at work Roots deep in 1920s economy
24. Uneven Distribution of Income Overproduction flooded market Not enough money to buy up goods produced Debt from installment plans Expensive items required monthly payments Eventually caused households to stop w/ new purchases
25. Job Loss Consumers stop buying radios Radio makers lay off employees; order less copper wire Copper wire production goes down; lay off workers; need less copper ore Copper mines slow down; lay off workers Families had little to no savings No support when they lost jobs
26. Loss of Export Sales Needed to sell more goods abroad US banks made loans to speculators instead of to foreign countries WWI nations facing recessions Hoover wanted to lower tariffs Republicans wanted to protect American industry
27. Hawley-Smoot Tariff Raised average tariff rate to highest level in American history Failed to help Foreign countries responded by raising their tariffs
28. Mistakes by the Federal Reserve Federal Reserve Board responsible for interest rates Should have raised to curb excessive speculation Obviously then, it did not
29. Federal Reserve In failing to do raise rates: Encouraged banks to make risky loans Led business leaders to think economy was still expanding Borrowed more money to expand production Caused more overproduction Depression hits, FR raised interest rates Credit tightened