The causes of the great depression

1. The causes of the great depression

2. Wait… what’s the great depression?

7. The great depression • Date: 1929-1939 • Definition: a period of economic depression in the United States and the rest of the world • Economic depression occurs when an economy produces fewer goods and services and employs fewer people • Significance • Huge cost to human well-being • Transformed the role of the US federal government in people’s daily lives

8. Five long-term Causes of the great depression • Monetary policy • Overproduction • Inequality • Speculation • Trade Day 3 Day 1 Day 2 Day 4

9. Day 1: overproduction and inequality

10. overproduction • In your notes: Is it possible for an economy to produce too much stuff? What might be the positive and negative consequences of producing too much?

11. Market simulation • Some of you are producers – your job is to sell golf pencils (provided by me) for as much profit as possible • Some of you are consumers – your job is to buy golf pencils from the producers for as little money as possible • Some of you are observers – be ready to answer questions on the worksheet

12. round 1 • One producer with one golf pencil to sell • Five consumers, with budgets of 20 cents each

13. round 2 • Two producers with five golf pencils each • Five consumers with budgets of 20 cents each

14. round 3 • Ten producers with ten pencils each • Three consumers, with budgets of 5-25 cents each

15. round 4 • Two producers with five golf pencils each • Ten consumers • Eight consumers get two cents each • Two consumers get 50 cents each

16. round 5 • Five producers with five golf pencils each • Ten consumers • Eight consumers get two cents each • Two consumers get 50 cents each • But consumers are going to get some bad news before buying begins…

17. So what does this have to do with the depression?

18. Basic economic principles • Prices are set by the combination of supply and demand • When demand > supply, prices go up • When supply > demand, prices go down • The balance of power depends on the distribution of wealth • When wealth is equally distributed, individual crises (like tuition or medical bills) don’t hurt the economy much • When wealth is heavily concentrated, a crisis for the rich means a crisis for the whole economy

19. Overproduction In the great depression • Agricultural overproduction • Farmers increased production significantly during WWI – and took on huge debts to do this • After WWI ended, demand fell sharply and farm prices crashed • Individual farmers kept production high, since profits were low • Similar problem in industry – factory methods made production increase, but eventually Americans ran out of money for new goods

20. Inequality in the 1920s • In the 1920s, the rich became far richer while the poor became only slightly less poor • Made worse by tax cuts for the rich under Herbert Hoover • Result: limited demand for consumer goods

21. Exit ticket • How did overproduction make the American economy unstable in the 1920s? • How did inequality make the American economy unstable in the 1920s?

22. Day 2: speculation

23. Some key terms • Stock: partial ownership of a company • Stock market: a place where shares of companies are openly traded • Speculation: investing in stocks or other ventures in the hope of profit, but with the risk of loss

24. The stock market in the 1920s • Two trends in the 1920s: • Stock prices went way up – a boom • More and more Americans invested in stock • People saw the stock market as a way to get rich quick

25. Stock market simulation • It’s January 1, 1920 • You’ve pooled $200 with your friends to invest in the stock market • You will invest at least half of the money today and meet periodically to reconsider your investments • You agree to sell everything on December 31, 1929 and divide the profits equally

26. Stock market game, round 1 • AT&T: $20 • Ford Motors: $25 • General Electric: $15 • Montgomery Ward: $12 • US Steel: $40

27. Stock market game, round 2 • AT&T: $20 (no change) • Ford Motors: $23 (-2) • General Electric: $25 (+10) • Montgomery Ward: $15 (+3) • US Steel: $38 (-2)

28. Stock market game, round 3 • AT&T: $25 (+5) • Ford Motors: $21 (-2) • General Electric: $30 (+5) • Montgomery Ward: $20 (+5) • US Steel: $42 (+4)

29. Stock market game, round 4 • AT&T: $30 (+5) • Ford Motors: $20 (-1) • General Electric: $35 (+5) • Montgomery Ward: $30 (+10) • US Steel: $55 (+13)

30. Stock market game, round 5 • AT&T: $2 (-28) • Ford Motors: $4 (-16) • General Electric: $5 (-30) • Montgomery Ward: $7 (-23) • US Steel: $10 (-30)

31. Margin buying • Margin buying: the practice of borrowing money from a broker to purchase stock • “You lend me money now, I’ll pay you back later when I sell my stock at a profit” • Great way to take advantage of a boom market (prices going up) • 1920s brokers allowed buyers to purchase stock with as little as a 10% down payment • But what do you think happens when the market goes down…?

32. Day 3: monetary policy

33. Speculation Review questions for 11.1 • What are the possible risks of investing in the stock market? • What are the possible rewards of investing in the stock market? • What are the advantages of margin buying (taking out a loan from your stockbroker in order to buy more stock)? • What are the disadvantages of margin buying?

34. Final notes on speculation • Investing in stock can be rewarding, but it always carries risks • The stock market was especially risky in the 1920s for two reasons: • Not much information about companies • Not much regulation from the government – for instance, over the down payment required for margin buying • By 1929, the market was overvalued and ready for a crash

35. Key terms • Inflation: an increase in the general price of goods and services • Deflation: a decrease in the general price of goods and services • Money supply: the amount of money available in an economy • Purchasing power: the amount of goods or services that a given amount of money can buy; “the worth of a dollar”

36. The federal reserve (“the fed”) • Central bank of the United States, established 1913 • Can choose to lend more or less money to banks (by varying the interest rate) • Influences inflation/deflation

37. What can the fed do? • If the Fed lends more money to banks, what happens? Inflation • If the Fed lends less money to banks, what happens? Deflation

38. Exit ticket • Explain: what should the Fed have done to boost the economy, and why?

39. Day 4: trade and tariffs

40. Review: why inflation would have helped • Inflation = prices going up • People spend more during inflation, since they expect prices to rise • Therefore, inflation stimulates demand • The government could have produced inflation by increasing the money supply • Instead, the government decided to keep the money supply stable • Result: continued low demand, low wages, and high unemployment

41. What did the us need to avoid an economic depression? • Key to economic recovery = more demand for American products • Prices would increase • Wages would increase • One possible solution: demand could come from overseas

42. So why didn’t other countries buy American? • After World War I, most European countries were economically devastated • Physical devastation • War debts • Most countries, including the US, wanted to protect their economies by raising tariffs – taxes on imported goods

43. The smoot-Hawley tariff • Date: 1930 • Definition: huge increase in tariffs (import taxes) charged on goods imported to the US • Goal: to protect US firms against competition from manufacturers in other countries • Results: • Hurt European economies, so people could afford fewer US goods • Encouraged other countries to raise tariffs, reducing demand for US goods