The Great Depression Page 1

Who or What Was Responsible?

Of the many purposes for documentaries, one is to attempt to uncover a hidden truth or mystery.
The reasons that caused the change from great prosperity in the 1920s to one of remarkable
collapse in the 1930s have sometimes been characterized as a mystery. There are many opinions
available regarding the cause or causes of The Great Depression. Which opinion is correct? What
or who is responsible?

Consider what was happening during these decades:

1920s = Unprecedented Prosperity 1930s = Unprecedented Failure

Home ownership – doubled
Included: electric lights, flush toilets
Automobile ownership – 60% of all
households up from 26% 10 yrs earlier
School – More teenagers attending high
school, fewer working full time
Unemployment – by 1923 was at 2.4%
Home ownership – 40-50 percent of all home
mortgages were in default - 1,000
homes a day in foreclosure
(people stopped buying automobiles)
School – Teens left school to ride in freight
cars to look for work.
Unemployment – by 1932 was at 23.6%
Fewer hours for employed

What happened? What caused the great change in such a short period of time?

The great factories and productive machinery that had raised living standards in the 1920s were
still present in the 1930s. Workers still had the same skills and were willing to work just as hard
as before, and farmers were producing more food than ever.

Many people who are neither historians nor economists care about the answer to the question of
“what caused this?” because they want to avoid a recurrence.

Discuss (5-10 minutes): What are some of your speculations? What happened? What caused the
great change in such a short period of time?

After discussing your initial thoughts, go on to the next page.

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Most economists agree that the Great Depression began with a recession caused by a fall in
spending.

(Do not share with anyone else, but review the occupation(s) you chose/received.)

Prosperity of 1920s was due largely to the sale of houses and automobiles.
• Loans and mortgages allowed smaller payments making purchases possible.
• Purchases created jobs in building and selling homes, cars, furniture, and appliances. Jobs
were also created in factories for the materials needed for homes and cars. Governments
paved roads and created electric plants and water and sewage facilities for the new cars
and homes.
• Workers could now afford to spend more money, providing income to other workers,
which they would then spend for other goods and services. This is a multiplier effect
when one person’s spending becomes income to another who can spend more and add to
the income of yet more people.

However, the multiplier effect can work in reverse.

By the late 1920s, US business activity slowed down and the economy experienced a mild
recession.
• Sales of homes and new automobiles began to fall.
• Business firms slowed expansion for new plants, causing workers who build plants or
produce machinery to lose their jobs. If your occupation that you received is working
in a machinery factory, let your group know you’ve lost your job.
• Sales of new cars are down. If your occupation that you received is selling cars, let
your group know you’ve lost your job.
• Car dealers cancel orders to automobile factories due to decreased demand. If your
occupation that you received is an autoworker, let your group know you’ve lost your
job.
• Auto factories cancel orders for steel and other materials to make cars. If your
occupation that you received is steel worker, let your group know you’ve lost your
job.
• Since sales of homes are down, construction workers also lost their jobs (let your
group know).
• Furniture sales and furniture production are also down. Tell your group you’ve lost
your job if you’re in furniture sales or production.
• If you’ve not lost your job, it may not last for long. Unemployed people can’t afford new
clothes or to eat out at restaurants. Let your group know you’ve lost your job if you
sell clothing or work in a restaurant.
• Who is left? Grocery store workers. Patrons are more frugal with spending, and grocery
stores see a decrease in profits, so they reduce their workforce. If you work at a grocery
store, let your group know you’ve lost your job.

All these people are out of work. If people start buying again, what will happen? Discuss.
Take time to discuss, then go on to the next page.
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If people start buying again, unemployment will fall.

For example:
Automobiles wear out. If people decide to buy new automobiles, car dealers will place new
orders. Auto workers and producers of materials for the auto industry will be reemployed.
Autoworkers and steelworkers have their jobs back. Car dealers will hire new salespeople.
Car salespeople have their jobs back. (Let your group know you just got employed! – “I got a
job!!!”)

Furniture wears out, too, and eventually some people decide to buy new furniture. Furniture
makers and furniture salespeople are back on the job. (Let your group know you just got
employed! – “I got a job!!!”)

As more people gain employment, some feel they can afford a new home. Construction
workers have jobs. People begin to buy higher priced food at grocery stores, to eat in
restaurants, and buy new clothes. Grocery store workers, restaurant workers, and clothing
sales people are working again. (Let your group know you just got employed! – “I got a
job!!!”)

With the purchases of various new products increasing, business firms expand production and
buy new machinery and equipment. Machinery producers have jobs again. (Let your group
know you just got employed! – “I got a job!!!”)

Everyone should now be employed again!!!

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This downturn beginning in July 1929 was typical of a business cycle. A slowdown in business
activity (a recession) begins with a fall in demand for durable goods. Durable goods are
relatively expensive and don’t wear out quickly – like cars or refrigerators. Houses, although
classified separately by economists, are the most expensive and most long-lasting goods. People
buy food on a regular basis and usually some clothing every year, but they buy durable goods far
more irregularly. Demand for housing peaked in 1926, and by 1929 many used cars were
available to compete with new cars. Normally as durable goods wear out and prices fall due to
lower demand, some people begin to buy again and the economy begins to recover. But that did
not happen after the recession that began in 1929; instead it turned into a severe and long-lasting
depression. Why?

• October 1929: Stock Market Crashes

• Mid-November: Investors buy at lower prices and there is a small recovery.
• April 1930: Stock prices again begin to freefall.
• 1930-1933: Banks begin to close in record numbers.
o Businesses cannot repay loans.
o When banks fail, depositors lose their account money. Money actually disappears
from the economy (there is simply not any money floating around any more).
• 1929-1933: U.S. money supply was reduced by 1/3.
o Less money in the economy = fewer goods and services
o Fewer goods and services = fewer workers are employed
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• The 1913 Federal Reserve Act states that the regional Federal Reserve Banks were
supposed to lend reserves to banks in trouble. However, the regional banks would lend
only to those banks they believed would not fail. They were passive while many banks
collapsed.

This was a worldwide financial collapse. The gold standard that was shared by England, France,
Germany meant if one of these nations experienced economic problems, the actions it took to get
out of trouble often passed the problems on to other nations.
The Great Depression Page 6

For your reference for the next exercise, understand basically how banks use money.

Banks create money in the economy by

making loans. The amount of money that
banks can lend is directly affected by the
reserve requirement set by the Federal
Reserve. This amount can be held either in
cash on hand or in the bank's reserve account
with the Fed. To see how this affects the
economy, think about it like this. When a bank
gets a deposit of $100, assuming a reserve
requirement of 10 percent, the bank can then
lend out $90. That $90 goes back into the
economy, purchasing goods or services, and
usually ends up deposited in another bank.
That bank can then lend out $81 of that $90
deposit, and that $81 goes into the economy to purchase goods or services and ultimately is
deposited into another bank that proceeds to lend out a percentage of it.
In this way, money grows and flows throughout the community in a much greater amount than
physically exists. That $100 makes a much larger ripple in the economy than you may realize!

Banking is all about trust. We trust that the bank will have our money for us when we go to get
it. We trust that it will honor the checks we write to pay our bills. The thing that's hard to grasp is
the fact that while people are putting money into the bank every day, the bank is lending that
same money and more to other people every day. Banks consistently extend more credit than
they have cash. That's a little scary; but if you go to the bank and demand your money, you'll get
it. However, if everyone goes to the bank at the same time and demands their money (a run on
the bank), there might be problem.
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Now, WHAT WOULD YOU HAVE DONE?

The world financial system that emerged after World War I was based upon the gold standard.
The United States and Great Britain guaranteed that they would exchange their currencies for
gold at a fixed rate — $20.67 for an ounce of gold, or £4.86. Other major countries agreed to
exchange their currencies for gold, dollars or pounds. In 1927, several countries, most notably
Germany and Austria, experienced serious bank runs. To stabilize their currencies, they
exchanged their dollars and pounds for gold. The United States experienced a serious loss of
gold (as did Great Britain). To encourage foreign investors to buy American investments, the
Federal Reserve Banks raised interest rates. If you were an American business owner planning to
build a new factory or buy new equipment, what would you have done after interest rates were
increased?
Discuss.

The Federal Reserve lowered interest rates after a time, but in 1930 and 1931, when the
American economy had already taken a downturn, more bank runs occurred in many countries,
and again gold flowed out of the United States. To keep gold in the United States, the Federal
Reserve Banks again raised interest rates. What was the result?
Discuss.

Now imagine that you are an American citizen with a bank account. You read the newspapers.
You see that banks are collapsing in other countries and that the rate of bank failures in the
United States has risen. What might you do?
Discuss.

In 1932 Congress creates the Reconstruction Finance Corporation (RFC), which lends money to
businesses that are in trouble, including banks. The law requires that the names of banks
receiving loans from the RFC must be published. You read in the newspaper that the bank in
which your money is deposited is receiving help from the RFC. What are you likely to do?
Discuss.