Background and Causes of

the Great Depression

Great Depression
• Worldwide economic downturn that began in 1929 and lasted until
about 1939.
• It was the longest and most severe depression ever experienced by
the industrialized Western world, sparking fundamental changes in
economic institutions, macroeconomic policy, and economic theory.
• Although it originated in the United States, the Great Depression
caused drastic declines in output, severe unemployment,
and acute deflation in almost every country of the world.
• Its social and cultural effects were no less staggering, especially in the
United States, where the Great Depression represented the harshest
adversity faced by Americans since the Civil War.
Causes / Facts of Great Depression
1. Overconfidance 9. Fall in Demand
2. Consumerism 10. Unequal Distribution of Wealth
3. Easy Credit 11. US Policies
4. Overproduction 12. Loss of Exports
5. 1929 Wall Street Crash 13. Failure by the Federal Reserve
6. The Banks 14. Draughts and Dust Bowls
7. Bankrupcies 15. Mass unemployment
8. Lack of Credit
Fact 1: Overconfidence
• For Middle Class Americans the Roaring Twenties was
a time of great prosperity.
• Industries boomed which led to the 1920s Economic
Boom.
• It was an era of modernism, excitement, new ideas
and it was the age of the automobile.
• People felt invincible and became overconfident
believing that the prosperous period would never end.
Fact 2: Consumerism
• The irrational exuberance of the Roaring Twenties led
to the rise of Consumerism in 1920's America
• People were encouraged to acquire new product in
ever-increasing amounts through mass advertising in
the newspapers and via the radio.
Fact 3: Easy Credit
• Once "thrifty and prudent" Americans threw caution
to the wind, careless of rising debt, and purchased
consumer items on easy credit.
• Stock Brokers promoted the idea of "Buying on
Margin" - encouraging enthusiastic investors to buy
stocks with money loaned from the stock broker.
• Nearly 4 million Americans engaged in heavy
speculation, gambling on the Stock Market.
Fact 4: Overproduction
• The demand for goods
• Massive increases in sales
• Modern technology
• New machinery and the adoption of systems
• Overconfidence in industries resulted in the
overproduction of consumer goods.
Fact 5: 1929 Wall Street Crash
• Overconfident Americans believed the Stock Market was also
invincible.
• Wall Street had enjoyed amazing profits from the 'Long Bull Market'
in which share prices rocketed from an average of $50 per share in
1922 climbing to an enormous $350 per share in 1929.
• The 1929 Wall Street Crash was greeted with shock, horror, fear and
disbelief. Stock brokers began to make Margin Calls and there was
widespread panic-selling of all stocks.
• Between $10-$15 billion was lost on Tuesday, October 29,
1929 (Black Tuesday) as the stock market completely collapsed due
to the plummeting share prices.
• There was an 89% decline in stock prices.
Fact 6: The Banks
• There were virtually no federal regulations to control banks
in the 1920s and small banks had recklessly invested their
customer's money on the stock market, buying stocks on
margin with customers’ savings and loaning money to stock
market investors .
• When the Wall Street Crash came small banks lost money
and defaulted on their loans.
• There were runs on banks who did not have the assets to
respond to the withdrawal requests of their customers.
Contd…
• Small banks were forced to close. During the 2 years
following the Wall Street Crash over 3000 banks went
bankrupt - over 10% of the nation's total.
• Banks that did survive stopped lending money, making less
credit available and the economy fell into recession.
Fact 7: Bankruptcies
• Over 20,000 companies and business went bankrupt
and closed.
• The high levels of debt and the Wall Street crash led to
the ruin of ordinary Americans who lost their life
savings, their homes and then their jobs.
Fact 8: Lack of Credit
• Banks were reluctant to make any new loans in the
financial climate.
• The lack of credit meant that people were unable to
recover from the economic bust.
• The downward spiral continued leading to
foreclosures, homelessness and unemployment.
Fact 9: Fall in demand
• The market in consumer goods quickly dried up
• Too many products were being manufactured due to
overproduction
• Too few people earning enough money to buy goods.
• Businesses closed and this had a 'domino effect' on
the companies that supplied the companies who lost
their orders and were also forced to close.
Fact 10: Unequal distribution of wealth
• The Unequal distribution of wealth in the 1920's
contributed to the Great Depression.
• 40% of middle class Americans prospered during the
economic boom
• The other 60% of Americans were poor and were
struggling to make a living even before the economic
bust.
• The whole of the nation began to suffer during the
Great Depression.
Fact 11: US Policies
• The US Government policies of the 1920s contributed to the
Great Depression.
• The policy of Isolationism in the 1920's, following WW1, led
to the passage of the1922 Fordney-McCumber Act that
introduced high tariffs the (taxes) on foreign goods in
American history furthering the US policy of Protectionism.
• The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs
to historically high levels creating protective tariffs (taxes)
and increased rates on imported goods.
Fact 12: Loss of exports
• It was vital to the US economy for Europeans to buy
American exports and US policies backfired as angry
European countries imposed a tax on American goods
making them too expensive to buy in Europe, and restricting
trade.
• The Loss of exports was due to the lack of cooperation with
Europe and the global effects of the Stock Market crash.
• During the Great Depression U.S. exports to Europe saw a
massive fall from $2,341 million in 1929 to $784 million in
1932.
Fact 13: Failures by the Federal Reserve:
• The Federal Reserve failed in its fundamental task to act as a
lender of last resort and failed to stem the decline in the
supply of money.
• The Federal Reserve kept interest rates low throughout the
1920s which encouraged banks to make risky loans believing
that the economy was expanding.
• The late decision to raise interest rates in 1928 and 1929 was
an attempt to limit speculation in securities markets, but in
effect slowed down economic activity in the US and
tightened credit.
Contd…
• The failures by the Federal Reserve included a slow response to the
Great Depression.
• The Gold Standard Act of 1900 had been passed to prevent the
country from printing too much money and running out of gold.
• The law restricted the Federal Reserve from enacting policies which
would significantly alter the growth of the money supply and limit the
inflation rate.
• The United States continued to retain the gold standard until April 25,
1933, when it was finally dropped as a means of combating the Great
Depression.
Fact 14: Drought and Dust Bowls
• The majority of the nation's farmers had suffered a severe
overproduction crisis during the 1920s that had resulted in
low prices of agricultural crops.
• In 1932 a devastating drought hit the farmers and the soil
turned to dust.
• Violent winds whipped the dry topsoil creating terrifying
dust storms destroying 100 million acres of land.
• Crops were ruined, livestock were killed and 3 million
impoverished people became unemployed and homeless
due to the Dust Bowl.
Fact 15: Mass Unemployment
• The consequence of the Great Depression was Mass
Unemployment in the United States which extended
the period of the Great Depression.
• Over 12 million people became unemployed.
• At its peak, over 12,000 people being made
unemployed every day.