THE CAUSES OF THE GREAT DEPRESSION. WAIT… WHAT’S THE GREAT DEPRESSION?
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Transcript of THE CAUSES OF THE GREAT DEPRESSION. WAIT… WHAT’S THE GREAT DEPRESSION?
THE CAUSES OF THE GREAT DEPRESSION
WAIT… WHAT’S THE GREAT DEPRESSION?
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
FIVE LONG-TERM CAUSES OF THE GREAT DEPRESSION
Monetary policyOverproduction Inequality SpeculationTrade
Day 1
Day 2
Day 3
Day 4
DAY 1: OVERPRODUCTION AND INEQUALITY
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?
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
ROUND 1
One producer with one golf pencil to sellFive consumers, with budgets of 20 cents each
ROUND 2
Two producers with five golf pencils eachFive consumers with budgets of 20 cents each
ROUND 3
Ten producers with ten pencils eachThree consumers, with budgets of 5-25 cents each
ROUND 4
Two producers with five golf pencils eachTen consumers
Eight consumers get two cents eachTwo consumers get 50 cents each
ROUND 5
Five producers with five golf pencils eachTen consumers
Eight consumers get two cents eachTwo consumers get 50 cents eachBut consumers are going to get some bad news
before buying begins…
SO WHAT DOES THIS HAVE TO DO WITH THE DEPRESSION?
BASIC ECONOMIC PRINCIPLES
Prices are set by the combination of supply and demandWhen demand > supply, prices go upWhen 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
OVERPRODUCTION IN THE GREAT DEPRESSION
Agricultural overproductionFarmers increased production significantly during WWI – and
took on huge debts to do thisAfter 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
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
EXIT TICKET
1.How did overproduction make the American economy unstable in the 1920s?
2.How did inequality make the American economy unstable in the 1920s?
DAY 2: SPECULATION
SOME KEY TERMS
Stock: partial ownership of a companyStock market: a place where shares of companies
are openly tradedSpeculation: investing in stocks or other ventures
in the hope of profit, but with the risk of loss
THE STOCK MARKET IN THE 1920S
Two trends in the 1920s:Stock prices went way up
– a boomMore and more Americans
invested in stockPeople saw the stock
market as a way to get rich quick
STOCK MARKET SIMULATION
It’s January 1, 1920You’ve pooled $200 with your friends to invest in the stock
marketYou will invest at least half of the money today and meet
periodically to reconsider your investmentsYou agree to sell everything on December 31, 1929 and
divide the profits equally
STOCK MARKET GAME, ROUND 1
AT&T: $20Ford Motors: $25General Electric: $15Montgomery Ward: $12US Steel: $40
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)
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)
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)
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)
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…?
DAY 3: MONETARY POLICY
SPECULATION REVIEW QUESTIONS FOR 11.1
1.What are the possible risks of investing in the stock market?
2.What are the possible rewards of investing in the stock market?
3.What are the advantages of margin buying (taking out a loan from your stockbroker in order to buy more stock)?
4.What are the disadvantages of margin buying?
FINAL NOTES ON SPECULATION
Investing in stock can be rewarding, but it always carries risksThe stock market was especially risky in the 1920s for two
reasons:Not much information about companiesNot much regulation from the government – for instance,
over the down payment required for margin buyingBy 1929, the market was overvalued and ready for a crash
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”
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
WHAT CAN THE FED DO?
If the Fed lends more money to banks, what happens?
InflationIf the Fed lends less money to banks, what
happens?
Deflation
EXIT TICKET
Explain: what should the Fed have done to boost the economy, and why?
DAY 4: TRADE AND TARIFFS
REVIEW: WHY INFLATION WOULD HAVE HELPED
Inflation = prices going upPeople spend more during inflation, since they expect prices to riseTherefore, inflation stimulates demand
The government could have produced inflation by increasing the money supply
Instead, the government decided to keep the money supply stableResult: continued low demand, low wages, and high
unemployment
WHAT DID THE US NEED TO AVOID AN ECONOMIC DEPRESSION?
Key to economic recovery = more demand for American productsPrices would increaseWages would increase
One possible solution: demand could come from overseas
SO WHY DIDN’T OTHER COUNTRIES BUY AMERICAN?
After World War I, most European countries were economically devastatedPhysical devastationWar debts
Most countries, including the US, wanted to protect their economies by raising tariffs – taxes on imported goods
THE SMOOT-HAWLEY TARIFF
Date: 1930Definition: huge increase in tariffs (import taxes) charged on
goods imported to the USGoal: to protect US firms against competition from manufacturers
in other countriesResults:
Hurt European economies, so people could afford fewer US goods Encouraged other countries to raise tariffs, reducing demand for US
goods