Causes of the economic crisis

Wall street
was it?
• LINE OF ARGUMENT: What factors caused the
economic depresssion?
INTERPRETATION: E.g. Many historians believe
the Wall Street Crash was merely a trigger not
a cause of Depression.
Essentially what this question is asking
is - how did these factors weaken
the economy/prepare it for a
depression by 1929?
Which was the worst?
BANKING SYSTEM Banking is essential
to build a strong economy
• Too many banks – 30,000 small state banks instead of a national
bank (lots of banks were established because of the high demand
for credit) Many banks also bought shares and used their investors
money to do so.
• Easy credit - system of lending is weak– economy is built on credit .
In 1929 $7bn worth of goods is sold on credit.
• Everyone in debt – few questions asked for loans
• One bank collapsing leads to a run at other banks, they had no
contingency plan. People want their savings back but banks cannot
provide. Banks want the loans back but people cannot repay them.
• Unregulated by government – banks could operate in any way, to
their own benefit
• Federal Reserve Bank controlled the amount of ‘gold’ in circulation
– they kept interest rates low to keep the market buoyant
• International loans to Allied countries – Dawes Plan with Germany
Over Production Relies on mass
• Mass production methods for consumer goods
and car manufacturing e.g. Ford T – moving line
assembly allows higher production – 1920 – 1 car
every 60 seconds (1,250,000 per year!) General
Motors and Chrysler also joined in.
• Supply outstrips demand therefore trade slows –
jobs lost (60,000 at Ford lose jobs in 1927)
• This impacts on share prices – people begin to
lose confidence
• Farming overproduction led to lower prices
Under consumption
• Uneven wealth distribution – North East and Far West
were the wealthiest. 60% of families earned less than
• ‘Old industry’ - coal, railways were threatened by new
industries such as cars and electrical industries.
• Rural areas do not have electricity to run these goods.
E.g. Clarence Birdseye patented refrigeration in 1925
but only 20,000 fridges in US by 1928. Electrical
consumption could be exaggerated
• Customers decline – once you have bought a fridge,
hoover – you don’t need another.
• Trade declines so business look to expand markets
Wall Street Crash – ‘a symptom not the
• Over-confidence in stock market.
• Shares bought on the margin – 10% deposit, rest
of share paid by a bank loan
• Black Thursday – panic selling of shares due to
loss of confidence in share prices as they dropped
e.g. General electric 315 points to 283 points.
• 60% of shares sold in October
• Crashes had happened prior to this and
depression did not result therefore other factors
must be to blame
Republican Policies – Lead the country
and have the power to regulate but
lack of action/misjudged policies
• Laissez-Faire - Inaction of Republicans such as Coolidge
and Hoover – lack of regulation
• High Tariffs and Isolationist economic policies affected
trade overseas– Fordney-McCumber Act 1922 – no
foreign goods into USA
• Businesses allowed to expand – mergers resulted in
corporations having a monopoly over industry which
lead to price-fixing
• Businessman were given too much power by the
government. Failure of get rich quick schemes.
• Focus more on short-term benefits, little long term
• Which of these was most responsible for
creating economic conditions for a Depression
to take hold?
• Why are the others less important?