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 policy
Day 3
 Overproduction
 Inequality
 Speculation
 Trade
Day 1
Day 2
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 sell
 Five consumers, with budgets of 20 cents each
ROUND 2
 Two producers with five golf pencils each
 Five consumers with budgets of 20 cents each
ROUND 3
 Ten producers with ten pencils each
 Three consumers, with budgets of 5-25 cents each
ROUND 4
 Two producers with five golf pencils each
 Ten consumers
 Eight consumers get two cents each
 Two consumers get 50 cents each
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…
SO WHAT DOES THIS HAVE TO DO WITH THE
DEPRESSION?
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
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
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 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
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
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
STOCK MARKET GAME, ROUND 1
 AT&T: $20
 Ford Motors: $25
 General Electric: $15
 Montgomery Ward: $12
 US 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 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
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?
Inflation
 If 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 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
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
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
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