Aim: What caused the Great Depression and how did Western Democracies respond to this

challenge?

April 16, 2013

Causes of the Great Depression in the U.S.

A. Uneven Prosperity – By 1929, 200 large companies control 49% of American industry and the richest .1% held 34 % of the nation’s wealth. 71 percent of American families earned less than $2,500 per year.

B. Personal Debt – People now buy products through the installment plan whether they can afford them or not.

C. Too Many Goods, Too Little Demand – Rising productivity led to more goods than people could buy.

Causes of the Great Depression in the U.S.

D. Playing the Stock Market: Seen as a way to “get rich quick.”– Total imbalance between actual investment

and stock market speculation. Net investment fell from $3.5 billion in 1925, to $3.2 billion in 1929, while shares traded on the stock market rose from $27 billion to $87 billion during the same period.

– Buying on Margin – When small investors borrow money from stockbrokers to invest in stocks. When prices fall, margin buyers often have to sell their shares to pay off brokers. This could lead to thousands of people selling at once, sparking a financial panic.

The Stock Market Crash A. In September of 1929, stock market prices started to slowly

fall. Investors began to panic and pull out their money.

B. On October 29, 1929 (“Black Tuesday”), 16.4 million shares of stock were sold and prices plummeted. As a result of this Great Crash, $30 billion in wealth was lost.

C. This is the spark of The Great Depression (1929-1940).

The Effects of the Crash

A. After the Stock Market collapses, many Americans are in debt and need money fast.

The Effects of the Crash B. Bank Runs: People rush to the banks to withdraw their

remaining money. The banks were unable to pay back many of these deposits because they had given enormous loans to businesses and consumers who had lost everything in the crash. Unpaid loans and bank runs cause 11,000 banks to fail. 9 million people lose their life savings.

C. Since people have less money, they can’t buy as much. As a result, thousands of businesses and factories go under. By 1933, 25 percent of Americans are unemployed.

How does the Depression spread to Europe? A. The banks of the U.S. loaned tremendous amounts of

money to the nations of Europe through the Dawes Plan during the 1920s. As a result, the American economy and the European economies were linked.

B. When crisis hits, New York bankers demand that European countries repay their short-term loans immediately. Gold reserves flow rapidly out of Europe (especially Germany and Austria)

C. American banks stop making loans to Europe and investing in their businesses. As a result, many of their businesses collapse. Unemployment rises, banks fail.

D. The United States puts high tariffs on European goods so Americans won’t buy them. European countries start doing the same thing to protect their domestic industries. Why is this a disaster for the world economy?

Government Policies Towards the Depression

A. Orthodox economic theory felt cuts in government spending would prevent inflation. After you cut spending, you wait for the market to correct itself (Adam Smith – invisible hand).

B. John Maynard Keynes – Urged government spending, running large deficits to stimulate the economy. Ultimately the approach FDR will take with the New Deal.

Great Britain’s ResponseA. In 1931, Labour Prime Minister Ramsay MacDonald forms a

coalition government with Conservatives and Liberals called the National Government .

B. Follows a fairly orthodox approach, takes steps to end the depression: – Slash the budget, raise taxes, cut unemployment benefits, and lower

government salaries– Take Britain off the gold standard to make its goods cheaper on the

world market. – Import Duties Bill – High tariff on all imports, except those from the

empire. Hurts export industries like textiles and coal, but helps domestic industries like automobiles and electrical appliances.

C. Mixed results: Bank runs that plagued most of Europe are avoided, industrial production rises by 20 percent between 1929-1937, radicals on the right and left are not able to gain power. But unemployment remains high and the economy is still fairly stagnant.

France’s Response• Depression started later and lasted longer

in France

• Crisis encouraged political extremism: – In February of 1934, French fascists

rioted and threatened to take over the republic. Want a government similar to Hitler’s Germany and Mussolini’s Italy.

– French Communist Party looks to Stalin’s Soviet Union for guidance.

• Socialist – communist cooperation – the

Popular Front – a coalition of left-wing parties takes control of the government in the May elections of 1936.

France’s Response • Leon Blum – Popular Front’s elected leader

• Calls for massive labor reforms: – Raised wages 7-15 percent– Employers were required to recognize unions– 2 weeks vacation for all workers– 40 hour work week

• French bankers and businessmen outraged, begin pulling their money out of the country. Inflation also continues to rise.

• Popular Front dissolves in June 1937, leaving France divided.

Legacy of the Depression

• Shatters the fragile political stability of the mid-1920s, and encourages the growth of extremist groups on both the right and the left. Ultimately paves the way for fascists to gain power across much of Europe.