Causes of the Stock Market Crash

& Great Depression

CAUSES• Wealth is unequally distributed among the population• Many people go into debt on installment plans• Old and decaying industrial base makes U. S. industry less competitive• Industry and agriculture overproduce• Government pursues unsuccessful economic policies• Stock market crash leads to financial panic

The GreatDepression

EFFECTS• People suffer widespread unemployment, hunger, poverty, and homelessness• Industrial and farm production falls• World economic crisis develops• Democrats win victory in 1932• Roosevelt initiates the New Deal

Troubling Economic Signs in the Late 1920’s

• Artificial prosperity (war boom) hid the weaknesses of many key American industries until the late 1920’s.

• Old Industries (textiles, steel, railroad) & New Industries (automobile, consumer goods) all suffered from competition, lack of demand, and new technology.

• The decline in the key industries had a trickle down effect on the rest of the nation’s industries.

• Postwar = demand for farm products declined by 50%. To compensate for lost income, farmers boosted production with the hope of selling more crops (increase in supply, lowered demand & price).

• By the late 1920’s, American’s bought less because of rising prices, stagnant wages, unbalanced distribution of income, & too much buying on credit created an economy that was ripe for depression.

Causes of the Stock Market Crash• October 29th 1929, “Black Tuesday” the bottom fell October 29th 1929, “Black Tuesday” the bottom fell

out and 16 million shares of stock were dumped. out and 16 million shares of stock were dumped. During the last week of October 1929, the Stock During the last week of October 1929, the Stock Market lost 30 billion in stock value (= the same Market lost 30 billion in stock value (= the same amount of money the U.S. spent on WWI). amount of money the U.S. spent on WWI).

5 reasons the Stock Market Crashed

1. Investors were speculating stocks.

5 Reasons the Stock Market Crashed

2. People bought stocks on margin.

5 Reasons the Stock Market Crashed

3. Huge selling by brokers caused stock prices to fall.

5 Reasons the Stock Market Crashed

4. Regular investors began to panic and sell their stocks

5 reasons the Stock Market Crashed

5. Banks ran out of cash reserves when stockbrokers couldn’t pay them back.

Causes of Great Depression (1929-1941)

• The Stock Market crash did not cause the Great Depression, but made the collapse of the economy & the Depression more severe.

1. Depressed farmers & industries

2. Uneven wealth distribution– Rich got richer & common man’s wages

decreased in 1920’s.– Caused lack of consumer buying power to keep

up with goods being produced.

3. Errors in the monetary policy– Errors in Govt handling of economy after crash, Federal

Reserve System followed a restrictive policy about how much money would be allowed in circulation.

– Policy dried up credit & didn’t allow enough money in circulation to boost economy.

4. Decline in Foreign Trade

– Our banks offered help to European countries after WWI, funds got low & we couldn’t lend Europeans money = Europeans couldn’t buy our goods.

– 1930, Congress passed Hawley-Smoot Tariff Act, to protect U.S. from European competition.

– High tariffs caused Europeans to buy less American goods, killed trade and American business, and led to worldwide under-consumption.

5. Herbert Hoover’s response to the Depression– He did nothing!– Elected in 1928, encouraged business leaders to

voluntarily assist with effort to strengthen industry (hands-off approach).

– Provided inefficient legislation to help farmers.– Believed Federal Government & State Governments would

get in way of economy if they got involved.

FDR wins the election of 1932

And saves the day by promising a “New Deal”!