Causes of the Great Depression

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Jackie-ate potatur

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  • The Great Depression was a period of major unemployment, economic depression and social issues that rocked the globe during the late 1920s and 1930s
  • The Wall Street Crash of 1929 is considered the trigger cause - the event which set everything in motion
  • Share

    A certificate which gives the owner a financial stake in a private company. These are traded at stock exchanges.
  • Wall Street

    The name for the New York Stock Exchange, based in Wall Street, New York City. Stock exchanges existed across the US. The New York stock Exchange is the largest and most important.
  • Communist
    A person who believes in the common ownership of property, land and business. Communists were opposed to the type of capitalist society that existed in the United States. Many communists were atheists, who did not believe in God.
  • Bear market
    A period when share prices fall.
  • Bull market

    A period when share prices go up
  • Federal Reserve Board
    The US equivalent of the Bank of England, created in 1914. This acts as the central bank of the USA, and the head of the board is appointed directly by the president. Central banks have the important role of helping set the rate of interest at which money can be borrowed, in order to limit or encourage the amount of lending within the economy. The Federal Reserve Board is also responsible for providing guidance on how to regulate the US economy, including the banking industry. In the 1920s only one third of US banks followed the Federal Reserve Boards regulations.
  • 5 main causes of the Wall Street Crash
    • Bull market
    • Overproduction
    • Wall Street Crash
    • Weakness of the US banking system
    • Land speculation
  • Land speculation

    1. The economy was already beginning to falter by the mid 1920s
    2. In 1926, land speculation had caused economic ripples, centred on Florida
    3. As wages rose, the idea of owning a home in Florida became attractive
    4. Industrialists such as Coleman Du Pont, bought up land in Southern Florida and sold it prosperous northerners who faced cold winters
    5. Florida = more accessible due to car, so 100s drove to Florida to buy their dream home
  • Land speculation continued

    1. Area around Miami went through a land boom – 1000s of homes built at Miami Beach, Palm Beach and Coral Gables (population grew from 30,000 to 130,000 1920-25)
    2. By 1926, land boom had collapsed
    3. Lack of infrastructure, like railways and roads limited development
    4. Criminals/swindlers sold land in the non-existent town of Nettie – gave the land boom a bad name
    5. September 1926 – major hurricane damaged southern Florida (400 dead, 50,000 jobless) – dissuaded many form investing
  • How did the collapse of land speculation lead to the collapse of the economy?
    The collapse of the land boom led to economic ripples that contributed to the overall economic downturn
  • Bull market

    1. There was huge over-speculation on future share prices
    2. USA had had 'bear markets' in the past
    3. But there was a belief that the bull market of the 1920s would never end
    4. Share values on NYSE doubled 1925-29 from $34b to $64b
    5. Americans could get rich quick through shares
    6. By 1929 many Americans borrowing money to buy shares, hoping to pay back the loans when they sold the shares at a higher price
    7. Once the Wall Street Crash happened the situation unravelled
  • How did the bull market lead to the collapse of the economy?
    The over-speculation and borrowing to buy shares that was fuelled by the bull market contributed to the eventual economic collapse
  • Overproduction

    1. America had a major issue with overproduction. Many businesses were producing far too much – they didn't have the customers willing to purchase their goods.
    2. The gap between the richest and poorest Americans had been widening during the 1920s
    3. Top 5% wealthiest accounted for 33% of all American wealth, whereas the poorest 40% only accounted for 12.5%
    4. The low taxation, and limited regulation policies of the Republican government had created a society and economy that lacked spending power – money simply wasn't distributed enough to allow for enough customers.
    5. Late 1920s, US reached limit on need for goods (only so many vacuums needed)
    6. Fordney-McCumber Tariff (taxes on imports) meant that foreign markets taxed US goods in return, limiting the opportunity for American businesses to sell their good abroad (export)
    7. Potential markets were also lost due to communist take over
    8. 1920-29 – US manufacturing capacity rose by 50%, but exports only went up by 38%
    9. Hire-purchase also undermined buying – people could only afford to pay for so many items on credit
  • How did overproduction lead to the collapse of the economy?
    The lack of sufficient demand and purchasing power to absorb the high levels of production contributed to the economic downturn
  • Wall Street Crash
    1. Thursday 24th October 1929 known as 'Black Thursday' - 12.8m shares changed hands ('sold') on Wall Street Stock Exchange (largest in the world)
    2. By the end of the day, share values had dropped nearly $4b
    3. The following Tuesday, 16m shares changed hands at low prices
    4. By the end of November, nearly $30b had been lost on the stock exchange
    5. Severe economic slump followed, but not a direct result of the WSC
    6. October – December 1929 – unemployment rose from 500,000 to 4m
    7. Companies closing down as a result of share value and bank collapse
    8. Many thought this was temporary
    9. WSC began the biggest depression in US and world history
    10. Average real wages fell by 16% (1929-31), GNP fell 29% (1929-33)
  • How did the Wall Street Crash lead to the collapse of the economy?
    The crash in share prices and loss of wealth led to a severe economic downturn, with rising unemployment, business closures and a broader economic depression
  • Weakness of the US banking system
    1. 1927 Federal Reserve Board kept interest low (3.5%) this fuelled borrowing from banks
    2. However much of the bank investment went in to shares and property which did not help to grow the economy
    3. Additionally, banks were providing 'call loans' – money to individuals for shares but they rarely conducted checks on peoples ability to repay
    4. This system only worked if the prices of shares went up
    5. The Wall Street Crash exposed 1000s of bad debts to banks
    6. This was made worse due to lack of bank regulations – Only 1/3 of banks followed rules set by Federal Reserve Board, 2/3 operated without regulations = increased risk
    7. Situation made worse as there were 1000s of different banks
    8. Banks, as the backbone of the economy, were destabilised by the WSC
    9. WSC caused the recall of thousands of loans which people couldn't pay – forced businesses to close and huge unemployment figures
    10. Extreme banking reform required to help stabilise the situation
  • How did the weakness of the US banking system lead to the collapse of the economy?
    The instability and lack of regulation in the banking system, which was exposed by the Wall Street Crash, contributed significantly to the broader economic collapse
  • How could you also blame banks for the Wall Street Crash too?
    The reckless lending and lack of regulation in the banking system fuelled the speculative bubble in the stock market, which then burst in the Wall Street Crash
  • Ranking the 5 causes of the Great Depression in order of importance
    • Weakness of the US banking system
    • Wall Street Crash
    • Overproduction
    • Bull market
    • Land speculation