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Unit 5 Essay 1 Why did the U. S. economy go “bust” in the late 1920’s and lead into the Great Depression ?
Economic Depression = § a sustained, LONGTERM downturn in economic activity. § Large INCREASES in unemployment; lack of availability of CREDIT § often due to some kind of BANKING or FINANCIAL crisis.
I. What caused the Great Depression ? The worst “depression” ever = massive unemployment, banks closed, homes/businesses lost, hunger(starvation), etc. Answer: ? ? “The stock market crashed”? ? Wrong – The stock market crash did NOT cause the Great Depression
What really caused the Great Depression ? “Booming 20’s” = Growing economy (new jobs, businesses) Like a great, towering skyscraper – the “Prosperity Building” However…you may notice something…
What really caused the Great Depression ? . . in the FOUNDATION ? “CRACKS” ! Weaknesses in the structure – noticed at first – but as time goes by, cracks bigger – weaknesses get worse
The Real Causes of the Great Depression 1 st Crack/Weakness: “Income GAP Grows between the RICH and WORKING Class” As 1920’s go by, amount made by the Upper Class EXPANDS, While income for WORKERS stays about the same
1 st Crack/Weakness – the “Income Gap” Interactive Notes Q&A’s 1. What is the “trend” in the graph for the “top 20%” ? What is the trend for the “bottom 20%” ? 2. Each group is compared, based on their average income in 1967 and 2002. By how much did the top 20% grow between 19672002? Bottom 20%?
The “Income Gap” Today
2 nd Crack/Weakness – “UNDERCONSUMPTION” • Workers wages do not keep up with INFLATION = • over time, money loses VALUE • Workers need RAISES to keep up with rising PRICES • but they’re not getting much in raises (income gap) • What would you do?
2 nd Crack/Weakness – “UNDERCONSUMPTION” • Workers BORROW more money (credit), but eventually…. . • Workers cannot BUY as much as the factories are making (producing) = • UNDER-CONSUMPTION LEADS TO: 1) Factories REDUCE production (aren’t SELLING as much) 2) Businesses LAYOFF workers = more UNEMPLOYMENT
***If Workers do not (or cannot) buy GOODS or PRODUCTS = Under. Consumption slow-down in economic growth
3 rd Crack/Weakness – Low Supply of Money = Not Enough money for CREDIT: • Federal Reserve BANK (“The Fed”) • decides how much MONEY will be in supply • how much to make (PRINT) • how much to have in the ECONOMY
3 rd Crack/Weakness – Low Supply of Money = • Fed also decides INTEREST rates • In 1920’s, The Fed is worried about INFLATION • So it starts to RAISE interest rates • and lowers “SUPPLY of $$” in econ. • Result = • Less money for CREDIT • Consumers cannot buy stuff, BUSINESSES cannot grow
***Low Supply of Money Businesses cut Production Businesses LAYOFF workers “slow down” in the “CIRCULAR flow” of economy
4 th Crack/Weakness: Reduced Foreign Trade LEADS TO: 1) Factories reduced production 2) Businesses lay off workers • In 1920’s, EUROPEAN nations borrowed from US banks to Buy US GOODS • Great for USA Economy but in the late 1920’s, The Fed raises…… • INTEREST rates – • Foreigners cannot AFFORD to borrow $$ • US businesses see SALES to foreigners, decline
***Reduced Foreign Trade Businesses sell less to FOREIGNERS businesses cut production layoff workers “SLOW DOWN” in the Circular Flow of economy
Review § What is a depression? § A long period of low production and high unemployment” § What caused the “Great Depression? § 4 Cracks (weaknesses in the economy)
II. Stock Market Crash of October 1929 (Earthquake)
II. Stock Market Crash of October 1929 The Crash – when the VALUE of US company’s STOCK fell by 40 -70% --This did not CAUSE the Great Depression Why did it happen ? 1. Excessive SPECULATION = a lot of very RISKY investment in the stock market
Stock Market Crash of October 1929 Why did it happen ? 2. People buying stock on MARGIN = buying stock with only 5% down payment, the rest is BORROWED
Stock Market Crash of October 1929 What led to the Crash ? So much stock is bought “on margin” (on CREDIT) that the VALUE of shares are INFLATED (like a “bubble”), meaning that shares are not WORTH the prices
IF… Stock Values go UP § Brokers/Investors can re-pay margin loans when they SELL the Stock § Brokers/Investors PROFIT from the DIFFERENCE of the higher price for their stock
IF… Stock values go DOWN § BANKS re-call loans made to BROKER/INVESTOR. § Then brokers SELL the stock to recover as much money as possible § If…. Stock values go down MORE § PANIC § This causes people to SELL, sell, sell more stocks.
C. How did the Crash Affect people ? Only a TINY number of people speculated – so why did the Crash affect so many others? 1. $30 BILLION was lost on BLACK Tuesday people lost CONFIDENCE in the economy § Few were willing to RISK investing again. § Without that money, companies go BANKRUPT or cut back
C. How did the Crash Affect people ? 2. BANKS had speculated with people’s money 800 banks FAILED after the Crash 9 MILLION people lost all their SAVINGS consumer SPENDING drops, weakens economy
“Bubbles” in the Economy = inflated values