SOME CAUSES OF THE GREAT DEPRESSION

THE STOCK MARKET • Stocks: A piece of a company that you get to own.

• “The stock market is an everyday term we use to talk about a place where stocks and bonds are "traded" – meaning bought and sold. For many people, that is the first thing that comes to mind for investing. The goal is to buy the stock, hold it for a time, and then sell the stock for more than you paid for it.

• Investors who hold stock for 15 years or more usually succeed in the market. Stocks are long-term investments. But there are no guarantees.”

• http://www.themint.org/kids/what-is-the-stock-market.html

• Stockbrokers: Provide a service to buyers/sellers of stocks. It is their job to sell or buy a stock with the best price available.

BEAR AND BULL MARKET AND BLACK TUESDAY

• “The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.”Investopedia http://www.investopedia.com/terms/b/bullmarket.asp#ixzz3qIxdnF00

• “The phrase "Black Tuesday" refers to the third day of the stock market crash of 1929. Black Tuesday, October 29, 1929 was the climax of the stock market panic that touched off the Great Depression. Nervous investors tried desperately to sell off their stocks and virtually no one wanted to buy shares. The prices for stocks collapsed, and it took years for the market to recover the value that it lost in those three days. The market panic set off a wave of bank closures, high unemployment, and inflation that we know as the Great Depression.”

• http://www.enotes.com/homework-help/what-does-phrase-quot-black-tuesday-quot-refer-u-s-21451

BUYING ON MARGIN AND ITS CONTRIBUTION TO THE CRASH

• “Loose stock market regulations were in place before the Great Depression, investors were able speculate (business transactions involving risks with hopes of big gains) wildly, buying stocks on margin, needing only 10% of the price of a stock to be able to complete the purchase.”

• “Leading up to the October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began. While the great rise in the stock market (from 181 points in early 1928 to 381 points in September 1929) was fueled by optimism and false hope…”

• http://www.investopedia.com/ask/answers/09/difference-between-investing-speculating.asp

• “Once the stock market crashed, millions of Americans began to withdraw their money, fearful that the banks would fail. Virtually overnight, they put thousands of banks in peril. The more money Americans withdrew, the more banks failed, and the more banks failed, the more money Americans withdrew. By 1933, more than 11,000 of the nation’s 25,000 banks had collapsed.”

• http://thegreatdepressioncauses.com/causes/

DEBT

• US Bonds: “Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government –and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.”

• http://guides.wsj.com/personal-finance/investing/what-is-a-bond/

• Foreign Debt Commission: “The United States Congress authorized the creation of a World War Foreign Debts Commission to negotiate and manage repayment agreements with Great Britain and France.”

• https://us-history-the-great-depression.wikispaces.com/War+Debt+Policies

THE GOLD STANDARD • “The gold standard is a monetary system where a country's currency or paper money has a value

directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.”

http://www.investopedia.com/ask/answers/09/gold-standard.asp#ixzz3qJFGL2xY

• “The stock market crash of 1929 was only one of the world's post-war difficulties. The pound and the French franc were horribly misaligned with other currencies; war debts and repatriations were still stifling Germany; commodity prices were collapsing; and banks were overextended. Many countries tried to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather than convert them into gold. These higher interest rates only made things worse for the global economy, and finally, in 1931, the gold standard in England was suspended, leaving only the U.S. and France with large gold reserves.

• Then in 1934, the U.S. government revalued gold from $20.67/oz to $35.00/oz, raising the amount of paper money it took to buy one ounce, to help improve its economy. As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation.”

•

http://www.investopedia.com/articles/05/030705.asp#ixzz3qJHqKXs0

THE GOLD STANDARD• “During the Depression, as revenues fell, governments trying to provide services ran growing

budget deficits. This unnerved banks and wealthy investors, domestic and foreign, spurring waves of cash-outs (“Here’s your paper money; give me my gold!”). Banks and individuals then hoarded the gold, rather than using it for making loans or new investments.

• The result was a continuing spiral of contraction. Credit was throttled, prices and wages fell (there wasn't enough money moving to sustain them), debtors were hammered (their payments were fixed as their incomes shrank), and ultimately there were widespread defaults on economic commitments (bankruptcies, inability to pay interest due, abandonment of loans, expanding layoffs).

• Gold withdrawals gutted the German financial system in the summer of 1931. When the state stopped shipments through exchange controls, the virus spread to Britain. As money evaporated from the banking system, economic activity floundered. Governments had two main options: Defend the exchange value of their currency to prevent inflation, at the price of further slowing the economy, or let the currency devalue to whatever level markets would determine, undermining exchange rates and purchasing power, in the hope that money "rightly priced" would begin circulating more fluidly.

• Germany held the mark at a fixed rate, which turned out to be the wrong strategy. Britain let the pound float, at the mercy of the market. Initially the pound fell from $4.85 to less than $4.00. Then it rose to $4.22 before dropping again to $3.91 in early 1932. Bonds denominated in pounds had lost between 15 and 20 percent of their exchange value, but British products suddenly were 15 to 20 percent cheaper to sell abroad. Such tradeoffs punished investors but advantaged exporters. More than a dozen other nations soon followed Britain in abandoning the gold standard.”

• http://www.bloombergview.com/articles/2011-12-12/the-gold-standard-and-the-great-depression-echoes

CONSEQUENCES OF EASY CREDIT

• “The Installment Plan was another name for buying on credit during the 1920's. Buying on credit is when one gives a down payment on a product to receive it, then pays small amounts over a long period of time to pay it off instead of paying the full price up front….

• …in the 20's, people bought stock this way in addition to other smaller goods.

• This complete disregard for the future is one of the underlying causes of the Great Depression. People bought stocks on credit and then sometimes couldn't pay for it one month; causing businesses and banks to lose money to an unrestricted economy.”

• http://us-history-the-great-depression.wikispaces.com/Easy+Credit

OVERPRODUCTION AND UNDER-CONSUMPTION

• “Over production of goods

• The efficiency of the production line and new farming technology both contributed to the over production of goods. Ford was producing so many cars that he could lower his prices more than any other company. But the amount of production he had gave him a lot of left over cars. This made him shut down his plants in 1931. He still has cars to sell, even when he has shut down his plants

• The new technology in farming made each harvest much more successful. More and more farmers produced more goods. Since they produced so many crops, they had to lower the prices. The farmers ended up losing money on the crops they harvested because there was an over supply.

• Under-consumption

• Many things contributed to the under-consumption of goods. The production line produced a lot more goods, but people could not afford to buy them. The production lines kept producing while the people were not buying. This created extra goods, in turn, lowering the prices of the goods. Now the companies were losing money on by making their products. For example, it takes farmers $1 to harvest a head of lettuce. But since there is so much of it, they have to lower their prices to 30 cents. Now it takes the sale of 3 heads of lettuce to pay for the harvest of one. ”

• http://bigmateo0.tripod.com/id1.html

DEFLATION & INFLATION• “Inflation

• Inflation refers to a general increase in the price of goods and services. This occurs when demand for these items grows faster than the supply.The stock and bond markets are very sensitive to changes in the CPI (A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.) because when inflation rises, purchasing power is eroded. The ensuing drop in consumer spending has a negative effect on stock and bond prices.

Deflation

•Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit.

• The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

This is the opposite of inflation, which is characterized by rising prices (do not confuse deflation with disinflation, which is simply a slowing of inflation). To many economists, deflation is more serious than inflation because deflation is more difficult to control.”

http://www.investopedia.com/exam-guide/cfp/economics-time-value/cfp6.asp#ixzz3qJOVSjTZ

SMOOT & HAWLEY TARIFF ACT • Tariffs: Taxes on imported and exported goods.

• “The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups, and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.

• The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.”

• http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html

FARM CRISIS • In the early 1930s prices dropped so low that many farmers went bankrupt

and lost their farms Some farm families began burning corn rather than coal in their stoves because corn was cheaper.

• Some farmers became angry and wanted the government to step in to keep farm families in their homes. The Federal government passed a bill to help the farmers. Surplus was the problem; farmers were producing too much and driving down the price. The government passed the Agricultural Adjustment Act (AAA) of 1933 which set limits on the size of the crops and herds farmers could produce.

• http://library.truman.edu/scpublications/chariton%20collector/Spring%201986/Farming%20in%20the%20Great%20Depression.pdf

DUST BOWL • “The Dust Bowl (1931-1939) was a giant dust storm that was caused by farmers who broke up the

grass which supported the dirt. The dust covered most of the Midwest and some clouds of dust that passed through the Eastern cities like New York or Massachusetts.”

• http://us-history-the-great-depression.wikispaces.com/Crisis+in+the+Farm+Sector

• The ecosystem disruption unleashed plagues of jackrabbits and grasshoppers.Plagues of jackrabbits and grasshoppers descended on the Plains and destroyed whatever meager crops could grow.

• Dust storms crackled with powerful static electricity.So much static electricity built up between the ground and airborne dust that blue flames leapt from barbed wire fences and well-wishers shaking hands could generate a spark so powerful it could knock them to the ground. Since static electricity could short out engines and car radios, motorists driving through dust storms dragged chains from the back of their automobiles to ground their cars.

• The swirling dust proved deadly.Those who inhaled the airborne prairie dust suffered coughing spasms, shortness of breath, asthma, bronchitis and influenza. Much like miners, Dust Bowl residents exhibited signs of silicosis from breathing in the extremely fine silt particulates, which had high silica content. Dust pneumonia, called the “brown plague,” killed hundreds and was particularly lethal for infants, children and the elderly.

• http://www.history.com/news/10-things-you-may-not-know-about-the-dust-bowl

• In the spring of 1934, the massive drought impacted 27 states severely and affected more than 75 percent of the country. The Dust Bowl was result of the worst drought in U.S. history.