Causes and effects of the Great Depression

• 1929-1939- Severe economic downturn leading to deflation, high unemployment, a decline in the gross domestic product, and a rise in poverty

• Farming overproduction: After WWI, US farmers saw a decline in demand (when demand falls, price falls) to make up for lower prices, farmers produced more (cycle of deflation)

• Factories switched from making war items to consumer items --> produced more and more consumer goods (eventually demands falls)

• When demand falls, factories lay off workers--> people cannot buy things (cycle of unemployment)

• Consumerism after WWI outpaced the money people had saved

• People bought items on credit

• People bought stocks on margin (pay 10% now and the rest when your stock goes up)

• Did not plan for a future when the economy wasn't booming

• There are very few rules to regulate the stock market

• Buying on margin: lead to risky investments and inflated stock prices

• Junk stocks- fake stocks for companies that don't actually exist

• Black Thursday (Oct. 24, 1929)- panicked stockholders begin selling shares

• Black Tuesday (Oct. 29, 1929)- at that point in history- biggest one day stock loss

• During the 1920s, isolationism causes nations in raise their tariffs

• Tariff- tax on imports (makes goods from other nations more expensive than domestic goods)

• As the US starts to realize overproduction is leading to deflation, it raises tariffs even higher (Smoot-Hawley Tariff)

• Other nations respond --> led to trade war and international trade plummets

• Banks had heavily invested in the stock market in the 1920s

• When the stock market crashed in 1929, banks lost A LOT of money

• A rumor began that banks did not have $

• People rushed to the banks to take all of their $ out of the bank

• Banks had to shut down (there was no protection and people lost everything)

• People who had money began hoarding it instead of spending to stimiulate the economy

-AAA- Agricultural Adjustment Administration: paid famers to produce less

-WWII- production had to increase to make war supplies

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Effect

-Social security- money to people too old/disabled to work

-Unemployment insurance- help people who got laid off

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Effect

• 1944 (End of WWII)- Meeting at Bretton Woods Conference -

• GATT- General Agreements on Tariffs and Trade (economic alliance treaty)

  • Keep nations from setting high tariffs during economic turmoil​

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Effect - New International Finance system

• FDIC - government insures bank deposits. 

• Bank holidays- stopped people from withdrawing $

• Glass-Steagall Act- commercial banks and investment banks were separated​ (repealed in 1999)

Effect: Gov. regulation of banks/stock market

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• SEC - new agency to regulate stock market​

  • Makes sure junk stocks aren't sold

  • Can halt stock sales

  • Can investigate fraud

Effect 3: Gov. Stock market

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