Causes

Background

The 1920’s was a prosperous time for some but not for everyone.

Although the nation’s wealth grew by billions it was not distributed evenly. The 1% saw a 75% salary increase while the 99% only saw a 9% salary increase.

80% of Americans had no savings

During the 1920’s Installment Payment became popular: “Buy now, Pay later”

1) Stock Market Crash of 1929During the 1920’s , many Americans began

speculating in the Stock Market

Speculating is buying risky stocks in hopes of becoming rich quickly.

Prior to Crash, stocks were overpriced due to speculation

More and more people were buying on credit

Black Tuesday, October 29th, 1929 the stock market crashed and 16.4 million stocks were dumped.

By November, investors had lost $30 billion

Led to widespread poverty and took nearly a decade to recover from.

2) Federal Reserve System

In 1907, the Stock Market Crashed for the first time as rates went down and a “panic selling” of stocks sent the Stock Exchange into a downward spiral.

The nation faced recession and banks began to close

With no central system to inject money back into the economy, a wealthy investor named JP Morgan realized that by providing low interest loans, he could stabilize the economy as well as make a profit

Morgan rallied those who had cash to spare and together they returned capital to banks lacking in funds

In 1913 Congress established the Federal Reserve System in order to prevent the need for financial figures to restart the economy in the case of another crash .

In the Crash of 1929, the Federal Reserve took an opposite strategy and decided to cut money supply by nearly a third.

This harsh reaction may have occurred in order to refuse help to careless banks and to encourage banks to be more responsible.

The Federal Reserve’s strategy only made matters worse as with the lack of funds, it was almost impossible for any bank to make a recovery.

3) War Debt and Tariffs

At the end of WW1, European nations owed the US about $10 billion dollars( $115 billion today) but had no way of paying it back

The US insisted on being paid back which later resulting in European nations unable to buy goods from the US, therefore hurting international trade.

In 1922, US passed the Fordney-McCumber Act which instituted high tariffs on industrial products

Nations refused to trade which resulted in decline of World Trade.

4)Overproduction

Companies were producing massive amounts of products but worker’s wages remained low

Not many workers could afford to buy the factory output due to their low wages

Surplus could not be sold internationally due to the tariffs.

5) 1928 Presidential Election

Democratic Al Smith vs Republican Herbert Hoover

Hoover, having fame for feeding starving Europeans after WWI, won the election.

Hoover’s winning platform was based on continuing the prosperity of the ‘20s.

Belief in self-reliance would later effect his decisions on how to deal with the Great Depression as he adopted a “Do-Nothing attitude”

“ I do not believe that the power and duty of the General Government out to be extended to the relief of the individual suffering… The lesson should be constantly enforced that though the people support the government, the government does not support the people.” –Herbert Hoover (1930)