Overview
This lecture summarizes the causes, effects, and lessons of the Great Depression, emphasizing the significance of history in understanding financial crises.
The Roaring Twenties: Setting the Stage
- Post-World War I America entered a period of economic prosperity known as the Roaring Twenties.
- Economic growth was fueled by returning soldiers, delayed projects, and more women in the workforce.
- Consumer goods like vacuum cleaners, electric washing machines, and automobiles became widespread.
- Banks gave out easy loans, enabling more people to buy products and invest.
Stock Market Boom and Speculation
- Stock market investing became extremely popular among all social classes in the 1920s.
- Many individuals took out loans to buy stocks, increasing financial risk.
- Banks also invested heavily in the stock market, often using customer deposits.
- Stock prices rose rapidly, outpacing company production and actual economic growth.
Warning Signs and the Market Crash
- By late 1920s, production and wages slowed while interest rates increased, but investors largely ignored economic issues.
- Investor uncertainty grew, leading to panic selling on October 24, 1929 (“Black Thursday”).
- Black Tuesday followed, with the market losing $40 million and many stocks becoming worthless.
- The Dow Jones lost 90% of its value over three years, and widespread losses devastated personal savings and banks.
Consequences of the Great Depression
- Banks failed, with depositors losing most of their savings.
- Unemployment peaked at 24.9%, and poverty, soup kitchens, and homelessness became widespread.
- The financial crisis affected people globally, not just investors and banks.
Long-term Impact and Lessons Learned
- The Great Depression contributed to political changes worldwide, including the rise of Nazi Germany.
- U.S. government responded by creating the FDIC and SEC to protect bank deposits and regulate markets.
- The crisis demonstrated the dangers of speculation, excessive debt, and unregulated financial markets.
Key Terms & Definitions
- Speculation — Risky investment in stocks or assets in hopes of quick profits.
- Black Thursday / Black Tuesday — Key dates in October 1929 when mass panic selling triggered the stock market crash.
- Dow Jones — A stock market index representing major U.S. companies, used as an economic indicator.
- Great Depression — The most severe global economic downturn of the 20th century, lasting through the 1930s.
- FDIC — Federal Deposit Insurance Corporation, protects bank deposits.
- SEC — Securities and Exchange Commission, regulates stock markets.
Action Items / Next Steps
- Review the causes and consequences of the Great Depression for upcoming assessments.
- Read about the formation and purposes of FDIC and SEC in assigned textbook sections.