5 Causes of the Great Depression Flashcards

Questions and Answers

What were the causes of the Great Depression? (Select all that apply)

Margin Buying (correct)

Unequal Distribution of Wealth (correct)

Buying on Credit (correct)

Stock Market Crash (correct)

Underconsumption/ Overproduction (correct)

What is buying on credit?

Buying on credit is when the bank pays for what you buy, and you pay the bank back by a certain time or you're charged more money.

Provide an example of buying on credit.

$100 (credit) - $10 (interest) = $110 total; you pay $9.17 per month over 12 months.

How did underconsumption/overproduction contribute to the Great Depression?

Changes in supply and demand led to overproduction by American farms and factories. Signup and view all the answers

What was the inequality in wealth distribution between 1920 and 1929?

The income of the wealthiest 1% rose by 75%, compared with a 9% increase for the other 99%. Signup and view all the answers

What is margin buying?

Margin buying is when an investor borrows money from a bank to buy stocks, typically putting down 10%. Signup and view all the answers

Define 'specular bubble'.

The specular bubble is the difference between the real value of an asset and what people are willing to pay for it. Signup and view all the answers

What were the events surrounding the Stock Market Crash on October 29, 1929?

On October 24, 1929, panic selling by speculators began; by October 29, the stock bubble burst, resulting in a loss of $10 billion. Signup and view all the answers

Explain margin buying using an example.

Investing $100 into a $10 share allows you to buy 10 shares; with bank loans, you can buy 100 shares. Signup and view all the answers

Study Notes

Causes of the Great Depression

Key factors that led to the Great Depression include buying on credit, underconsumption/overproduction, unequal distribution of wealth, margin buying, and the stock market crash.

Buying on Credit

In this system, banks finance purchases while consumers agree to pay back over time, often with interest.
Consumers could acquire goods without immediate funds, leading to a cycle of debt.

Underconsumption/Overproduction

An imbalance in supply and demand contributed to the economic downturn.
Significant production levels in farms and factories were not met with corresponding consumer demand.

Unequal Distribution of Wealth

From 1920 to 1929, the income of the wealthiest 1% increased by 75%, while the remaining 99% saw only a 9% increase.
Over 70% of families earned less than $2,500 annually, insufficient for a decent living.
Many families couldn't purchase common household items, highlighting the disconnect between production capabilities and consumer purchasing power.

Margin Buying

The 1920s saw an increase in stock market investments, often using margin buying, which required only 10% initial payment.
The system thrived as long as stock prices rose, but when prices plateaued and then dropped around 1927, it led to significant financial losses.

Specular Bubble

This term refers to the disparity between an asset’s real value and what investors were willing to pay.
Speculation drove prices up until the market eventually could not sustain them.

Stock Market Crash

On October 24, 1929, a wave of sell orders by nervous speculators triggered panic selling, resulting in a $3 billion loss.
Following temporary price rallies due to intervention by bankers, the market collapsed on October 29, 1929, leading to a $10 billion loss.
From the peak in 1929 to the low in 1933, the market lost approximately $69 billion in value.

Description

Explore the key factors that led to the Great Depression through these flashcards. Each card provides concise definitions and explanations for critical economic concepts such as buying on credit and stock market crash. Perfect for students and history enthusiasts looking to deepen their understanding of this pivotal period.