Notebook Page 47

The first marker was overproduction and deflation in the agricultural market following World War I

As the war ended, and Europe recovered, the 1920s saw a substantial decrease in agricultural demand

The large surplus in agriculture caused prices to drop; this phenomenon is known as deflation

To attempt to make more money, American farmers

INCREASED production, and reduced the price of food

This decreased their profits further, and many began to declare 

bankruptcy and default on their loans for equipment and land

This trend of overproduction soon crept into the industrial and commercial markets

As consumers acquired more material goods and debt, the demand 

for new manufactured goods declined in the mid-late 1920s

Left with surpluses, prices dropped, and deflation occurred in the industrial sector

To survive, many businesses laid off workers, which increased 

unemployment and caused another decline in demand

Additionally, buying on margin throughout the 1920s caused stock prices to become inflated

In October 29, 1929—a day known as Black Tuesday—stock prices began 

to plummet as investors were not willing to pay such high prices for stocks 

As the prices soared, shareholders lost money on their stocks due to 

the decrease in demand, AND many still had debt from buying on margin

Unable to pay loans, individuals and businesses began to declare bankruptcy

Additionally, since banks were also invested in the stock market, banks lost money, and, 

combined with the loss of revenue from bankruptcy claims, many banks began to shut down

As banks began to close, people flocked to withdraw their savings in a nationwide bank run

Roughly 1/3 of banks began to fail while the Federal Reserve—the central bank of the 

United States—failed to act by lowering interests rates or injecting money into the economy

As a result, a bank failure chain reaction began as banks closed due to a lack of funds

Without loans, individuals and businesses could not keep the economy going, 

and economic activity plummeted as jobs were lost and foreclosures began

This left the economy unable to recover; more jobs were lost, and unemployment 

surged to over 25% by 1933, and the Depression itself spread to Europe and Asia

Many economists blame a lack of demand, while others blame the Federal Reserve’s 

lack of response for turning a short recession into a disastrous decade-long depression

Before the 1930s, governments in Western economies had played a minimal role

Usually the only government intervention pro-capitalist:

• Preventing monopolies (maintain competition)

• Stopping union activity

• Giving contracts to private companies 

However, after the Great Depression, the world economy experienced an untold amount of 

unemployment, poverty, and misery; leaders who remained laissez-faire quickly lost popularity

To get the economy on track, many governments attempted a new theory of economics: Keynesian Economics 

Posited by John Keynes, it asserted the government could help the economy recover by 

creating demand through public works projects and state jobs with tax and loan money; 

this in turn would spur consumer spending, and restart the capitalist wealth creation cycle

The change in policy is referred to as interventionism, as the state directly intervenes in the economy

Two examples of Keynesian economics were the economies of the

US under Franklin Delano Roosevelt and Hitler’s Nazi Germany

In the US, FDR issued his New Deal, which drastically increased state intervention

More public works projects were started, as well as social programs like 

welfare, Social Security, food stamps, and state-run power companies 

Historians generally agree that the New Deal did not resolve the Great Depression; it did however, begin 

a trend of increased government intervention in the lives of citizens and realigned American political parties

In Germany, Hitler and the Nazi Party geared production towards infrastructure and military production

The state-funded infrastructure projects (like the Autobahn) and military production helped provide income 

to many Germans; this money was spent or saved in banks, and the economy began to recover in the 1930s

While FDR’s New Deal did not effectively result in recovery, Nazi Germany’s [pre-]wartime economy made a complete economic turn around; the US would recover later once it too transitioned to a wartime economy during World War II