Great Depression Flashcards
How did the lifestyle of the 1920’s affect the stock market crash and subsequent GD?
people were living lives that they couldn’t afford. people were borrowing more money than there was to borrow, so the stock market crashed.
What is the difference between a bull and bear market?
a bull market is up. money is being made (consumers)
a bear market is down. money is NOT being made
Describe the poverty rate and the income gap during the GD and compare it to today.
the poverty rate was higher than it is today
How do banks work?
they lend the same money out that people deposit in order to make a profit (in the form of interest) and generate economic activity (so people can start businesses)
What are cash reserves and why are they important?
the amount of money (or percentage) that banks have to keep on hand in their vault so they can meet the needs of their customers who need their money
How does a mortgage work (use principal and interest rate to explain)?
the loan the bank gives you when you buy a house
Define foreclosure.
when you can’t pay your mortgage and the bank comes and takes your house away from you(since you can’t pay the loan back).
What does speculation mean, in reference to the stock market?
you are buying stock only to make a profit and not because you think the company is a strong company. you are only buying the stock to turn around and sell it to make a profit
What does it mean to buy stock on margin?
to buy stock on credit
What caused the GD?
Banks loaning more money than they had to loan.
Describe the difficulties faced by farmers, migrant workers, bankers, companies
farmers faced decreasing prices for their goods as a result of oversupply and then couldn’t pay their mortgage, so went into foreclosure and often laid off employees. migrant workers couldn’t find jobs so they would move from place to place to do odd jobs and often were living in their cars or shacks. bankers saw many of their loans not being paid and therefore could not issue more loans and often went out of business. companies had to lay off workers, slow production and often went out of business
What was Hoover’s reaction to the GD?
He did not react, which led to him not being re elected
What economic philosophy and political party did Hoover subscribe to?
republican- believed the government should not be very involved in the economy.
What is Rugged Individualism?
Hoover/Republican idea/advice for Americans to just keep working really hard because they didn’t believe the government should have to help people out. they should do it on their own
What was the unemployment rate during the GD?
25%
Describe the spiral of doom.
Overproduction leads to lower prices, layoffs, foreclosure, decrease in consumer spending, increase in borrowing, increase in tariffs, increase in interest rate, continued bank closures, more layoffs, etc. review the chart we did in class
How does consumer spending impact the economy?
66% of the economy runs on consumer spending
How does inflation and deflation impact prices of goods?
inflation increases prices of goods and deflation leads to a decrease
How was the global economy affected by the GD?
worldwide depression; global trade fell; tariffs went up
What is a tariff and how did tariffs contribute to the GD?
tax on import; can’t sell goods abroad; other countries retaliate
Why is free trade important?
so countries don’t face an oversupply and lower prices
What is the Federal Reserve and what does it do?
Government agency created in 1913 under Woodrow Wilson that regulates banking and money supply. It makes loans to private banks, prints currency, and decide when to raise or lower interest rates.
How does the psychology of Americans create a panic in the financial system?
because the system is inherently unstable (not enough money to go around), when Americans panic, they begin to pull their money out of the system, which leads to bank runs or stock market decline. sometimes these panics are started by nothing more than a rumor that makes people panic.
How long did the GD last?
1929- end of WWII
Why did some Americans move to the Soviet Union during this time?
they thought they would have better opportunities and the USSR had a very low unemployment rate
Who did Americans blame for the GD?
themsleves
Why did some Americans think capitalism had failed?
it looked as though the system was going to collapse
What/who caused the Dust Bowl and what impact did it have on the nation and its people?
Government policies that encouraged people to settle and farm land that should never have been farmed in the first place led to black blizzards and dust storms that often turned the land to desert.
Why was FDR’s personality a good fit for the nation when he took office?
reassuring and optimistic, he took action immediately and got the government involved
What economic philosophy and political party did FDR subscribe to?
Democrat -increasing government intervention in the economy
What is a command economy and what are its limitations?
(not good)
when the government controls the entire economy and there are no private businesses; it is inefficient and often corrupt and it lacks innovation and incentive
What is laissez faire capitalism and what are its limitations?
when the government doesn’t get involved at all and individuals are allowed to operate in a free market and do basically whatever they want; leads to poor working conditions, income inequality, poor products for consumers, monopoly, lack of competition
Why did FDR refer to his policies as “The New Deal?”
The “New Deal” was the government was going to force companies to abide by new government regulations and those regulations were going to be enforced. the government was also going to insert safety nets for citizens
How did FDR help banks?
banking holiday to stem the panic; sent currency from the Fed to make sure banks could meet the needs of those who wanted cash
What were Fireside chats and what impact did they have?
FDR speaking directly to the American people by radio to calm them down and explain what was happening and his plan
Describe unemployment insurance, the FDIC, social security, and farm subsidies.
when you lose your job, you can apply to get a monthly amount from the government for 18 months to try and help you pay your bills; FDIC insures bank deposits; social security is amount of money workers have to give to the government from their paycheck so they can get some of it back after they retire; farm subsidies are when the government pays a farmer to produce a certain good or not to produce something (so the price goes back up)
What is the SEC?
Securities and Exchange Commission -enforcement agency of the US gov’t to punish companies for breaking the rules
Who was Dorothea Lange, who employed her, and what impact did she have on America?
photographer during GD, government employed her through the WPA and she documented what it was like
What other safety nets were put in place by FDR?
Fair Labor Standards Act, and all other programs that were permanent and we still have
What does it mean to short a stock
buy an option that lets you make money if the stock price falls
What parallels are there between the GD and the 2008 recession?
too much borrowing, income inequality, lack of regulations or enforcement
What is deregulation and why did it have an impact on the 2008 recession?
when the government relaxes the rules and takes away some of the regulations; companies then take advantage and participate in riskier behavior that could destabilize the economy
What are subprime loans?
crappy loans that should not be given to people because they most likely can’t repay them
What is the shadow banking system?
when people put their money in hedge funds and derivatives and can avoid regulation
What is a credit crunch?
when the economy starts to tumble and many people can’t pay back their loans, banks don’t feel comfortable loaning people any money because even though they might be a good candidate for a loan, they don’t have enough cash reserves or confidence to lend $ out
What is the difference between a recession and a depression?
recession is when economic activity falls for 2 consecutive quarters and a depression is when it continues to fall
What was the bailout, or TARP program, and was it successful?
the bailout (officially called TARP) was when the government gave taxpayer money to big banks and other companies to prevent them from going bankrupt; helpful at saving the system from collapse but unfair for regular Americans who didn’t make those risky decisions in the first place