UNIT EIGHT:THE GREAT DEPRESSION AND WORLD WAR II LESSON 30 WHATDUNNIT? THE GREAT DEPRESSION MYSTERY FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY ©NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 351 LESSON 30 WHATDUNNIT? THE GREAT DEPRESSION MYSTERY LESSON DESCRIPTION already declared “bank holidays” — suspending The students read a brief passage posing the all banking activity to prevent bank failures. basic question about the Great Depression: Why The Federal Reserve System had been estab- did it happen? A brief simulation activity shows lished in 1913, in part to prevent bank failures how unemployment in one part of the economy by lending reserves to banks that were experi- can lead to unemployment in other parts of the encing unusually high cash withdrawals. On the economy. With the aid of a visual, the teacher eve of the Depression, the first concern of the 12 compares the simulation to the business cycle. regional Federal Reserve banks should have The teacher then uses another visual to intro- been the overall health of the financial system. duce the role of bank failures in intensifying the But many of the regional presidents, formerly depression, and the students fill out a worksheet commercial bankers, hesitated to lend to banks that helps them understand how the decisions of in their districts that they considered unsound. foreign and domestic banks, the Federal Reserve Many banks thus were allowed to fail, and the System and individual depositors brought about failures caused fear among account holders in the collapse of the American banking system in sound banks, prompting them to panic and with- 1933. draw their funds. MYSTERY The Federal Reserve System also raised inter- est rates in late 1931, which discouraged busi- The American economy went from unprece- ness borrowing and contracted the money supply. dented prosperity in the 1920s to unprecedented Banks keep some of their reserves in the form of misery in the 1930s. It was an extraordinary bonds. When interest rates rise, the prices of reversal. Why did it occur? bonds fall; banks then hold assets that have declined in value, yielding less revenue when ECONOMIC HISTORY banks sell them to raise funds to pay depositors. The Great Depression of the 1930s began The problem the Federal Reserve Banks faced with falling demand for durable and investment in the 1930s is that they were obliged to follow goods in mid-1929, followed by a slowdown in the rules of the gold standard. When gold began business activity. The stock market crash of to flow out of the United States as a result of October1929 reduced the assets held by many financial instability in foreign countries, the investors and consequently their willingness and reserve banks raised the interest rates that their ability to buy. Under normal circumstances both member banks had to pay to borrow reserves. the economy and the stock market would proba- This encouraged foreign governments and indi- bly have recovered quickly. Most politicians and viduals to buy American bonds rather than economists, in fact, agreed at the time that exchanging their dollars for American gold. But “prosperity was just around the corner.” it also raised interest rates throughout the But demand continued to fall, business activi- American economy, which discouraged spending ty continued to decline and unemployment rates by American businesses. continued to rise until, by March1933, unem- ployment stood at 28 percent of the labor force. CONCEPTS The primary cause of this continued decline was • Business cycle the dramatic rise in bank failures, which led to a significant reduction in the amount of money • Demand that was available to buy goods and services. • Federal Reserve System Between 1929 and 1933 there were more than 9,000 bank failures in the United States. When • Income Franklin Roosevelt took office, 38 states had 352 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY ©NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY WHATDUNNIT? THE GREAT DEPRESSION MYSTERY LESSON 30 • Money PROCEDURE • Multiplier 1. Tell the students that this lesson will focus on the causes of the Great Depression. OBJECTIVES Distribute Activity 30.1. Invite the class to speculate on explanations of the mystery. Students will: 2. Explain that most economists agree that 1. Analyze the relationship between decreases the Great Depression began with a reces- in consumer spending and unemployment. sion caused by a fall in spending. Randomly 2. Describe the multiplier effect that comes distribute Occupation Cards made from into play when workers who lose jobs Activity 30.2 to the students. Tell them not spend less, reducing total spending and to reveal their occupations to others. causing other workers to lose jobs. 3. Tell the students that U.S. prosperity in 3. Analyze the gold standard as it con- the 1920s had been based to a large extent tributed to bank failures and a reduction on the sale of houses and automobiles. in the money supply. Consumers for the first time could buy houses and cars on the installment plan, CONTENT STANDARDS and they were eager to do so. These pur- chases created jobs for workers who built Economics homes and cars, the furniture and appli- • A nation’s overall levels of income, employ- ances that went into new homes and the ment and prices are determined by the steel and other materials that were used to interaction of spending and production produce cars. Jobs were also created as decisions made by all households, firms, business firms built new plants and bought government agencies and others in the new equipment to produce what consumers economy. (NCEE Content Standard 18) wanted. Governments built paved roads for the new automobiles and electric plants • Federal government budgetary policy and and water and sewage facilities to service the Federal Reserve System’s monetary the new households. The prosperity of policy influence overall levels of employ- workers in all these industries allowed ment output and prices. (NCEE Content them to spend a lot of money, thus provid- Standard 20) ing income to other workers — income History which they in turn spent to buy other goods and services. Economists call the • The causes of the Great Depression and spread of such new spending a multiplier how it affected American society. (Era 8, effect — one person’s spending becomes Standard 1, National Standards for income to another person, who in turn can History) spend more and add to the income of oth- ers. TIME REQUIRED 45 Minutes 4. But the multiplier effect can work in reverse. By the late 1920s, U.S. business activity began to slow down as the econo- MATERIALS REQUIRED my entered what began as a mild reces- • A transparency of Visuals 30.1, 30.2 and sion. Sales of homes and new automobiles 30.3 began to fall. Business firms slowed their • A copy of Activities 30.1 and 30.3 for each expansion of new plants, causing workers student who made a living building plants or pro- ducing machinery to lose their jobs. • An Occupation Card for each student, made from Activity 30.2 5. Tell the students who received Occupation FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY ©NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 353 LESSON 30 WHATDUNNIT? THE GREAT DEPRESSION MYSTERY Cards in the machinery–producing indus- will be reemployed. Tell the autoworkers try to stand up. They are now unemployed and steelworkers to sit down. Car dealers because business firms are ordering less will hire new salespeople. Tell the car machinery. salespeople to sit down. Furniture wears out, too, and eventually some people decide 6. Tell the students in car sales to stand up. to buy new furniture. Tell the furniture They are now unemployed because sales of makers and furniture salespeople to sit new cars are down. The car dealers who down. These people are back on the job. lay them off also cancel their orders to automobile factories. Owners of these fac- 10. As more and more people gain employment tories fire autoworkers. Tell the autowork- again, some feel they can afford new ers to stand up; they are now unemployed, homes. Tell the housing construction work- too. Auto factories in turn cancel their ers to sit down. People begin to buy higher- orders for steel and other raw materials priced food in grocery stores, to eat in used to make cars. Tell the steel workers restaurants and to buy new clothes. Tell to stand up — joining the ranks of the the grocery store workers, restaurant work- unemployed. ers and clothing salespeople to sit down. As purchases of various new products rise, 7. Since sales of new houses have also gone business firms expand production and buy down, tell the housing construction work- new machinery and equipment. Tell the ers to stand up. Furniture sales are also machinery producers to sit down. These down. Tell the furniture sellers to stand people are back on the job. By this time, up. Furniture stores reduce orders to everyone in the class is sitting. furniture factories. Tell the furniture workers to stand up. All these people are 11. Explain that the downturn beginning in out of work. July 1929 was typical of a business cycle. Display Visual 30.1. A slowdown in busi- 8. Ask the students who are still seated to ness activity (a recession) begins with a look around at all the people who are fall in demand for durable goods. Durable unemployed. The jobs of students who are goods are goods that are relatively expen- still seated are now in danger too. People sive and don’t wear out quickly, such as who are unemployed don’t buy new cars or refrigerators.