WHERE DID ALL THE MONEY GO? The Great Depression Mystery
This lesson printed from:
Posted April 27, 2004
Author: Council for Economic Education Technology Staff
Posted: April 27, 2004
Updated: January 4, 2007
In this lesson, the students read a brief passage that poses the mystery, "How did the Great Depression happen?" As detectives, they gather clues using the Internet to investigate the mystery through a series of clue sheets. In the first step they complete a retrieval chart to summarize information about the consumer price index, unemployment rate, federal spending, and US and world events that have economic and political implications. Next, working in groups, they then do additional research on the Internet focusing on information on the economic conditions of the country looking at labor, income, unemployment, government spending, and the public debt. Then you will read three articles on some of the top economic events of the century, including Henry Ford 's impact, the Federal Reserve System's role in the economy, and the stock market crash of 1929. Finally, they complete an interactive web model that demonstrates the interdependence of a market system.
- Identify conditions in the economy during the period 1920-1933 that led to the Great Depression.
- Analyze the relationship between increases and decreases in employment and consumer spending.
- Trace the ripple effect in the economy that occurs when workers lose jobs.
- Explain the interdependence of the various parts of a market economy.
- Explain how the policies of the Federal Reserve System during the 20s and 30s affected the Great Depression.
During the 1920s, most people in the United States enjoyed prosperity.
But the affluence of the Roaring Twenties began to evaporate in 1929. By 1932, 12 million people were out of work.
The American economy went from unprecedented economic growth in the 1920s to unprecedented misery in the 1930s. Why?
Among the major reasons for the Great Depression included overproduction, restrictive trade policy, speculation in the stock market based on buying stock on credit, problems with the banking system, and tax policy. What began as a mild recession following a lengthy period of economic expansion soon became a depression. By the 1930s the amount of money in circulation had drastically decreased.
Activity #1 - Student Handout (PDF 8k - 1 page)
Clue Sheet #1 - Student Handout (PDF 10k - 3 pages)
Clue Sheet #1 - Teacher's Guide
Tell the students to read Activity #1. It focuses on the contrasts between the 1920s and the 1930s and poses the mystery that is central to this lesson: What caused the Great Depression? After the students read the mystery, send the students to the Almanac: History & Government website. Assign each student a five year interval (1920-1924, 1925-1929, 1930-1935). Have each student research these five years on the site and complete that section of Clue Sheet #1. Place students in groups of three, one for each time period, to share the information with one another until every student has completed Clue Sheet #1. In a class discussion, have them answer the following questions:
- What was happening to consumer prices during the 1920s? 1930s?
[During the 20s prices remained relatively stable. After 1929, they dropped dramatically.]
- Which groups would be most negatively affected by the changes in prices you identified?
[Farmers and businesses suffered because they got such low prices and were forced to leave the land, lay off workers, and many closed their businesses for good.]
- What was the trend in the unemployment rate in the 20s? 30s?
[In the 20s, the rate was fairly low, down to 1.8% in 1926, and stable. The rate jumps dramatically in the 30s.]
- Why was that occurring in the 30s?
[Income had fallen so the people had much less money to buy the goods and services businesses produced. To cut back on production, businesses had to keep laying people off. There were less jobs available, households' income decreased again and again causing additional layoffs.]
- What was happening to spending by the federal government in the 20s? 30s?
[Declined steadily during the 20s and into early 30s. Then federal spending rose significantly from 1933-1935]
- What events might explain government spending patterns in the 20s and 30s?
[WWI ended so the need for govt. spending declined sharply in the 20s. Jobs related to the production of public goods and services declined. When President Franklin Roosevelt was elected he began to use federal spending to put people back to work to increase income so that households would be willing and able to purchase what businesses produced.]
- What events occurred in the U.S. or the world that would affect peoples' lives directly or indirectly in the 20s? 30s? Explain that impact of some of these events.
[After WWI there was a wave of immigrants that came to the U.S. for work. This caused problems on the domestic front and sparked anti-immigrant feelings and policies. The punitive nature of the Treaty of Versailles caused major problems in Europe for the German economy, the U.S. wouldn't sign it, nor join the League of Nations. International trade was disrupted. During the decade of the 20s, the punitive nature of the Versailles Treaty and the competing philosophies of the socialists, communists, and fascists led to increasing unrest in Europe. The 1920s and 30s saw a great deal of innovation and inventions that made many new goods and services available. . With the developments in the communications field and in entertainment, the seeds of major new industries began that changed the way people relate and what they knew about areas other than their own location. Medical discoveries increased people's attention to health and longevity and spawned other new businesses. Productivity increased significantly which reduced costs to businesses which stabilized prices as reflected by the CPI during the 20s. After the recovery from a recession following WWI, the U.S. was at full employment from 1923-1929. Government spending also remained very stable during the 20s and until after the election of FDR in 1932. President's Roosevelt's programs to hire people for government jobs increased government spending dramatically. These are just some of the connections related to the economic conditions in the 20s and 30s.]
Clue Sheet #2 - Student Handout
Clue Sheet #2 - Teacher's Guide
Use the same groups of three and assign each person in the group a section from Clue Sheet #2. (Labor and employment, Poverty and Income, and Economy and Government) The Internet sites for each section can be found on Clue Sheet #2. As the students do the research, have them complete Clue Sheet #2, which is a series of questions, so that they can suggest how these factors contributed to the Great Depression. The sites deal with labor and employment, poverty and income, and the economy and government. When they have finished, each group shares their answers and then the class answers the following questions:
- How are the overall employment trends related to income?
[The lower the unemployment rate, the higher the level of income. When unemployment increases, total income drops.]
- Why was farm income depressed throughout the 1920s?
[Total demand for food decreased while the supply remained relatively stable causing food prices to fall reducing farm income lower than everyone else's.]
- What caused the trends in government spending during this time?
[Government spending decreased when WWI ended. Many believed the federal budget should be balanced and the government had accumulated large debts during the war.]
Assign each member of the group one of the three articles listed below taken from the Top 25 economic events. Each clue sheet contains the article and a series of questions. Students should read the article and answer the questions. Students in the group then share the information with each other.
Clue Sheet #3a - Henry Ford Begins Production of the Model T in Highland Park
Clue Sheet #3a - Teacher's Guide
Clue Sheet #3b - The Federal Reserve Board (PDF 10k - 3 pages)
Clue Sheet #3b - Teacher's Guide
Clue Sheet #3c - The Stock Market Crash of 1929 (PDF 10k - 3 pages)
Clue Sheet #3c - Teacher's Guide
Have the class then answer the following:
- How did innovation and Ford's leadership in employee relations fuel the economic growth during the 1920s?
[Many new products were invented, old ones refined, and many were available to average citizens who saw wages going up. Jobs were created and income increased fueling further investment and expansion.]
- What role did the Federal Reserve System play in this era?
[Money for expansion came from savings and stock speculation. The Fed tightened the money supply to reduce the speculation, which decreased the ability of the consumers and businesses to borrow. When the market collapsed, the Fed remained neutral rather than trying to stimulate the declining economy.]
- How did the stock market crash accelerate the economic slide into the Great Depression?
[Demand for many goods and services slowed in the late 20s, which reduced corporate profits. Investors became nervous and began to sell their stock decreasing the prices of many stocks. Since many had bought the stock on credit, they could not pay back those loans because the stocks were now worth less than the loans. As prices plummeted and they lost their savings, many banks that had loaned them the money to buy stock failed. Their customers lost all the deposits they had in those banks. Between Nov. and Dec. of 1929, $30 billion was lost to the whole economy for spending, savings, and taxes.]
Using the car as an example, have students brainstorm what businesses began or grew because of the mass production of the automobile. (These would include suppliers to both industries, capital equipment manufacturers, producers of complementary goods, construction industry.)
Point out to students the following:
- Suppliers provide all the parts and materials needed to make a car and the car companies assemble those parts.
- Capital goods are the factory, tools, and the machinery used in production.
- Complementary goods are ones that develop because cars became the main means of transportation. Examples of these would be roads, gas stations, hotels, restaurants, repair shops, housing, etc.
Have students complete the Interdependence Web Activity. Within this interactive activity, students will drag the businesses to the column for suppliers, complementary goods/services, or capital goods to see how many businesses are related to one another.
After the students have completed the interdependence web, the teacher then reviews what they have discovered about economic interdependence and the Great Depression by discussing the following:
- What types of jobs does any business need to function?
[production workers, machinists, office staffs, managers, salespeople, maintenance staff, transport workers, finance people, etc.]
- When these workers earn income from their jobs, what are the three major things that workers do with their income?
[spend, pay taxes, and save]
- When income declines, what happens to the three 'things' you identified in the previous question?
[All three, spending on goods and services, taxes, and savings will decline. If people lose their savings first, spending declines then also causing more layoffs and another decrease in jobs.]
- When demand for cars declined in the late 20s, what kinds of companies business declined?
[list all the ones from the web]
- Have students create an Interdependence Web that shows the businesses related to the personal computer revolution. Make sure they've completed the Interdependence Web Activity(Part 4) so they have an idea of what their final product should resemble.
[Plastics, chips, glass, sand, silicon, wiring, packaging material, distributors, advertising, speakers, peripherals, software, disks, stores, training and consulting, electricity, printers, repair services]
- Have students explain the relationships among these businesses and predict what would happen in the economy if interest rates rose by 5% or more.
[If the interest rates rise, it makes borrowing more expensive. Many consumers and businesses already have computers with which they could make due. Consequently, they do not purchase new systems. First the computer manufacturer begins to lay off employees and decreases orders for supplies to make the computers. They also may cut back on advertising to save money. Suppliers now have fewer orders and they begin to cut back on their workforce. The demand for complementary goods declines such as software and that industry is hit next. Peoples' incomes decline and spending is further reduced. Tax revenues decrease as people are laid off but government spending increases as people qualify for unemployment, Medicaid, etc. Savings decline and interest rates increase further.]
Discuss the following with the class:
- What conditions in the economy led to the Great Depression?
[overproduction, decrease in demand for goods, stock speculation using credit, Federal Reserve policy decisions, tariffs that led to trade wars which reduced exports and imports.]
- What is the relationship between increases and decreases in employment, consumer spending, and the money supply?
[When jobs are created, employment increases and so does people's income. They have more money to spend, to save, or to be taxed. The opposite occurs when employment decreases.]
- Trace the ripple effect when workers lose their jobs.
[They buy less goods and services because they have less income. The businesses where they had spent their money now have fewer customers so they may have to lay off even more workers whose household income then declines also. Sometimes households use savings to buy what they want, but when they lose their jobs, they may have to use that money to purchase necessities such as food and housing.]
- Explain the interdependence of the various parts of a market economy.
[All the parts of a market economy are connected to one another. When an event occurs in one part of the economy, other parts will feel effects eventually. What happens to in large numbers of people's jobs determines how much total income is available to be spent, saved and taxed in an economy.]
- Explain the impact of the Federal Reserve's policies in the 20s and 30s on the Great Depression.
[In 1928 and 1929, the Federal Reserve tightened up on the money supply to dampen the speculation in the stock market. When investors began to lose confidence in the stock market when corporate profits declined, the ensuing sell-off of stocks dramatically reduced the money supply. The Federal Reserve System maintained a neutral policy rather than acting as the lender of last resort for the banks. Because of this policy, the Depression deepened making the economy worse.]