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Lesson 1: The Causes, the Crash, and the Fallout

By Andrew Otocka

This lesson will promote student understanding of the economic causes of the Depression. It simulates the rollercoaster of emotions that investors endured in 1929.

The Lesson

The Crash of 1929 was the impetus for the Great Depression, but it was the preexisting economic conditions - far more widely spread than the number of individual investors, that caused the downward spiral that doomed Herbert Hoover's presidency.

Bell Activity: Write the following question on the board, and have students answer in their journals: "What are some specific metrics that we can use to determine if the economy is doing well or poorly?"

Stock Market Game

Start with a brief discussion or explanation of what stock is (pieces of ownership in certain companies) and how stock markets operate (supply and demand largely determine the value of stocks, as expressed by their price).

Tell students that you are going to simulate how the stock market works. Each one will need a piece of paper, which they should turn "landscape" style (lying on its side). On your classroom chalkboard, write 5 publicly traded companies that would have been around in 1929 (I like to use RCA, Coca-Cola, Chase Bank, Rawlings, and Sears) on the left margin of the board, leaving space in between.

Across the top of the board, list 5 months - June, July, August, September, and October. Under June, make up prices for each company. "Give" each student $1,000 of imaginary funds, and have them invest in the available companies. Tell them that they may not keep any money as cash, and make sure that they are keeping track of how many shares they have purchased, not just how much money they have spent. Track the performance of their purchases over the next three months, making up prices as you go. Make sure that prices rise, steeply in some cases. Build class excitement by having kids compare how much they have made. Try to create a sense of competition. In October, "crash" the market to levels considerably lower than the prices you started out with in June.

Once the market has crashed, debrief the activity. Talk about how much unhappier people would be if the money were real. Then explain the concept of "buying on the margin" - buying stock with borrowed money. Buyers only needed 10% of the actual value of the purchase in cash; the rest could be borrowed from a bank or other lending institution. If the value of the purchase fell below its original price, it would trigger a margin call in which the lender would ask for their money back immediately. This would force the purchaser to sell and also somehow raise the balance owed in some other way. All of these sales would drive prices stock down, triggering more margin calls.

The Causes of The Great Depression

Tell students that the stock market crash was not the cause of the ensuing depression; it was the spark that lit the powder keg. There were several underlying causes that had quietly built up over time:

1. Growing amounts of consumer debt. During the 1920's, more and more Americans bought more and more goods using credit that required regular installment payments. Simply put, they were overleveraged.

2. Low prices for agricultural commodities. After World War I, farmers failed to adjust to lessened demand, causing a supply glut.

3. Overproduction in industries. Manufacturers were largely ignorant of the fact that their products were nearing the saturation point for sales and continued to produce at robust rates, often borrowing money to do so.

4. Weakness in traditional pillars of the economy. Coal was being supplanted by oil and railroads by automobiles. Both these and their affiliates suffered.

The Fallout: Stocks plummeting hurt businesses and individuals. Many people hurried to banks to withdraw their savings to cover themselves. The high level of withdrawals (also known as "bank runs") caused many banks to close completely. Other banks called in all of their loans to cover withdrawals, causing businesses to close and lay off workers. These workers tried desperately to get their savings (if they had any) out of banks, and the cycle began again. The downward spiral launched the country into the Great Depression. President Herbert Hoover was faced with an unprecedented challenge.