Unit 5: Boom and Bust

1. Unit 5: Boom and Bust

2. 1929-1932 Chapter 17 The Great Depression Begins

3. I. Causes of the Depression A. The Scenario 1. Prosperity of the 20s a. total economic output had grown 50%+ b. revolution in technology: autos & airplanes c. building of roads and buildings d. radio, gin & jazz

4. 2. But all is not as it seems: a. farming depressed b. old industry threatened by new industry (tech. advances) c. surpluses mounting in warehouses d. government polices allowed too much consolidating, easy credit, speculation resulting in high debt e. unequal distribution of wealth hurting purchasing power 1920s Economy

5. B. The Election of 1928 1. The Candidates a. Herbert Hoover (R) food dude, Sec.of Commerce b. Alfred E. Smith (D) A Catholic! 2. Campaign Issues (Rum, Romanism, Ruin) a. Prohibition – Hoover dry, Smith wet b. Religion – Hoover Quaker, Smith Catholic c. Economy – Prosperity-Republicans took the credit “two cars in every garage” 1928 Election

6. 1928 Election Results

7. Hoover's "Rugged Individualism" "We are challenged with a peace-time choice between the American system of rugged individualism and a European philosophy of diametrically opposed doctrines – Doctrines of paternalism and state socialism“ " Our American experiment in human welfare has yielded a degree of well-being unparalleled in all the world. It has come nearer to the abolition of poverty, to the abolition of fear of want than humanity has ever reached before"

8. C. The Long Bull Market 1. Optimism a. Stock prices at new highs – Bull Market encourages many Americans to invest heavily in stock- Stock Market:system for buying & selling shares of companies Bull Market: long period of rising stock prices b. Many bought stock on margin. Investors able to put down10-20% in $ to buy stock, the rest available on easy credit. - worked ok until prices began to fall - American public was in enormous debt & their “wealth” was all in paper

9. RCA 1928 - $85 1929 - $505 “Paper Profits” “Speculative Bubble” 1928-1930: 40%

10. c. Margin Call: Broker could demand investor to repay immediately. Result of this practice: investors sensitive to any drop in price. Sold quickly fearing inability to repay loan • d. Banks loaned M$ on speculative schemes. Speculators took risks, betting market would climb, hoped to sell stock & make $ quickly

11. C. The Great Crash 1. Crash! a. Margin Calls led to customers putting stocks up for sale at rapid pace – market falls in a tailspin • b. October 24, 1929 – Black Thursday – 13M shares sold off. $5B lost! As stock prices fell & more brokers called on customers to put up more cash unleashing a vicious cycle sending prices on the stock exchange plunging.

12. - NY bankers stepped up to buy stocks at prices higher than going rate - trading stabilized, market recovered until 10/29 • - bankers really had only forced prices up temporarily – then sold their own securities & got out of the market. Fall continues • c. October 29, 1929 – Black Tuesday – 16 million shares sold off as panic swept stock exchange. $9B lost! • d.Within days, the “wealth” of a large part of the country which had concentrated in vastly inflated stock prices, vanished Black Tuesday

13. 2. Banks in a Tailspin • a. Banks weakened • - banks had lent money to speculators • - banks had invested depositors’ $ in the stock market, • b. When stock values collapsed, banks lost $, speculators couldn’t repay loans • c. Banks made less loans, less credit now available – leads to a recession d. Some banks can’t recover and must close – customers lose their savings – crisis of confidence in banking system

14. e. News of bank failures caused panic – customers withdraw $, more banks collapse f. Banks make $ by lending $ received by depositors & collect interest on loans. Banks hold on to only small amt of $ to cover day to day biz – Banks collapse when too many people withdraw their $ g. 10% of nations banks close

15. A Bank Run

16. The Roots of the Great Depression - Causes 1. Uneven Distribution of Wealth a. 5% of Americans earned 30% of nation's income b. Govt policy reduced taxes on highest income: so they would reinvest in stocks or place it in savings acct (Trickle Down Theory) c. not enough $ to farmers & workers who would have bought consumer goods & thus kept $ in circulation

17. 2. Overproduction a key cause of Depression a. new technology increased production capacity of farms and factories - many Americans can’t afford to purchase these products(under-consumption) (low wages) b. Americans buy on Installment Plan – down-payment + monthly installments c. To pay off debts, some reduced other purchases. Leads to decreased consumption. Less consumption leads to lower production leads to unemployment – ripple effect on economy

18. So, to summarize it, HIGH DEMANDfor consumer goods and agricultural products led to OVERPRODUCTION.

19. It Had a A Domino Effect • Here • Abroad…

20. 3. Dangerous Foreign Trade Balance: Loss of Export Sales a. Banks lent $ to stock speculators instead of foreign companies b. w/o loans from US banks, foreign companies purchased fewer US products (These economies were already on verge of economic collapse) c. Hawley-Smoot Tariff– protectionist bill – threw up trade barriers across the US – prompted Europeans to retaliate - to do the same thing, worsening crisis for both US & Europe. In 1932, US exports fell to about 1/5 of what they had been in 1929 – hurts US manufacturers & farmers d. Europe in it's own economic crisis in 1931. Banks in Europe failed. Europe in a cycle of poverty & political instability

21. 4. Govt Policies & Mistakes by the Federal Reserve a. Artificially low interest rates - fed speculative schemes. Helped cause the Depression in these ways: • 1) encouraged banks to make risky loans • 2) led biz leaders to believe economy still expanding • - thus, borrowed more $ to expand production – a mistake since it led to overproduction at a time when sales were falling – • - companies had to lay off workers to cut costs • b. Fed then raised interest rates, tightening credit • c. Govt policy of laissez-faire - belief that depressions were a normal part of the business cycle

22. Buying on Credit increased personal debt.Higher interest rates caused LESS DEMANDfor goods.

23. The Business Cycle The Inevitable Ups and Downs...

24. 5. Stock Market based Economy • a. speculation drove up market prices beyond the stocks value b. practice of buying on margin encouraged more speculation c. Not enough gov’t REGULATION (rules) of the stock market Causes of Great Depression

25. II. Life During the Depression • A. The Depression Worsens • 1. How bad does it get? • a. by 1933, over 9000 bank failures • b. by 1932, ~ 30,000 companies went out of biz • c. by 1933, over 12 M unemployed – ¼ of workforce • d. avg family income only $1,600/yr

26. Statistical Terms Item19291932 -GNP $104b $54b -Inv. Capital$ 10b$ 1b -Income $82m $40m -Exports $5.2b $1.6b -Unemployment 3% 25%

30. An Unemployment Line

31. Gross National Product

32. 2. Lining Up at Soup Kitchens • a. bread lines/soup kitchens – people lined up for free food

33. Soup Line Soup Line

34. 3.Living in Makeshift Villages • a. people forced out of home, onto street • b. shantytowns/Hoovervilles • c.people wandering streets – hobos

36. Hooverville, USA

37. Portland

38. Cleveland

40. New York City, Central Park

41. Sacramento

42. Hoovervilles were a familiar part of the Oklahoma City skyline for nearly a decade.

43. Populated by families from all walks of life and occupations,

46. …from those who lost their farms, hoping to find work in the city…

47. Norman family, lost farm the year before, 1939

48. …to blue collar urban workers, left unemployed from factory and small business closings…

50. ..and professionals, teachers and bankers.