Chapter 14: The Great Depression Lesson One: The Nation’s Sick Economy

Why it Matters now 1. The Great Depression has had a lasting effect on how Americans view themselves and their government. 2. It is important to understand that the explosive economic growth of the 1920’s hid severe economic problems.

Things to think about as you read… What economic factors and conditions made the American economy appear prosperous in the 1920s? What were the basic economic weaknesses in the American economy in the late 1920s? What events led to the stock market crash of October 1929? What were the effects of the crash on the economy of the United States and the world?

Economic Troubles on the Horizon Industries in trouble: Key basic industries like Railroads, mining, and textiles barely made any profits during the 1920’s. Railroads suffered as the automobile industry grew. Coal mining suffered as new materials replaced coal as the main source of energy around the nation. Production in other industries declined after World War I

More Industries IN Trouble Consumer Industries During the late 1920’s sales of automobiles, and consumer goods like refrigerators & radios began to slow down. the number of new houses being constructed declined too. This decline in consumer spending affected other industries like steel, aluminum, glass, furniture manufacturing & lumbering. Agriculture suffers During World War I international demand for American wheat, corn & meat was at an all-time high. Farmers expanded production. many borrowed money to finance these expansions. once the war ended demand decreased & farmers quickly found themselves deep in debt. Many were forced into foreclosure losing lands that had been in their families for generations.

Living on Credit At the End of the 1920’s americans were buying less for several reasons prices were rising. wages had not kept pace with production – companies produced more goods than people could afford to buy. Many americans also found themselves deep in debt. At the beginning of the decade they had relied on credit to purchase big ticket items like radios & refrigerators. Many americans were beginning to struggle paying these monthly debts.

the Uneven distribution of wealth Another Major problem with the American economy was the uneven distribution of wealth during the 1920s. The wealthiest one percent of the population’s income grew 75 percent, but the average worker saw under a 10 percent gain. More than 70% of the nation’s families earned less then $2,500.00 a year – this sum was considered the minimum amount needed for a decent standard of living. The unequal distribution of wealth meant that most americans could not participate in the economic advances of the 1920’s.

The Election of 1928 The Republicans Calvin Coolidge chose not to run for re-election in 1928 The Republicans nominated Herbert Hoover, He had never run for public office before, but he had an outstanding record as a public servant. Hoover had been a member of Harding and Coolidge’s cabinets, had overseen America’s food production during World War I. He also helped to ensure that many Europeans avoided starvation after the war by facilitating food exports. He had an outstanding reputation as a business-like administrator. He ran on a platform that boasted a decade of economic growth.

The Election of 1928 The Democrats The Democrats hoped to capitalize on Urban America’s frustration with social issues like Prohibition. Democrats chose New York governor Al Smith, an outgoing politician with a strong Brooklyn accent, whose support came mostly from cities to oppose Hoover. Smith was the first Catholic to run for president. He faced prejudice because of his religion. Southerners and westerners also opposed him because of his stance on social issues. Hoover easily won the election, but the race clearly demonstrated the conflicts dividing the nation in that era.

The Stock Market and the Economy The stock market was a visible symbol of American Economic Growth. Throughout the 1920’s stock prices continued to rise. Rising stock prices encouraged even casual investors to put huge sums of money into the market. By 1929 about 4 million americans were invested in the stock market. The Government did little to regulate stock transactions. Businessmen could legally conspire to control stock releases and to inflate prices. Widespread investments in the market led to two forms of risky investments speculation – the purchase of stock with the hope of turning a quick profit regardless of risk Buying on Margin – Essentially margins investors made a down payment, but bought stock on credit and hoped that the stock would generate enough profit to cover the remaining costs of said stock.

The Stock Market Crashes The steady growth of the early 1920s gave way to astounding gains at the end of the decade until its September 3, 1929, peak. Many people were beginning to see trouble as consumer purchasing fell & rumors of a collapse circulated. On Thursday, October 24, 1929, some nervous investors began selling their stocks, others followed, creating a huge sell-off with no buyers. Stock prices plunged, triggering an even greater panic and more sales. Toward the end of the day, leading bankers joined together to buy stocks and prevent a further collapse, which stalled the panic through Friday. But the next Monday the market sank again, and Black Tuesday, October 29, was the worst day, affecting stocks of even solid companies. The damage was widespread and catastrophic. In a few short days the market had dropped in value by about $16 billion, nearly one half of its pre-crash value.

Effects of the Crash Effects on Banks Impact on Individuals Though some thought the market would rally, countless individual investors were ruined. Margin buyers were hit the hardest, because brokers demanded they pay back the money they had been loaned. To repay the loans, investors were forced to sell their stocks for far less than they had paid, and some lost their entire savings making up the difference. In the end, many investors owed enormous amounts of money to their brokers, with no stocks or savings left to pay their debts. Effects on Banks The crash triggered a banking crisis, as frightened depositors rushed to withdraw their money, draining the bank of funds. Many banks themselves had invested directly or indirectly in the stock market by buying companies’ stocks or by lending brokers money to loan to investors on margin. When investors couldn’t repay margins, banks lost money, too. These failures drove many banks out of business.

More Effects of the Crash Impact on Business The crash crushed businesses, because banks couldn’t lend money. Consumers also cut back their spending on everything but essentials, and companies were forced to lay off workers when demand decreased. Unemployed workers had even less money to make purchases, and the cycle continued. In the year after the crash, American wages dropped by $4 billion and nearly 3 million people lost their jobs. Impact on Europe The fragile economies of Europe were still struggling from World War I. They had borrowed a great deal of money from American banks that the banks now wanted back. With U.S. buying power down, foreign businesses were less able to export their products and were forced to fire workers. Governments tried to protect themselves by passing high tariffs, making foreign goods expensive.

Great Depression by the Numbers The decline in world trade in the 1930s created misery around the world and contributed to the nation’s slide into the Great Depression. After the stock market crash, economic flaws helped the nation sink into the Great Depression, the worst economic downturn in history. The stock market collapse strained the resources of banks and many failed, thus creating greater anxiety. In 1929 banks had little cash on hand and were vulnerable to “runs,” or a string of nervous depositors withdrawing money. A run could quickly drain a bank of all its cash and force its closure. In the months after October 1929, bank runs struck nationwide. hundreds of banks failed, including the enormous Bank of the United States. Bank closures wiped out billions in savings by 1933.

January 5, 2017 Warm-up Question: Please answer in complete sentences. Identify the three industrial areas that were barely profitable during the 1920’s. Weaknesses in these industries indicated that the economy was not as strong as many people believed.