Notes 3.3: The Fun

Notes 2.3: The Great Depression Begins

Notes 2.3: The Fun Ends and the Great Depression Begins

The Stock Market Throughout the 1920s, Americans had bought stocks on margin. Margin buying: pay a portion, usually 10%, of the total stock price when you buy and pay the outstanding balance when you sell. This means you can buy more stock at the lower price and make more money. Throughout the 1920s stock prices rose steadily, making this seem like a good investment, and making many Americans rich.

Crash! Margin buying worked well until October of 1929. There were fewer new customers to buy stocks at higher prices, leading to lowered prices (many prices were falsely inflated due to margin buying). On October 29, 1929 (Black Tuesday), the market plummeted, losing between $10-15 Billion dollars in value. Anyone with investments in the market lost their money.

So? Everyone who had bought on margin still had to pay back the money they owed on their original purchase, even if the stock was worthless. People rushed banks to take out money to pay back these loans. They wanted to cash out of the market before it lost even more value. Banks did not have all the money on hand – they also invested in the stock market! As banks ran out of money to give customers, they closed, leaving thousands without their savings.

Bank Runs Even Banks that had money were affected by bank failures. People heard of bank failures and Americans who lost their life savings and rushed to banks to remove their money. More banks ran out of money and failed. More Americans lost their savings.

These are the events that sparked the Great Depression, but not the CAUSES. --These events would not have led to a long-lasting depression if other issues had not existed.--

What caused the Great Depression? 1. Uneven Distribution of Wealth and Income Most Americans could not afford to buy the products they helped produce Buying on Credit – a way Americans could buy new goods, but they reached a point they could not afford to buy any more If no one is buying goods, factories stop producing/ shut down; fewer people can buy goods, more factories shut… 2. Loss of Export Sales Fewer foreign companies buying American goods Hawley Smoot Tariff causes even less foreign buying of goods 3. Mistakes by the Federal Reserve- Federal Reserve kept interest rates low in the 1920s, which did not curb credit/ margin buying and speculation. Low rates encourage risky behavior Low rates made business think economy was expanding and took out more loans. Once Depression started it raised interest rates and tightened credit. Made things worse!

What Caused the Great Depression?

Cause #1 1. Uneven Distribution of Wealth and Income Most Americans could not afford to buy the products they helped produce Buying on Credit – a way Americans could buy new goods, but they reached a point they could not afford to buy any more If no one is buying goods, factories stop producing/ shut down; fewer people can buy goods, more factories shut…

Cause #2 2. Loss of Export Sales Fewer foreign companies buying American goods Hawley Smoot Tariff causes even less foreign buying of goods

Cause #3 3. Mistakes by the Federal Reserve- Federal Reserve kept interest rates low in the 1920s, which did not curb credit/ margin buying and speculation. Low rates encourage risky behavior Low rates made business think economy was expanding and took out more loans. Once Depression started it raised interest rates and tightened credit. Made things worse!

Depression  During Hoover’s administration (1928-1932) the Depression worsened: Over 9,000 bank failures 30,000 companies a year went out of business More than 12 million unemployed (almost 25% of workforce) Average income dropped from $2,300 to $1,600

Choices? Bread lines, soup kitchens No government help available Hoovervilles – shanty towns set up on unused and public lands around the country, full of Americans displaced by the Depression. Hobos – travelled the country on railroads (illegally) looking for work. Mostly men and boys.

Worse for Farmers… Farming, already the only 1920s industry NOT to thrive, worsened in the 1930s. When prices dropped in the 1920s, much of the land went unused. This meant no plants, wheat or grass, existed. In 1932 there was a major drought. With no plants, the soil literally blew away. This became known as the Dust Bowl.

This led to horrible dust storms that would choke the few remaining crops and families. Most farmers could not pay their farm mortgages and were forced to leave, heading west. These newly displaced farmers were called “Okies”, a derogatory term. They joined other Americans in Hoovervilles and roadside camps, trying to find work anywhere in the US.