The Crash and Depression NOTES FOR COLLEGE ECON

Section 3: The Economy in the Late 1920s People expected the “Coolidge prosperity” to continue in Hoover’s presidency. People expected the “Coolidge prosperity” to continue in Hoover’s presidency.

1928 Statistics Life expectancy Life expectancy  Men: 59  Women: 63

Economy Appears Healthy Stock Market is a weathervane for the economy. Stock Market is a weathervane for the economy.  Since 1914: Wages were up 40%  Unemployment VERY low: 4%  “Food, shelter and clothing for all.”

Everybody Ought to be Rich High confidence in business. High confidence in business. Many people were investing in businesses – even things that were risky. Many people were investing in businesses – even things that were risky. Labor Stability: “welfare capitalism” Labor Stability: “welfare capitalism”  Better wages  Paid benefits & vacation

Economic Danger Signs Uneven Prosperity Uneven Prosperity Personal Debt Personal Debt Playing the Stock Market Playing the Stock Market Too many goods, too little demand Too many goods, too little demand Trouble for farmers and workers Trouble for farmers and workers

Economic Danger Signs: Uneven Prosperity Stock Market success meant mostly the rich got richer. Stock Market success meant mostly the rich got richer. 1929: 200 businesses controlled 49% of the wealth of the nation. 1929: 200 businesses controlled 49% of the wealth of the nation.

Economic Danger Signs: Uneven Prosperity 1929: 24,000 families – only.1% of the of the population – had incomes of over $100, : 24,000 families – only.1% of the of the population – had incomes of over $100,000. They held 34% of the country’s TOTAL savings. They held 34% of the country’s TOTAL savings.

Economic Danger Signs: Uneven Prosperity 71% of the people in the US earned LESS than $2, % of the people in the US earned LESS than $2, % had NO savings 80% had NO savings Most families needed EVERYONE – including children – to work to support the family. Most families needed EVERYONE – including children – to work to support the family.

Economic Danger Signs: Uneven Prosperity Government tax policy made it worse. Government tax policy made it worse.  Taxed the poor more and gave big breaks to the rich.  Thought taxing the rich interfered with business expansion.

Economic Danger Signs: Personal Debt Most Americans were living on credit. Most Americans were living on credit.  Believed that future income would cover their debts.  Bought radios, vacuum cleaners, cars, refrigerators

Economic Danger Signs: Playing the Stock Market “Get-rich-quick” attitude in 1920s. “Get-rich-quick” attitude in 1920s. SPECULATION: Practice of making high-risk investments in hope of getting a huge return. SPECULATION: Practice of making high-risk investments in hope of getting a huge return.

Economic Danger Signs: Playing the Stock Market Investors could purchase stock (a share of ownership in a company) Investors could purchase stock (a share of ownership in a company) BUYING ON MARGIN BUYING ON MARGIN  Purchase stock for a fraction of the price.  10% down – borrow the rest.  If stock went UP in price – you could pay off the loan for the stock and the interest.

Economic Danger Signs: Too Many Goods, Too Little Demand Overproduction causes prices to go DOWN. Overproduction causes prices to go DOWN. “Ripple Effect” “Ripple Effect”  1925 Ford had to cut making cars, because too many were not being sold.  Affected steel, rubber and glass.  Jobs got cut

Economic Danger Signs: Too Many Goods, Too Little Demand Between 1928 – 1929 housing construction fell by 25%. Between 1928 – 1929 housing construction fell by 25%. People weren’t feeling quite so secure about their futures. People weren’t feeling quite so secure about their futures.

Economic Danger Signs: Trouble for Farmers and Workers Farmers had gone into debt to buy more land and machinery to grow more ag goods. Farmers had gone into debt to buy more land and machinery to grow more ag goods. 1920s – Farmers unable to pay their loans because of bad farm prices. 1920s – Farmers unable to pay their loans because of bad farm prices.

Economic Danger Signs: Trouble for Farmers and Workers Many farmers lost their farms. Many farmers lost their farms. Enough farmers not paying their loans made the banks that had loaned the money fail. Enough farmers not paying their loans made the banks that had loaned the money fail.  6,000 rural banks failed in 1920s

Economic Danger Signs: Trouble for Farmers and Workers 1927 and 1928 Congress tried to pass laws to help farmers and 1928 Congress tried to pass laws to help farmers.  Coolidge vetoed them  It wasn’t the government’s job to provide assistance to farmers.  Laissez - Faire

Economic Danger Signs: Trouble for Farmers and Workers Many laborers did not have higher wages and benefits. Many laborers did not have higher wages and benefits. Rayon mills in Tennessee: Women worked 56-hour weeks earning cents an hour. Rayon mills in Tennessee: Women worked 56-hour weeks earning cents an hour. $10 a week!!!! $10 a week!!!!

Setting the Scene October 29, 1929 October 29, 1929 CRASH! CRASH!

The Market Crashes NOTE: A stock’s value SHOULD be based on the company’s earnings and assets. NOTE: A stock’s value SHOULD be based on the company’s earnings and assets. BUT: Demand and speculation can make a stock price go up even more. BUT: Demand and speculation can make a stock price go up even more.  Think of auctions

The Market Crashes Leads to OVERVALUED stocks. Leads to OVERVALUED stocks. Then, if you borrowed money to get the stock … Then, if you borrowed money to get the stock … CRASH CRASH

People asked “How did this happen?” Black Thursday: Black Thursday:  Some banks and brokers began to call in loans after stocks began to fall in value.  People who had bought General Electric at $400 had to sell for $283.  In one day $3,000,000,000 was lost!

Black Thursday: October 23, – 8 million shares of stock were sold. 4 – 8 million shares of stock were sold. Reassurances from stock specialists and the President. Reassurances from stock specialists and the President. “The nation’s business is on a sound and prosperous basis.” “The nation’s business is on a sound and prosperous basis.”

Black Tuesday: October 29, 1929 To stop the panic of Thursday, bankers pooled their money to buy up stocks to make things look stable for Friday and Monday To stop the panic of Thursday, bankers pooled their money to buy up stocks to make things look stable for Friday and Monday

October 29, 1929 THAT is what happened to ALL stocks. THAT is what happened to ALL stocks.  Investors lost money  Businesses lost profits  Workers were laid off  Banks who had loaned money failed when people couldn’t pay back their loans.

October 29, 1929 Because investors were consumers – they had NO money to buy things. Because investors were consumers – they had NO money to buy things. Businesses couldn’t sell products. Businesses couldn’t sell products. Laid off workers. Laid off workers. Who couldn’t buy things then. Who couldn’t buy things then. Businesses failed. Businesses failed.

October 29, 1929 Because investors couldn’t pay loans back to banks.. Because investors couldn’t pay loans back to banks.. Because businesses couldn’t pay back loans to banks Because businesses couldn’t pay back loans to banks Because banks had also been speculating on the stock market with savers’ money … Because banks had also been speculating on the stock market with savers’ money …

October 29, 1929 Banks are rumored to be failing Banks are rumored to be failing Bank runs to try to get money out of banks. Bank runs to try to get money out of banks. But THERE WAS NO MONEY! But THERE WAS NO MONEY! BANKS FAIL and close. BANKS FAIL and close.

October 29, 1929 Because Americans have no money to invest Because Americans have no money to invest  Global investments fall  Unemployment happens in other countries  The rest of the world can not afford US goods  Europe can’t pay off their war debts to US businesses  Closes more US factories

October 29, 1929: The Great Crash It wasn’t enough! It wasn’t enough! Tuesday – people panicked. Tuesday – people panicked. 16 million shares were sold. 16 million shares were sold. When there is more supply than demand When there is more supply than demand  PRICES GO DOWN, DOWN, DOWN, DOWN

October 29, 1929: The Great Crash Overall losses $30,000,000,000 Overall losses $30,000,000,000 The business cycle – a period in which the economy grows then contracts. The business cycle – a period in which the economy grows then contracts.

The Ripple Effect of the Crash Someone who thought and lived like they had a million dollars Someone who thought and lived like they had a million dollars  Found out they only had $100.

Ripple Effect on the Economy Risky loans hurt banks Risky loans hurt banks  Banks earn their profits on the interest they earn for loaning out money.  Gave out HUGE amounts of loans on very risky loans.

Ripple Effect for the economy Consumer borrowing: Consumer borrowing:  Banks also make money on loans they make to consumers to buy cars, appliances, etc.  Consumers lost money and / or their jobs and could not pay their debts to the bank.

Ripple Effect on the Economy Bank Runs: Bank Runs:  People rushing to the bank to get their money out.  Banks didn’t have enough money in the vaults to give people withdrawing.  Banks had to call in loans to get some money.  Consumers and businesses did not have the money

Ripple Effect on the Economy Savings wiped out Savings wiped out  By million savings accounts had vanished.

Ripple Effect on the Economy Cuts in Production Cuts in Production  Businesses had no money to keep producing goods.  Few people had the money to buy goods.

Ripple Effect on the Economy Rise in unemployment Rise in unemployment  Businesses laid off workers.

Ripple Effect on the Economy Further cuts in production as unemployment grew and incomes shrank, consumers spent less and less money and businesses produced still fewer goods. Further cuts in production as unemployment grew and incomes shrank, consumers spent less and less money and businesses produced still fewer goods.

Economic Contraction An economic decline marked by falling output of goods and services. An economic decline marked by falling output of goods and services.  THE GREAT DEPRESSION  Lasted until 1941

The Great Depression: Impact on Workers and Farmers August 1931 – Ford closed its Detroit factories. August 1931 – Ford closed its Detroit factories.  75,000 unemployed in one day.  Millions others unemployed.

The Great Depression: Effect on Workers and Farmers Because large factories closed – small businesses and restaurants began to fail too. Because large factories closed – small businesses and restaurants began to fail too.  No customers  No merchandise  Rich people laid off staff

The Great Depression: Effect on Workers and Farmers Farm prices that were already low, fell even more. Farm prices that were already low, fell even more. 1929: 1 bushel of wheat was $ : 1 bushel of wheat was $ : 1 bushel of wheat went for 42 cents 1932: 1 bushel of wheat went for 42 cents DISASTER FOR FARMS DISASTER FOR FARMS

The Great Depression: Underlying Causes Unstable economy Unstable economy Overspeculation Overspeculation  Optimism was more than real value for goods. Government policies Government policies  Too late, the government in 1929 tried to stop the overspeculation.  Only made it worse.

Hoovervilles How did people “get by”? How did people “get by”?  Houses with extended families.  Drifted as hobos, migrant workers  Shantytowns “Hoovervilles”

Hoovervilles

Depression’s Effect on Health “No one has starved.” “No one has starved.”  President Hoover

Effect on Health But some did. But some did. Thousands went hungry. Thousands went hungry. Poor, hungry and without shelter – more prone to illness. Poor, hungry and without shelter – more prone to illness.  Particularly children.

Impact on Health In the country, people grew food. In the country, people grew food.  Used for food and to barter for other goods. In the cities, sold apples and pencils. In the cities, sold apples and pencils. Begged for money and food. Begged for money and food. Fought over restaurant garbage. Fought over restaurant garbage.

Stress on Families Men felt like failures for not providing for families. Men felt like failures for not providing for families. Women were often fired for “taking” jobs from men. Women were often fired for “taking” jobs from men.  Particularly if married Women took low-paying jobs as domestics. Women took low-paying jobs as domestics.

Discrimination Increases Times created hostilities against minorities. Times created hostilities against minorities.  Whites were willing to take the low wages of Asian-Americans, Hispanics and African- Americans.  Mass deportation of Mexican-Americans – even though they were born in the USA!

President Hoover’s Response? Said if Americans had “confidence” things would get better. Said if Americans had “confidence” things would get better. Blamed other countries not the American economy. Blamed other countries not the American economy. Tried to tell people the factories would quickly reopen. Tried to tell people the factories would quickly reopen.

President Hoover’s Response Voluntary Action Voluntary Action  Let volunteer organizations like church charities and local governments help people.  It wasn’t Washington’s job to support and help people.

President Hoover After 1931, he did try SOME federal programs to help people – but it wasn’t enough. After 1931, he did try SOME federal programs to help people – but it wasn’t enough.  Hoover thought government aid would cause people to lose their self-respect.  Offered the Classical Economic Model’s tax cuts to people.

Election of 1932 Republican: Herbert Hoover Republican: Herbert Hoover Democrat: Franklin D. Roosevelt Democrat: Franklin D. Roosevelt Who do you think won??? Who do you think won???

Election of 1932 Electoral Map Electoral Map