Signs of Trouble Stock Market Crash The Depression Begins The Great Depression Signs of Trouble Stock Market Crash The Depression Begins

The United States Economy in the 1920’s The United States economy in the 1920’s was very strong The growth of the automobile industry had a positive impact on many other industries Unemployment was low People were making more money and working less

Installment Buying In the 1920’s Americans began buying items they couldn’t afford through the use of installment buying (buying on credit) This increased the demand for goods But it also increased consumers debt

The Stock Market The strength of the economy led many people to invest in the Stock Market in hopes of becoming rich

How does the stock market work? You buy 100 shares of stock of x $5.00 per share How much money have you invested? $500.00 Scenario #1 stock increases to $20 per share How much are your 100 shares of stock now worth? How much profit have you made? 100 shares of stock $2,000.00 stock value x $20.00 per share - $500.00 initial investment $2,000.00 $1,500.00 net profit

How does the stock market work? You buy 100 shares of stock of x $5.00 per share How much money have you invested? $500.00 Scenario #2 stock decreases to $1 per share How much are your 100 shares of stock now worth? How much money have you lost? 100 shares of stock $100.00 stock value x $1 per share - $500.00 initial investment $100.00 $400.00 net loss

Buying Stock on Margin People who did not have money to purchase stock could buy stock on margin Banks and stock brokers would loan people money to purchase stock People had to pay back the bank/brokers with interest

Buying Stocks on Margin: Scenario A Hello, sir. I would like to purchase 100 shares of stock in the Ford Motor Company. How much is it going to cost me? investor stock broker

Buying Stocks on Margin: Scenario A Well, Ford stock costs $10 per share. You want to buy 100 shares? Figure it out yourself, smart guy! investor stock broker

Buying Stocks on Margin: Scenario A Ummm… 100 shares x $10 per share = $1,000.00 Oh, well. I only have $100. I can’t afford 100 shares. investor stock broker

Buying Stocks on Margin: Scenario A No, problem! Just give me $100 and you can owe me the rest! investor stock broker

Buying Stocks on Margin: Scenario A Like, how much would that be? Let me think… $1,000 worth of stock - $100 paid = $900 owed Alright, it’s a deal!! investor stock broker

Buying Stocks on Margin: Scenario A Six months later, Ford stock doubles to $20 per share. My 100 shares are now worth... 100 shares x $20 per share $2,000 investor stock broker

Buying Stocks on Margin: Scenario A That’s great! Now pay me the $900 you owe me! investor stock broker

Buying Stocks on Margin: Scenario A No problemo! It was a pleasure doing business with you! investor stock broker

Buying Stocks on Margin: Scenario A Now let’s figure out how much money I made! $2,000 net worth - $900 owed $1,100 profit - $100 initial investment $1,000 net profit investor

Buying Stocks on Margin: Scenario B Six months later, Ford stock decreases to $1 per share. My 100 shares are now worth... 100 shares x $1 per share $100 investor stock broker

Buying Stocks on Margin: Scenario B Too bad, hotshot! You still owe me $900! investor stock broker

Buying Stocks on Margin: Scenario B But I’m broke! What am I going to do! investor stock broker

Buying Stocks on Margin: Scenario B I don’t care what you do as long as you pay me back! investor stock broker

Speculation Many people invested in companies that they believed would some day become profitable rather than in companies that were already profitable This can be very rewarding because the stocks are often inexpensive and if the company succeeds you can make large amounts of money This is very risky because if the company does not make it you will lose your money

Signs of Trouble Although the economy of the 1920’s was very strong signs of trouble began to appear

Signs of Trouble Overproduction: Massive business inventories---- Increased Supply

Effects of Overproduction Farms and factories overproduced beyond the demand. Businesses cut production Demand for goods fell. Workers suffered from wage cuts and lay offs. People had little or no money to spend.

Signs of Trouble Lack of diversification in American economy--prosperity of 1920s largely a result of expansion of construction and automobile industries

Signs of Trouble Not all Americans shared in the Prosperity of the 1920’s Many farmers and factory workers were unable to purchase cars and houses and thus maintain economic growth Farm income declined 66% from 1920 to 1929 By 1929 the top 10% of the nation's population received 40% of the nation's disposable income

Signs of Trouble Huge credit problems Steady stream of bank failures in late 1920s as customers (many of them farmers) were unable to pay mortgages Many bankers had invested money in the stock market Low margins encouraged speculative investment on the part of banks, corporations, and individual investors

Signs of Trouble Decline in demand for American goods in international trade Some nations, particularly Germany, were experiencing financial crises and inflation and they could not afford to purchase American goods Unable to pay wartime debts, many European nations borrowed from American banks, further increasing debt High American protective tariffs discouraged trade * Hawley-Smoot Tariff

The Stock Market Crash By October 1929, margin buying (buying stock on credit) had reached $8.5 billion in loans to stock purchasers Stock prices began to fall in September 1929. On October 24 (Black Thursday) and October 29 (Black Tuesday), prices fell drastically as sellers panicked. By December $40 billion in stock value had been lost.

The Stock Market Crash

The Stock Market Crash President Hoover and business leaders attempted to calm Americans by assuring them that the country's economy was fundamentally sound

The Stock Market Crash People who had invested all their savings in stock lost everything People that had bought stocks on margin could not pay back banks

The Great Depression Economic Downturn accelerated by stock market crash leads to the Great Depression One of the most difficult periods in American history

The Great Depression Between 1929 and 1933, 100,000 businesses failed Corporate profits fell from $10 billion to $1 billon

The Great Depression Between 1929 and 1933, over 6000 banks failed with over 9 million savings accounts lost ($2.5 billion)

The Great Depression By 1933, 13 million workers were unemployed (25% of the work force) and many were underemployed

The Great Depression Malnutrition increased, as did tuberculosis, typhoid and dysentery. In 1932, 95 people died of starvation in New York City Many turned to soup kitchens and breadlines for food

The Great Depression Large numbers of homeless workers roamed the U.S., particularly the Southwest, seeking work

The Dust Bowl An environmental disaster in the southern Great Plains during the 1930’s Severe drought during 1931 caused the soil to dry out and swept the soil away Farmers had cleared millions of acres of grassland Grass had held the soil in place Farmers went bankrupt and moved west

President Hoover’s Response Did not believe that it was the role of the government to provide relief to Americans Urged Americans to turn to community and church resources (Salvation Army, Community Chest, Red Cross) to meet needs of the poor

Hoover’s Response Gradually used federal agencies to address issues Met with business and labor leaders to reduce layoffs and strikes Financed federal work projects, such as massive dams in the West (Boulder, Hoover, and Grand Coulee) Set up RFC (Reconstruction Finance Corporation) in 1932 to make loans to stimulate economy in a "trickle-down" manner

The Bonus Army

The Bonus Army

The Bonus Army

The Election of 1932 President Hoover (Rep) vs. Franklin D. Roosevelt (Dem) Hoover refused to accept any responsibility for the economic downturn ("No president must ever admit he has been wrong") and was booed and jeered when he made his few campaign appearances outside Washington Campaign slogans: "The Worst is Past," "Prosperity is Just Around the Corner" Accused FDR of seeking the destruction of capitalism

The Election of 1932 Franklin Roosevelt wanted to use the power of the government to solve the crisis. Offered a New Deal for the "forgotten man" Campaign slogan: "Happy Days are Here Again" signaled Democratic optimism in face of economic problems

The Election of 1932 Though party platforms were remarkably similar, Democrats supported repeal of Prohibition and an increase in federal relief FDR won 57% of the popular vote and Democrats took control of both the House and Senate

The Election of 1932

The Bank Holiday One of Roosevelt’s first actions as president was to declare a Bank Holiday Roosevelt ordered that all Banks close for four days Congress passed the Emergency Banking Relief Act This gave FDR a wide range of power over the banks Setup a system to protect people’s money that was deposited in the banks The goal was to restore public confidence in the banking system

Fireside Chats Roosevelt was concerned about restoring the American peoples confidence in the economy He used the radio to deliver a message of hope and optimism to the American people “The only thing we have to fear is fear itself” These were called fireside chats because FDR would sit by a fireplace in the White House when he spoke

The First 100 Days FDR launched Hundred Days of legislative and administrative changes after taking office Relief – provide assistance to the poor; provide government jobs to get people back to work Recovery- actions to restart consumer demand for products Reform- create laws and government programs to prevent further economic decline