The Economy in the Late 1920’s

As you enter the room… Pick up the worksheet and answer the bell ringer question: What factors contributed to the booming economy of the 1920’s

The Economy Seemed Fine….. Hoover was the Secretary of Commerce for Harding and Coolidge, and everyone expected the economy to get even better with him as president Since WWI, wages had risen by more than 40% and unemployment was below 4% on average About 8% today Welfare Capitalism – employers raised wages and provided benefits to prevent union activity Hoover: “Poverty will be banished from this country”

The Stock Market Viewed as the “weathervane” of the economy How does it work? At some point, just about every company needs to raise money for some reason They have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a stake (issuing shares of stock) in the company. When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings. Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done. As a company's earnings improve, investors are willing to pay more for the stock. In addition, in years in which profits are very high, companies may choose to pay dividends to their stock holders, or a portion of the profit

The Stock Market in the 1920’s Increasing stock values indicated prosperity in the late 1920’s 1925: $27 billion 1928: $38.5 billion Oct. 1929: $87 billion 1929 was seen as a year “of unprecedented advance, of wonderful prosperity”

“Everybody Ought to be Rich” 1929 article by John Raskob “I am firm in my belief that anyone, not only can be rich, but ought to be rich” What does this say about the attitudes and confidence of Americans in early 1929? Raskob exaggerated the power of investment This article, among other influences in society, led to an overconfidence in the stock market

“Hindsight is 20/20” 6 main factors, looking back that should have been warnings 1. Prosperity was hugely uneven 65% made $1,999 or less 29% made $2,000-$4,999 5% made $5,000-$9,999 1% made over $10,000 Also, 0.1% of the population held 34% of savings Close to 80% of the population had no savings

“Hindsight is 20/20” 2. Buying on credit leads to… Personal debt!!! 3. Widespread speculation (high risk investments) 4. Many were buying stocks on margin (credit) 5. Overproduction slowed industries (especially auto and construction) Remember supply and demand – in this case supply outpaced demand 6. Farmers struggled due to low farm prices 6000 rural banks failed “we were in a depression before 1929, we just didn’t call it that” A rural Tennessee farmer

Stock Market Crash

The Dow Jones Industrial Average An average of stock prices for major industries in the US In early 1928, it was 191 and by September 3, 1929, it was at an all-time high of 381 After that peak in September, the stock process began to fall slowly Some banks began to call in loans from speculators, but others loaned even more

Problems begin… Black Thursday, October 24 Investors were worried about a bad last hour of trading the day before They began to sell (General Electric stock fell from $400/share to $283/share) The day saw a $3 billion loss on the market No serious effects on the general population Government and economic officials insisted the nation should not worry

Black Tuesday To stop the losses, a group of banks pooled their money to buy stock, but it only delayed the problem a few days On Tuesday, October 29, BLACK TUESDAY a record 16.4 million shares were sold (the average in a day was about 4 million) This collapse of the market is known as the GREAT CRASH By the end of the day, Nov. 13 the DOW had fallen from the record of 381 nearly in half to Overall losses totaled $30 billion

The Business Cycle The economy expands and contracts over time Vocab before clip…. Real GDP (gross domestic product) - An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices.