The Great Depression Begins 1929 - 1932 Chapter 17 Section 1

The Election of 1928 The 1928 election placed former head of the Food Administration and secretary of commerce, Herbert Hoover, on the Republican ticket against Democratic candidate, Alfred E. Smith. The issue of Prohibition played a major role in the campaign. Hoover favored a ban on liquor sales. (Dry candidate) Smith opposed the ban. (Wet candidate) Religious differences between the candidates had a major effect on the campaign. Smith faced a smear campaign because he was Catholic. Herbert Hoover easily won the 1928 election by a landslide.

1928 Election Results

Hoover’s vision for America Hoover was optimistic about America’s future. He said: “We are nearer to the final triumph over poverty than ever before in the history of any land…” (Primary source)

The Long Bull Market The stock market was established as a system for buying and selling shares of companies. A long period of rising stock prices is known as a bull market. Prosperous times during the 1920s caused many Americans to invest heavily in the stock market. In the 1920s stock prices tended to reflect their true value. Details: 10% of American households owned stocks. In the late 1920s, new investors bid prices up without looking at a company’s earnings and profits.

Buying stock on the margin Buying stock on the margin meant that investors paid a small deposit – 10% - and borrowed the remaining amount from the stockbroker. Stockbrokers made commission on the sale and earned interest on the loan. As long as stock prices kept going up, buying on the margin was safe. What happened when the stock price began to fall?

Margin Call Stockbrokers wanted to protect the loans they had given out to investors. When prices began to fall, stockbrokers called in the loan – -- they asked for their money back! This was called a margin call Investors had to repay the loan they had taken out to buy the stock in full. Effects?

The Great Crash By late 1929, a lack of new investors in the stock market caused stock prices to drop and the bull market to end. Investors saw the value drop, and began to sell their shares. This caused the prices to fall further… On October 29, 1929, stock prices fell drastically on Black Tuesday, resulting in a $10 to $15 billion loss in value. While this did not cause the Great Depression, it did undermine the economy’s ability to hold out against its other weaknesses. The stock market crash weakened the nation’s banks.

The Crash of ‘29

Summary of the causes of the Crash of ‘29 Before the late 1920s the stock prices reflected the true value of the stock. Then stock prices kept rising (bull market) Investors began buying stocks on the margin – without considering the company’s earnings or product. Professionals sensed danger and began to sell their stock, others did too and prices began to fall. The stock market crashed in October 1929.

Bank Runs Bank runs resulted as many bank customers withdrew their money at the same time, causing the bank to collapse. Banks were forced to close as they could not recover from the losses they made. Peoples’ savings were wiped out, which made it more difficult for people to cope with unemployment and the poverty that accompanied the Great Depression.

Bank runs – savings gone!

Roots of the Great Depression The stock market crash in 1929 helped to put the economy into a recession: downward turn. However, many forces worked together to lead toward the long lasting deep Depression. Language of the discipline: Depression: a period of time where business production, employment and stock market values remain very low for a long time.

The Roots of the Great Depression Important forces to consider: Efficient machinery led to overproduction, and Americans could not afford to buy all the goods produced. Oversupply and low demand. The uneven distribution of wealth in the United States added to the country’s economic problems. Details: In 1929 the top 5 percent of American households earned 30 percent of the country’s income. More than two-thirds of the nation’s families earned less than $2,500 a year.

The Roots of the Great Depression, cont. Many Americans bought expensive items on installment plans (cars, refrigerators, radios). Many found repayments too high and cut back on their spending = rising unemployment as companies cut back on production.

Roots of the Great Depression Less American goods were sold overseas; demand in Europe declined and US jobs were lost as exports abroad fell. The Hawley-Smoot Tariff severely dampened trade between the USA and Europe. Why? This high tariff greatly increased the cost of trade Effect: Intensified the Depression: as exports dropped, so did production and unemployment increased.

Roots of the Great Depression Mistakes were made by the Federal Reserve. The Fed usually raises interest rates to curb rising prices and spending, and this would have been a wise policy during the consumer driven years of the 1920s. (Higher interest rates = encouraged people to save and not to spend or take out expensive loans) However, the Fed kept interest rates LOW: Effect: More spending Risky loans People borrowed more than they could pay back.

Main causes of the Great Depression

Summary