Hubbard 2005

Today’s Objectives Describe the characteristics of the 1920s stock market. Identify the causes of the Great Depression

Daily Question What were the major campaign issues of the Election of 1928?

Daily Question Answer The issue of Prohibition played a major role in the campaign. Hoover (a “dry”) favored continuing the ban on liquor sales. Smith (a “wet”) opposed the ban. Religious differences between the candidates had a major effect on the campaign. A smear campaign against Smith based on religion, first catholic to run for President. The Republicans took full credit for the prosperity of the 1920s.

Daily Question How did the stock market crash weaken the nation’s banks?

Daily Question Answer The stock market crash caused the banks to lose money on their investments, and speculators defaulted on bank loans. Because the government did not insure bank deposits, customers lost their money if a bank closed. Bank runs resulted as many bank customers withdrew their money at the same time, causing the bank to collapse.

Great Depression 1. Uneven Distribution of Wealth 2. Declining Sales 3. Federal Reserve Mistakes 4. Stock Market Crash

The Roots of the Great Depression uneven distribution of wealth added to the country’s economic problems. 1929 top 5% of households earned 30 % of the country’s income. BUT more than 2/3 of families earned less than $2,500 a year.

Election of 1928 Herbert Hoover (Republican) defeats Alfred E. Smith (Democrat) by a landslide! Republicans took credit for the economic prosperity of the 1920’s.

Prosperity of the 1920’s The “Roaring Twenties” were a time of economic prosperity and consumer confidence. Automobiles become common. Prohibition “Flappers” Jazz!

Understanding the Economy of the 1920’s The stock market was established as a system for buying and selling shares of companies (stock). Good times during the 1920s caused many to invest in the stock market.

This Sounds Like a Bull to me. The stock market is characterized by either a Bull or a Bear Bear Market, Slow Trading (Hibernating) Bull Market, Charging Ahead

A Bull Market 1920’s was a long period of rising stock prices, known as a bull market. As the bull market continued to increase, many investors bought stocks on margin, making a small cash down payment, and paying the rest back later – buying on credit.

Speculation Speculation when investors bet on the market climbing and sold whatever stock they had in an effort to make a quick profit.

Why were stock market investors in the 1920s sensitive to any fall in stock prices? If prices fell, they might not be able to pay back what they owed when they sold their stocks for less than they paid for them. If a Margin Call was made, they might not be able to pay it.

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. As stockbrokers issued margin calls, customers placed their stocks up for sale, causing the stock market to plummet further.

Black Tuesday Stock prices fell drastically on October 29, 1929, Black Tuesday, resulting in a $10 to $15 billion loss in value This did not cause the Great Depression, it destroyed the economy’s ability to hold out against its other weaknesses.

What the Crash Did Do. Weakened the nation’s banks. Banks lost money on their investments Speculators defaulted on loans. The government did not insure bank deposits so customers lost their money if a bank closed.

Bank Runs Bank runs resulted as many bank customers withdrew their money at the same time, causing the bank to collapse.

Fed up with The FED Instead of raising interest rates to stop speculation, the Federal Reserve Board made the mistake of lowering the rates. This encouraged banks to make risky loans and misled business owners into thinking the economy was still expanding

Credit, the Installment Plan Many bought on the installment plan, making a down payment and paying the rest in monthly installments. Paying off installment debts left little money to purchase other goods.

Consumer Activity Efficiency in industry led to overproduction Worker’s wages did not increase fast enough to buy all of the production goods. This lower consumption added economic problems. As sales decreased, workers were laid off, resulting in a chain reaction that further hurt the economy.

The Hawley-Smoot Tariff The Hawley-Smoot Tariff intensified the Depression by raising taxes on imported goods. Americans purchased less from abroad because of the high cost. In return, foreign countries raised their tariffs on American products, causing fewer to be sold overseas.

Checking for Understanding Define Match the terms on the right with their definitions on the left. A __ 1. a system for buying and selling stocks in corporations __ 2. buying bought at great risk with the anticipation that the price will rise __ 3. buying a stock by paying only a fraction of the stock price and borrowing the rest __ 4. a long period of rising stock prices __ 5. demand by a broker that investors pay back loans made for stocks purchased on margin A. stock market B. bull market C. margin D. margin call E. speculation E C B D

Why does studying the Depression Matter today? Prosperity in the United States seemed limitless before the Great Depression struck. Overproduction and agricultural problems contributed to the economic catastrophe. President Hoover looked to voluntary business action and limited government relief as solutions, but these efforts failed. Meanwhile, millions of Americans lost their jobs and life savings. Artists and writers depicted this suffering, and many people turned to lighthearted films to escape their difficult lives.