The Nation’s Sick Economy Chapter 14, Section 1 The Great Depression Begins

What would you do to feed your family? .) Reproduction number: LC-USF34-9095 (film negative) Caption: "Migrant agricultural worker's family. Seven children without food. Mother aged 32, father is a native Californian. March 1936." Location: FSA/OWI - J355. (Also available on microfilm and microfiche: Microfilm LOT 344; Chadwyck-Healey Far West fiche #32:A-9.)

What groups of Americans will be most hurt by the economic crash? What jobs might you consider to be depression proof?

What can you do to find a paying job? What can unemployed and impoverished people do to help each other?

Objectives Summarize the critical problems threatening the American economy in the late 1920’s Describe the causes of the stock market crash and the Great Depression Explain how the Great Depression affected the economy in the United States and throughout the world

Main Idea As the prosperity of the 1920s ended, severe economic problems gripped the nation.

Why It Matters Today The Great Depression has had lasting effects on how Americans view themselves and their government.

Economic Troubles on the Horizon 1.) How did the diminished demand affect farmers and business in the 1920’s? 2.) How did falling incomes affect consumer behavior?

Industries in Trouble What industrial weakness signaled a declining economy in the 1920s? Answer – The older industries such as textiles, steel, and railroads, which were the foundation of our economy, were barely profitable.

Industries in Trouble Superficial prosperity of the 20s hid the signs Railroads losing business to other modes of transport Coal-mining hard-hit by new forms of energy Housing-starts decline. When the number of new homes being built falls so do related jobs

Farmers Need A Lift During WWI crop prices steadily rise as international demand soars Farmers plant more and borrow money to buy land and equipment to meet the demand Demand falls after the war and prices drop

Farmers Need A Lift Farmers grow more to make up for decreasing prices This only drives prices lower Annual farm income drops from $10 billion to $4 billion Farmers can’t pay the banks

Farmers Need A Lift Banks foreclose to recoup debt Rural banks eventually begin to fail as well Congress’ McNary-Haugen bill calls for price-supports Government buys surplus crops at guaranteed prices Pres. Coolidge vetoes the bill twice

Consumers Have Less Money to Spend Rising Prices Stagnant wages Uneven distribution of wealth Overbuying on credit

Living on Credit Many during the 20s were living beyond their means Credit – buy now, pay later Monthly payments with added interest charges Easy credit creates large consumer debt Faced with debt, consumers stop spending

Uneven Distribution of Income 29% 5% 65% 1%

Uneven Riches Rich get richer In 1929, 200 large corporations control 49% of American industry In 1929, 24,000 families, or 0.1% of the population, have incomes exceeding $100,000 They hold 34% of the country’s total savings 513 families are millionaires

Uneven Distribution of Income Mass production of goods, advertising, and the mass media created a pressure for people to consume. Easy credit based on a rising economy gave people the means to buy what they could not afford. This “house of cards” crashed with the stock market. What percentage of Americans had incomes under $5,000? Answer 94%

A chart showing the disparity in income distribution in the United States.[17][18] Wealth inequality and income inequality have been central concerns among OWS protesters.[19][20][21] CBO data shows that in 1980, the top 1% earned 9.1% of all income, while in 2006 they earned 18.8% of all income.[22

The share of income going to higher-income households rose, while it fell for others. CBO has examined the trends in the distribution of income for all households between 1979 and 2007.

After-Tax Income Grew More for Highest-Income Households CBO finds that, between 1979 and 2007, income grew by: 275 percent for the top 1 percent of households, 65 percent for the next 19 percent, Just under 40 percent for the next 60 percent, and 18 percent for the bottom 20 percent.

Main Idea What did the experience of farmers and consumers at this time suggest about the health of the economy? Answer – Beneath the surface prosperity of the 1920s, the economy was in trouble.

How did popular perceptions of prosperity influence the election of 1928?

The Election of 1928

The Election of 1928 Hoover Stanford U. Sec. of Commerce Mining engineer Iowa Quaker Quiet and reserved Alfred E. Smith Self-made man Career politician 4 terms as NY governor Lower East Side, NYC Roman Catholic Personable

The 1928 Election Republican: Herbert C. Hoover 58% of the popular vote Democrat: Alfred E. Smith 41% of the popular vote

1928 Election: Herbert Hoover v. Alfred Smith The irony of the 1928 election…

“We in America are nearer to the final triumph over poverty than ever before.”

“Master of Emergencies” Mississippi River Flood of 1927 President Calvin Coolidge sent the Sec. Of Commerce to lead relief efforts Raised $15 million through radio campaign Built tent cities for 600,000 homeless Made to remind voters what he had done to make life better for those in need Many historians believe this to be the first campaign film

Stock Market Dreams Most visible symbol of America’s prosperity Dow Jones Industrial Average is a measure based on the stock prices of 30 prosperous companies trading on the New York Stock Exchange Bull market is a period of rising prices By 1929, 4 million or 3% owned stock

New York Stock Exchange Started in 1792, it is the nation’s premier marketplace for buying and selling stocks. Stockbrokers take orders from customers to buy and sell shares of more than 3,000 companies To complete the transaction, brokers offer and receive bids in what resembles an auction

New York Stock Exchange Two types of transactions: A limit order tell the broker to buy and sell at a certain price A market order tells the broker to execute the transaction immediately, regardless of price. With computers, brokers can complete a transaction in 12 seconds. The Internet allows investors to buy and sell for themselves, forgoing the cost of a broker.

New York Stock Exchange                                                 

Watching the ticker tape at the height of the bull market.

The Bull Market v. The Bear Market

The Bull Market Stock prices rise in the 20s The market is viewed as a get rich quick opportunity The basic concept of the stock market…

Stock Market 101 What is a share of stock? Why do companies sell shares of stock? Why do people buy stock? What determines the value of stock?

The Bull Market Two ways to make money in the stock market: Long term investment… Speculation… Margin buyers… Risky?…

Trouble Signs Speculation – buying stocks and bonds on the chance of a quick profit, while ignoring the risks. Stocks - Owning stocks in a company makes you part owner of that business. If the company is successful the value of the stocks will rise or it will be able to pay a higher annual dividend. The better the company does, the better the investor does. Bonds - Governments, states, corporations and many other types of institutions sell bonds. It is a promise to repay the principal or cost price along with the interest on a specified or maturity date.

Trouble Signs Buying on Margin – paying a small percentage of the stock’s price as a down payment and borrowing the rest. The government did little to regulate the market The reality was that these upward spiraling prices did not reflect the true value of the companies If stock prices decreased, people buying on margin had no way of paying off their loans

Interpret the following quote… “In effect, the automobile of American capitalism had one foot pressed to the accelerator of production and another on the brake of consumption.”

1920-1929 Dow Jones

1930-1939 Dow Jones

The dot.com Bubble Late 90s and the dot.coms is a modern example of the speculative bubble covering roughly 1995–2000 the collection of start-up companies selling products or services using or somehow related to the Internet. Successful dot-coms Amazon.com eBay Google MSN PayPal (now a subsidiary of eBay) Priceline.com Yahoo! Netflix

How did speculation and margin buying cause stock prices to rise? Answer They caused over investment as people ignored the risks and bought more than they could pay for.

The Stock Market Crash * Not a 1 or 2 day event Wall Street Oct. 29, 1929 What happened on "Black Tuesday?”…

The Stock Market Crash

The Stock Market Crash Hoover: “the fundamental business of America is sound” The market lost $40 billion from October 29 to April of 1930 The market crash is followed by The Great Depression The economic low point: 1932-33

The Causes of the 1929 Market Crash PANIC selling!!!!!! …No demand Speculation & margin purchase – Undermined confidence in investment (fear), growth & spending (…FEAR!) Lack of government regulation…

Think… Where did the $40 billion in market assets (money) go when the market crashed? Paper profit… Is paper profit real?...

The Stock Market Crashes September 1929, stocks peak and then begin to fall Confidence wavers and some sell stock October 24, “Black Thursday” market plunges and people panic. 13 million shares are traded. What happened on October 29, 1929?

Black Tuesday The stock market bubble burst Confidence in broken and people sell 16 million shares frantically Stock purchases made on credit are huge debts now Others lose their life’s savings By mid-November, investors lost $30 billion, an amount equal to the cost of WWI

The Crash of 1929 October – average stock lost ¼ of its value November – industrial stocks lost ½ of their value October 1929 to June 1932 GM fell 73 points to 8 USS 262 points to 21 Montgomery Ward 138 to 4 RCA from 101 to 2.5

Financial Collapse The crash signaled the beginning of the Great Depression from 1929 to 1940. The crash alone did not cause the depression. What happened to banks and businesses in the economic collapse?

Banks and Businesses Fails Run on the banks Banks invested in the stock market In 1929, 600 banks closed By 1933, 11,000 of the country’s 25,000 banks had failed No government protection or insurance Millions lose savings

Depression Indicators Textbook page 470 Bank Failures Business Failures Income & Spending Unemployment

How safe is your money? That "FDIC" logo you see as you walk in the door means that you hold insurance on your deposits. Depositors are typically protected for up to $100,000. Banks also carry private banking insurance -- specially designed private coverage to protect deposits in the case of burglaries, robberies, vandalism, etc.

Banks and Businesses Fail Between 1929-1932, the GNP – the nation’s total output of goods and services – was cut in ½ from $104 billion to $59 billion. 90,000 businesses go bankrupt Unemployment jumped 3% (1.6 million) to 25% (13 million) 1 in 4 Americans out of work The rest faced pay cuts and reduced hours

How Banks Create Money                                                                                                                                                                                                                                                 

How banks make money

Why does it work? Banking is all about trust. While people are putting money into the bank every day, the bank is lending that same money and more to other people every day. If everyone goes to the bank at the same time and demands their money (a run on the bank), there might be problem.

All of the above become issues in the Great Depression. The impact of the Wall Street Crash… · 12M people out of work · 20K companies bankrupt · 1600 banks close · 1 in 20 farmers evicted · 23K suicides in one year–highest ever All of the above become issues in the Great Depression.

A recession is a business cycle in which economic activity slows down. Recessions occur when there is a drop in consumer spending. Production (GDP), investment, household incomes, business profits & inflation fall. Increased bankruptcies Unemployment rise. Governments response: Increasing money supply, increasing government spending & decreasing taxation.

Depression A depression is a sustained, long-term downturn in economic activity in one or more economies (countries). A depression is characterized by: - Lasting a long time - No buyers…suppliers cut production - Large increases in unemployment - No availability of credit - Price deflation - Bank failures

A British election poster shows that the depression was a world event                                                                                                                                                   A British election poster shows that the depression was a world event

Worldwide Shock Waves Europe Costs of rebuilding High debt German war reparations The depression compounded these problems by limiting America’s ability to import European goods This in turn made it impossible to sell American products abroad

How did the Great Depression affect the world economy? Answer World trade dropped, causing unemployment to rise globally

Hawley-Smoot Tariff 1930 by Congress Highest protective tariff Designed to keep out foreign competition Opposite effect Prevented other countries from earning American currency to buy our goods Unemployment grew worse in export industries Countries retaliate World trade falls by 40%

GNP Gross National Product… GNP = The total amount of goods & services produced within our economy 1929: GNP = $104 billion 1933: GNP = $56 billion

Global Effects of the Depression American investors withdraw $ from Europe World trade plummets and unemployment skyrockets Germany and Austria extremely hard-hit In Asia, farmers and workers suffer as exports drop by ½ Demand for Latin American products like sugar, beef, and copper collapse

Global Repercussions, 1921-1933 Loans US Banks Wall St. Reparations Debt Payment Debt Payment US Treasury

Global Effects of the Depression How might a depression of this world scale contribute to the rise of dictators like Hitler and Mussolini?

SHOW U the causes of the Great Depression… Stock market crash & financial panic High Tariffs limiting trade Over production in industry Weak agricultural economy Unequal distribution of wealth

The Great Depression –

What happened to banks in the economic collapse?

“Bank Runs” – 20% of all banks close

What happened to businesses the economic collapse?

Mass unemployment…. 1929… 3% unemployment 1933… 25% unemployment Urban unemployment: - Cleveland 50% - Akron 60% - Toledo 80%

Hoover encourages Americans to remain confident

How is this car like the economy of the late 1920s? Make an analogy… How is this car like the economy of the late 1920s?