Chapter 9 The Great Depression Lesson 1: The Causes of the Great Depression

New Presidential Administration President Herbert Hoover 1929-1933 “I have no fears for the future of our country…it is bright with hope.” –Inaugural Speech Optimistic and encouraged stock sales to rise

Understanding the Bull Market Rising Stock Market over an extended period of time Early 1920s (Jazz Age) -stock reflected their true value Late 1920s (as the Jazz Age came to a close)- Investors did not report a company’s earnings and profits People began to SPECULATE- buying a stock at great risk with the anticipation that prices will rise buy quickly at low prices, sell quickly at higher prices. ONLY LASTED AS LONG AS INVESTORS CONTINUED TO PUT NEW MONEY INTO IT

Understanding the Stock Market Buying ON MARGIN- making only a small cash down payment, the rest would be an interest rated loan to be paid later to the stock broker When stocks began to fall the broker could issue a MARGIN CALL- to demand the “on margin” loan be paid at once

The Great Crash September 1929-As investors decided the boom was over they sold more stock, causing prices to go even lower Monday October 21, 1929- customers put stocks for sale at such low prices the market plummeted October 24- Black Thursday- the market dropped even farther, people in debt from paying back margin calls October 29- Black Tuesday- steepest drop in prices ever- 16 million shares of stock were sold By Mid November $30 Billion was lost (the same amount as the total wages of all Americans that year)

Banks Begin to Close The Market crash weakened the nation’s banks in TWO ways: Banks lent billions $ to stock speculators Banks invested depositor’s $ in the stock market, hoping for a high return Lending the PEOPLE’s MONEY Banks lost money on their investments and speculators defaulted on their loans Many banks begin to cut loans to consumers and businesses With less credit available consumers could not spend money-sending the economy into a recession

Unstable Banking Systems Government did not insure bank deposits, so if a bank failed, customers lost their $ Americans lost confidence in the banks Many Americans made bank runs -many depositors with drawl their money at the same time, which caused banks to fail. 1932- ¼ banks in the US went out of business

Roots of the Depression 1. Uneven Distribution of Income OVERPRODUCTION (thanks mass production) Most Americans did not earn enough $ to buy goods they helped produce Produced 32% more, but only got paid 8% more Because of low demand of goods, production stopped and people lost their jobs No more disposable income Farmers- over produced, couldn’t sell (dropped prices so low they weren’t getting a return), went bankrupt and lost farms Americans had been buying high priced items on credit, now couldn’t pay their installments

Roots of the Depression 2. Loss of Export sales As the Bull Market grew the US stopped loaning money overseas and instead loaned it to speculators Without loans from US banks foreign companies purchased fewer American products Congress passed the Hawley-Smoot Tariff to raise tariffs, expecting to get a return on imports, except foreign countries raised their own tariffs and it hurt both American farmers and American business

Roots of the Depression 3. Mistakes by the Federal Reserve Kept interest rates low in the early 1920s Borrowed too much money to expand production in the mid 1920s Increased interest rates after the crash, which only made debt greater and tightened the American’s credit.