The Great Crash Ch 21-1

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1 The Great Crash Ch 21-1 The Main Idea The stock market crash of 1929 revealed weaknesses in the American economy and trigger a spreading economic crisis. Learning Goal/Content Statement Content Statement 15/Learning Goal(Ch 21): Describe how the federal government s monetary policies, stock market speculation and increasing consumer debt led to the Great Depression

2 Ch 21-1 vocab Gross National Product: total value of goods and services produced in a nation during a specific period. Between 1922 and 1928 this rose by 30%. Herbert Hoover: 31 st president of the U.S. He helped save Europe from starvation after WWI but as president failed to deal effectively with the Great Depression. Buying on Margin: buying stocks with a loan from stock brokers. Federal Reserve: Nation s central bank Black Tuesday: October 29, Stock Market crashes.

3 1.The Appearance of Prosperity 1.Strong Economy Between 1922 and 1928 the U.S. gross national product, or total value of all goods and services, rose percent. Though farmers and some other workers didn t benefit, the overall economy performed well, especially for automakers and those who made auto parts. Overall unemployment remained low, averaging around five percent between 1923 and Union membership slowed as employers expanded welfare capitalism programs, or employee benefits. This feeling of prosperity encouraged workers to buy new products and enjoy leisure activities such as movies. 2.Stock Market Expansion The stock market, where people buy stocks, or shares, in companies, performed very well in the 1920s, with stock values sharply increasing each month. The value of stocks traded quadrupled over nine years. The steep rise in stock prices made people think the market would never drop, and more ordinary Americans bought stocks than ever before. The number of shares traded rose from 318 million in 1920 to over 1 billion in Business leaders said everyone could get rich from stocks.

4 High Hopes 3.Faith in business and government Many Americans thought the prosperity of the 1920s proved the triumph of American business, and public confidence in government was high. Presidents Harding and Coolidge both favored policies that helped business, and both were very popular, easily winning elections. 4.The election of 1928 When Coolidge didn t run for reelection in 1928, the Republicans easily chose Herbert Hoover. Hoover had been on Harding and Coolidge s cabinets, had overseen America s food production during World War I, and had an outstanding reputation as a business-like administrator. Hoover s opponent was New York governor Al Smith, an outgoing politician with a strong Brooklyn accent, whose support came mostly from cities. Smith was the first Catholic to run for president. He faced prejudice because of his religion, and because of his opposition to Prohibition. Hoover easily won the election, but the race clearly demonstrated the conflicts dividing the nation in that era.

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6 5.Economic Weaknesses While many Americans enjoyed good fortune in the 1920s, many serious problems bubbled underneath the surface. One problem in the American economy was the uneven distribution of wealth during the 1920s. The wealthiest one percent of the population s income grew percent, but the average worker saw under a 10 percent gain. For most Americans, inflation or rising prices swallowed up any increase in salary. Coal miners and farmers were very hard hit, but by 1929 over 70 percent of U.S. families had too low an income for a good standard of living. Four out of every five families couldn t save any money during the so-called boom years. Credit allowed Americans to buy expensive goods, but by the end of the decade many people reached their credit limits, and purchases slowed. **Credit given by companies installment buying** Warehouses became filled with goods no one could afford to buy. Why were stock prices still going up? (Radio business example)

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8 6.Credit and the Stock Market Investors increasingly used credit to buy stocks as the market rose. Based on the assumption value of stock market would always rise. 6. Buying on Margin Investors were buying on margin, or buying stocks with loans from stockbrokers, intending to pay brokers back when they sold the stock. As the market rose, brokers required less margin, or investors money, for stocks and gave bigger loans to investors. Buying on margin was risky, because fallen stocks left investors in debt with no money. If stocks fell, brokers could ask for their loans back, which was called a margin call. 7.The Federal Reserve The board of the Federal Reserve, the nation s central bank, worried about the nation s interest in stock and decided to make it harder for brokers to offer margin loans to investors. Their move was successful, until money came from a new source: American corporations who were willing to give brokers money for margin loans. Buying continued to rise.

9 Stock Price Per Share ($down) 10% Price Per Share Profit 1 $10 (1) 6months $20 +$11 5 $20x5 =$100 (10) 6 months $40x5 =$200 +$ $40x25=$1,000 (100) 6 months $80x25=$2,000 +1, $80x125=$10,000 (1000) 6 months $100x125 =$12,500 +$3,500 Buying on Margin: Total value of stocks: 125 shares x $100= $12,500. Pay off loan??? Total amount borrowed: $9,000 (10, down) **Magnify** Profit Margin Loan 1,000 down /3,500 profit 350% Return Profit no loan 10,000 down/2,500 profit 25 % Return Total Profit (w/loan paid): $3,500 Total Amount of own money spent: $1,000 OCTOBER 29, 1929 VALUE OF YOUR STOCK GOES FROM $100 to $1 per share. Total value of stocks: $125 Total you owe to stock broker: $9,000 (9, = $8,875) *MARGIN CALL AVERAGE INCOME $3,000-5,000 a year

10 Union Wages and hours NYC Source: Fite and Reese, An Economic History of the United States. 2 nd Edition. Occupation 1914 per hour Hours/ Week Weekly Wage 1924 per hour Hours/ Week Weekly Wage Bricklayer $ $33 $ $66 Carpenter $ $28.73 $ $57.77 Painter $ $22 $ $52.52 Plumber $ $30.36 $ $60.50 Average weekly wage in manufacturing in 1925 was $25. In 1932 it was $17.

11 8.The Stock Market Crashes The steady growth of the early 1920s gave way to astounding gains at the end of the decade until its September 3, 1929, peak. Many people were beginning to see trouble as consumer purchasing fell and rumors of a collapse circulated. On Thursday, October 24, 1929, some nervous investors began selling their stocks (Joe Kennedy) and others followed, creating a huge sell-off with no buyers. Stock prices plunged, triggering an even greater panic to sell. Toward the end of the day, leading bankers joined together to buy stocks and prevent a further collapse, which stopping the panic through Friday. But the next Monday the market sank again, and Black Tuesday, October 29, was the worst day, affecting stocks of even solid companies. The damage was widespread and catastrophic. In a few short days the market had dropped in value by about $16 billion, nearly one half of its precrash value.

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13 Causes of Great Depression/Stock Market Crash Uneven distribution of wealth Inflation Over-extension of Easy credit Over speculation in the stock market

14 Causes of Great Depression/Stock Market Crash Uneven distribution of wealth: rich got richer and poor s wealth didn t catch up. This causes inflation. Prices for items goes up. Inflation: most take home money was spent for increased price of everyday items. If people wanted or needed something they just used credit. Over-extension of Easy credit: This creates artificial demand for items. Consumer spending stops when credit dries up. Then economy slows down and stock prices will begin to dip. Workers get laid off. Can t pay back loans hurting banks. Bank Runs. But stocks don t go down because of buying on margin. Over speculation in the stock market: value of stocks were overinflated due to buying on margin. Once sell off begins the stock market s value plummets.

15 Effects of the Crash 9.Impact on Individuals Though some thought the market would rally, countless individual investors were ruined. Margin buyers were hit the hardest, because brokers demanded they pay back the money they had been loaned. To repay the loans, investors were forced to sell their stocks for far less than they had paid, and some lost their entire savings making up the difference. In the end, many investors owed enormous amounts of money to their brokers, with no stocks or savings left to pay their debts. 10.Effects on Banks The crash triggered a banking crisis, as frightened depositors rushed to withdraw their money, draining the bank of funds. Bank run. Many banks themselves had invested directly or indirectly in the stock market by buying companies stocks or by lending brokers money to loan to investors on margin. When investors couldn t repay margins, banks lost money, too. These failures drove many banks out of business.

16 More Effects of the Crash 11.Effects on Business The crash crushed businesses, because banks couldn t lend money. Consumers also cut back their spending on everything but essentials, and companies were forced to lay off workers when demand decreased. Unemployed workers had even less money to make purchases, and the cycle continued. In the year after the crash, American wages dropped by $4 billion and nearly 3 million people lost their jobs. 12. Effects Overseas The fragile economies of Europe were still struggling from World War I. They had borrowed a great deal of money from American banks that the banks now wanted back. With U.S. buying power down, foreign businesses were less able to export their products and were forced to fire workers. Governments tried to protect themselves by passing high tariffs, making foreign goods expensive. The decline in world trade in the 1930s created misery around the world and contributed to the nation s slide into the Great Depression.

17 Hoover s Response to the Great Depression *Things to Come* Hoover s core beliefs that government should not provide direct aid, but find ways to help people help themselves shaped his presidency. Ideas and Beliefs Before the market crash, Hoover tried to help farmers by strengthening farm cooperatives. Cooperative: an organization owned and controlled by its members, who work together for a common goal After the crash, Hoover continued to believe in voluntary action, and he urged business and government leaders not to lay off workers, hoping that their cooperation would help the economic crisis pass. Direct Action Businesses cut jobs and wages, and state and local governments cut programs and laid off workers. The crisis persuaded Hoover to go against his beliefs and establish the Reconstruction Finance Corporation in 1932, a program that provided $2 billion in direct government aid to banks and institutions. Later that year he asked Congress to pass the Federal Home Loan Bank, a program to encourage home building.

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