THE GREAT DEPRESSION BEGINS. Photos by photographer Dorothea Lange

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1 THE GREAT DEPRESSION BEGINS Photos by photographer Dorothea Lange

2 1920 s Problems Factories making too Much; Farms growing too much BANKS Have NO $$ PEOPLE LOST SAVINGS & JOBS NO ONE TO HELP! Factories fire workers (Don t need them) Farm Prices fall (Farmers can t make $$) Banks Close because they have no money: Loans have not been paid back, can t give people their savings Farmers & Factory Workers can t pay back loans to Banks: DEFAULT!!

3 SECTION 1: THE NATION S SICK ECONOMY As the 1920s advanced, serious problems threatened the economy while Important industries struggled, including: Agriculture Railroads Textiles Steel Mining Lumber Automobiles Housing Consumer goods

4 FARMERS STRUGGLE Photo by Dorothea Lange No industry suffered as much as agriculture During World War I European demand for American crops soared After the war demand plummeted Farmers increased production sending prices further downward

5 CONSUMER SPENDING DOWN By the late 1920s, American consumers were buying less Rising prices, stagnant wages and overbuying on credit were to blame Most people did not have the money to buy the flood of goods factories produced

6 GAP BETWEEN RICH & POOR Photo by Dorothea Lange The gap between rich and poor widened The wealthiest 1% saw their income rise 75% The rest of the population saw an increase of only 9% More than 70% of American families earned less than $2500 per year

7 HOOVER WINS 1928 ELECTION Republican Herbert Hoover ran against Democrat Alfred E. Smith in the 1928 election Hoover emphasized years of prosperity under Republican administrations Hoover won an overwhelming victory

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9 Increased large federal spending for public works Hoover Dam Cuts taxes to stimulate private spending and corporate investment Calls on state and local governments to increase capital spending on public works Asks corporate America to voluntarily hire workers Young Hoover supporter in 1928

10 THE STOCK MARKET By 1929, many Americans were invested in the Stock Market The Stock Market had become the most visible symbol of a prosperous American economy The Dow Jones Industrial Average was the barometer of the Stock Market s worth The Dow is a measure based on the price of 30 large firms

11 STOCK PRICES RISE THROUGH THE 1920s Through most of the 1920s, stock prices rose steadily The Dow reached a high in 1929 of 381 points (300 points higher than 1924) By 1929, 4 million Americans owned stocks New York Stock Exchange

12 SEEDS OF TROUBLE The Stock Market s bubble was about to break By the late 1920s, problems with the economy emerged Speculation: Too many Americans were engaged in speculation buying stocks & bonds hoping for a quick profit Margin: Americans were buying on margin paying a small percentage of a stock s price as a down payment and borrowing the rest

13 In September the Stock Market had some unusual up & down movements On October 24, the market took a plunge...the worst was yet to come On October 29, now known as Black Tuesday, the bottom fell out 16.4 million shares were sold that day prices plummeted People who had bought on margin (credit) were stuck with huge debts THE 1929 CRASH

14 By mid-november, investors had lost about $30 billion

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16 THE GREAT DEPRESSION Alabama family, 1938 Photo by Walter Evans The Stock Market crash signaled the beginning of the Great Depression The Great Depression is generally defined as the period from in which the economy plummeted and unemployment skyrocketed The crash alone did not cause the Great Depression, but it hastened its arrival

17 FINANCIAL COLLAPSE After the crash, many Americans panicked and withdrew their money from banks Banks had invested in the Stock Market and lost money In banks fail By ,000 of the 25,000 banks nationwide had collapsed Bank run 1929, Los Angeles

18 GNP DROPS, UNEMPLOYMENT SOARS Between , the U.S. Gross National Product (GNP) the total output of a nation s goods & services fell nearly 50% from $104 billion to $59 billion 90,000 businesses went bankrupt Unemployment leaped from 3% in 1929 to 25% in 1933

19 The U.S. was not the only country gripped by the Great Depression Much of Europe suffered throughout the 1920s In 1930, Congress passed the toughest tariff in U.S. history called the Hawley- Smoot Tariff It was meant to protect U.S. industry yet had the opposite effect Other countries enacted their own tariffs and soon world trade fell 40% HAWLEY- SMOOT TARIFF

20 CAUSES OF THE GREAT DEPRESSION Tariffs & war debt policies U.S. demand low, despite factories producing more Farm sector crisis Easy credit Unequal distribution of income

21 SECTION 2: HARDSHIPS DURING DEPRESSION The Great Depression brought hardship, homelessness, and hunger to millions Across the country, people lost their jobs, and their homes Some built makeshifts shacks out of scrap material Before long whole shantytowns (sometimes called Hoovervilles in mock reference to the president) sprung up

22 SOUP KITCHENS Unemployed men wait in line for food this particular soup kitchen was sponsored by Al Capone One of the common features of urban areas during the era were soup kitchens and bread lines Soup kitchens and bread lines offered free or low-cost food for people

23 CONDITIONS FOR MINORITIES Conditions for African Americans and Latinos were especially difficult Unemployment was the highest among minorities and their pay was the lowest Increased violence (24 lynchings in 1933 alone) marred the 1930s Many Mexicans were encouraged to return to their homeland As conditions deteriorated, violence against blacks increased

24 RURAL LIFE DURING THE DEPRESSION Between almost ½ million farmers lost their land While the Depression was difficult for everyone, farmers did have one advantage; they could grow food for their families Thousands of farmers, however, lost their land Many turned to tenant farming and barely scraped out a living

25 THE DUST BOWL A severe drought gripped the Great Plains in the early 1930s Wind scattered the topsoil, exposing sand and grit The resulting dust traveled hundreds of miles One storm in 1934 picked up millions of tons of dust from the Plains an carried it to the East Coast Kansas Farmer, 1933

26 Dust storm approaching Stratford, Texas

27 Storm approaching Elkhart, Kansas in 1937

28 Dust buried cars and wagons in South Dakota in 1936

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32 Woody Guthrie

33 On the fourteenth day of April, of 1935, there struck the worst of dust storms that ever filled the sky.

34 You could see that dust storm coming, the clouds looked deathlike black, and through our mighty nation, it left a dreadful track.

35 From Oklahoma City, to the Arizona line, Dakota and Nebraska to the lazy Rio Grande

36 It fell across our cities, like a curtain of black rolled down! We thought it was our judgment, we thought it was our doom!

37 The radio reported, we listened with alarm, the wild and windy actions of this great mysterious storm.

38 From Albuquerque and Clovis, and all New Mexico, they said it was the blackest that ever they had saw.

39 From ol Dodge City, Kansas, the dust had rung their knell, and a few more comrades sleeping, on top of ol Boot Hill.

40 From Denver, Colorado, they said it blew so strong, they thought that they could hold out, but they didn t know how long!

41 Our relatives were huddled, into their oil boom shacks, and the children they was cryin as it whistled through the cracks!

42 And the family it was crowded, into their little room, they thought it was their judgment, they thought it was their doom.

43 The storm took place at sundown, it lasted through the night. When we looked out next morning, we saw a terrible sight!

44 We saw outside our window, where wheat-fields they had grown, was now a rippling ocean of dust the wind had blown.

45 It covered up our fences, it covered up our barns. It covered up our tractors in this wild and dusty storm.

46 We loaded our jalopies, and piled our families in. We rattled down that highway, to never come back again.

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50 HARDEST HIT REGIONS Boy covers his mouth to avoid dust, 1935 Kansas, Oklahoma, Texas, New Mexico, and Colorado were the hardest hit regions during the Dust Bowl Many farmers migrated to California and other Pacific Coast states

51 Photographer Dorothea Lange captures a family headed west to escape the dust storms

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53 HOBOES TRAVEL The 1930s created the term hoboes to describe poor drifters 300,000 transients or hoboes hitched rides around the country on trains and slept under bridges (thousands were teenagers) Injuries and death was common on railroad property; over 50,000 people were hurt or killed AMERICA

54 EFFECTS OF DEPRESSION Suicide rate rose more than 30% between Alcoholism rose sharply in urban areas Three times as many people were admitted to state mental hospitals as in normal times Many people showed great kindness to strangers Additionally, many people developed habits of savings & thriftiness

55 SECTION 3: HOOVER STRUGGLES WITH THE DEPRESSION After the stock market crash, President Hoover tried to reassure Americans He said, Any lack of confidence in the economic future... Is foolish He recommended business as usual Herbert Hoover

56 HOOVER S PHILOSOPHY Hoover believed it was the individuals job to take care of themselves, not the governments Hoover was not quick to react to the depression He believed in rugged individualism the idea that people succeed through their own efforts People should take care of themselves, not depend on governmental hand-outs He said people should pull themselves up by their bootstraps

57 HOOVER S SUCCESSFUL DAM PROJECT Hoover successfully organized and authorized the construction of the Boulder Dam (Now called the Hoover Dam) The $700 million project was the world s tallest dam (726 feet) and the second largest (1,244 feet long) The dam currently provides electricity, flood control and water for 7 western states

58 Any dam questions?

59 HOOVER TAKES ACTION: TOO LITTLE TOO LATE Hoover s flurry of activity came too late to save the economy or his job Hoover gradually softened his position on government intervention in the economy He created the Federal Farm Board to help farmers He also created the National Credit Organization that helped smaller banks His Federal Home Loan Bank Act and Reconstruction Finance Corp were two measures enacted to protect people s homes and businesses

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62 BONUS ARMY A 1932 incident further damaged Hoover s image That spring about 15,000 World War I vets arrived in Washington to support a proposed bill The Patman Bill would have authorized Congress to pay a bonus to WWI vets immediately The bonus was scheduled to be paid in The Army vets wanted it NOW

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65 BONUS ARMY TURNED DOWN Thousands of Bonus Army soldiers protest Spring 1932 Hoover called the Bonus marchers, Communists and criminals On June 17, 1932 the Senate voted down the Putnam Bill

66 BONUS MARCHERS CLASH WITH SOLDIERS Hoover told the Bonus marchers to go home most did 2,000 refused to leave Hoover sent a force of 1,000 soldiers under the command of General Douglas MacArthur and his aide Dwight Eisenhower

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69 AMERICANS SHOCKED AT TREATMENT OF WWI VETS MacArthur s 12 th infantry gassed more than 1,000 marchers, including an 11-month old baby, who died Two vets were shot and scores injured Americans were outraged and once again, Hoover s image suffered

70 Hoover had little chance to be re-elected in 1932

71 People Default on Loans + Banks have no money to give = Banks Close People Loose savings

72 OBJ #1- Cause & Sparks of Depression B. SPARK!!! Of the Depression 1. Stock Market Crash, Black Thur. Oct. 29, 1929 a. Summer 1929, Investors begin to sell stocks b. Supply & Demand Again Massive Sell-Off and prices begin to 2. How??? a. Buying on Margin (Borrowing $$) - Buy stock by just paying a small portion of what the stock is worth ex shares at $10= $1000 only pay $300 still owe $700 -Problem, stock crashes and you loose your money and can t payback stock broker - stock broker can t pay back bank

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75 Causes of the Great Depression & Hoover s Response IB History of the Americas

76 Myths and Misconceptions Many people believe that the crash of the stock market was the cause of the Depression. Not so, it was only a symptom. Many people also believe that Herbert Hoover s laissez-fair economic philosophy prevented the federal government from taking steps to prevent the crisis. Hoover was proactive in trying to ease the impact of the depression, it was too little, too late. Many people think that the Great Depression was the only major economic crisis in U.S. history. Nope, but it was the worst. Many people do not realize that the Depression was global and affected almost every capitalist economy on earth Some believe that FDR and the New Deal ended the Depression. Wrong again, WWII ended he Depression

77 The Facts In September of 1929 the U.S. economy began showing signs of contraction (decline from the growth of the 1920 s) August 1929, recession begins, GDP falls by and unemployment rises. Automobile sales fall 30% in By 1929 farm incomes fall more than 50% September 1929 stock prices begin to fall, the market crash on Black Tuesday October 29 th losing 90% of its value by By 1932 US GDP fell 30% US factory production fell 46% US wholesale prices fell 32% US exports fell 70% US unemployment will reach 25% (33% in some regions)

78 US Unemployment Abstract of the US Department of Labor

79 US GDP Based on data from: Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP

80 US Farm Prices US Bureau of Labor Statistics

81 US Industrial Production

82 US Stock Market US Bureau of Labor Statistics

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84 Many did not realize how severe the downturn was until 1932, when the economy had technically hit bottom.

85 Brother Can You Spare a Dime? Once I built a railroad, I made it run I made it race against time Once I built a railroad, now it's done Brother, can you spare a dime? Once I built a tower, up to the sun Bricks and mortar and lime Once I built a tower, now it's done Brother, can you spare a dime?

86 Overproduction Banking Practices & Fed Policies Causes of the Great Depression Stock Market Political Decisions

87 1. Over-production

88 Overproduction The roaring twenties was an era of great prosperity and economic growth. Average output per worker increased 32% in manufacturing and corporate profits rose 62%. The availability of so many consumer goods, such as electric appliances, radios and automobiles, offered to make life easier. Americans felt they deserved to reward themselves after the sacrifices of World War I. A return to normalcy. This led to a high demand for such goods, so companies began to produce more and more, in order to meet that demand.

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90 Overproduction Mass advertising fed mass consumption to satisfy the needs of mass production. Wages for labor remained stagnant (mechanization of labor, Taylorism, suppression of union collective bargaining). Businesses were investing profits in the stock market and not in workers wages. So. The uneven distribution of wealth grows % of the population owns 36.7% of the nations wealth by 1929 it has grown to 44.2% Eventually business produced more than consumers could purchase. You can only own so many radios, cars, and appliances. August 1929 Recession begins, two months before the stock market crash. During this two month period, production fell 20%, wholesale prices at 7.5 %, and personal income fell 5%.

91 Farm Overproduction In 1929, Agriculture still makes up half of the US economy During World War I, with European farms in ruin, the American farm was a prosperous business. Increased food production during World War I was an economic boom for many farmers, who borrowed money to enlarge and modernize their farms. The government had also subsidized farms during the war, paying high prices for wheat and grains. When the subsidies were cut, it became difficult for many farmers to pay their debts when commodity prices dropped to normal levels.

92 So Over production of consumer goods and agricultural goods means Supply was greater than demand. A surplus of goods in the market begins to drive prices down. Declining prices means declining profits Declining profits means stock values (for corporations) begin to fall. Oh my!!!

93 2. Banking & Money Policies

94 Consumer Credit The uneven distribution of wealth didn t stop the poor and middle class from wanting to possess luxury items, such as cars and radios But, wages were not keeping up with the prices and that created problems!

95 Consumer Credit One solution was to let products be purchased on credit. The concept of buying now and paying later caught on quickly. By the end of the 1920s, 60% of the cars and 80% of the radios were bought on installment credit. Consumerism in the New Era saw a change in US buying behavior. Thrift, saving, and frugality were replaced with consumption, and keeping up with the Jones

96 The Federal Reserve Board The Federal Reserve Board was created by Congress in 1917 in response to the Banking Crisis of The Fed was created as the US central bank with two primary functions: 1) Regulate and inspect the nations commercial banks, by assuring banks had sufficient cash reserves 2) Regulate the amount of money circulating in the economy. Known as Monetary Policy To stimulate growth the Fed increases money in circulation by lowering interest rates for member banks, and decrease in the amount of money banks are required to keep in reserve

97 Fed Monetary Policy The Federal Reserve was suppose to serve as a protective watchdog of the nation s economy. It had the power to set the interest rate for loans issued by banks. In the 1920 s, the Fed encouraged buying on credit by lowering interest rates (discount rate) Eventually so many people were buying on credit that inflation increased.

98 By 1929 the Fed decided to slow the rapid (runaway?) growth by increasing interest rates. Raising interest rates means that it cost more to borrow and raises the price of existing debt. So. People borrowed less and purchased fewer goods. They also started using available cash to pay off debt and therefore purchased fewer goods. Less demand = surplus goods = deflation = declining profits = declining stock prices = rising unemployment Oh my! So

99 3. STOCK MARKET ACTIONS

100 The Stock Market The Stock Market is seen as an indicator of the nation s economy. In reality it is only and index of the value of corporate stocks based primarily on the market demand for a particular stock As an investment the goal is to buy low and sell high. The value of stocks soared in the 1920 s as corporate profits rose, fueled by mass consumption. (Fueled by credit, shhhhhh!!!) Once a rich man s game, everyone was in the market in the 20 s Optimism was high, and speculation was rampant

101 Stock Market: Buying on Margin Buying on the margin means that you can purchase shares with a don payment. The Margin Requirement in 1926 was 10%. So a $100 share of stock could be yours with only a $10 down payment Speculators expect the value of the stock to go up in price enough (at least 90% to break even) covering the balance. Buying on the margin encouraged thousands of small time, new (inexperienced) investors to purchase stocks As long as corporations were selling goods and turning a profit stock prices rose and buying on the margin was safe. As long as

102 George Olsen "I'm In The Market For You I'll have to see my broker Find out what he can do. 'Cause I'm in the market for you. With margin I'm all through. 'Cause I want you outright it's true. We'll count the hugs and kisses, When dividends are due, 'Cause I'm in the market for you.

103 Stock Market: Banks & Margins In 1927 banks did two stupid, greedy things 1) Banks began letting customers borrow money to buy stocks and used the customers stock holdings as collateral for the loan. They gave money to people with no money to gamble 2) Banks started to use depositors money to speculate in the stock market. Normally banks pay you interest for savings. Then they loan it to businesses or families that were good risks to buy homes or start companies etc. Not speculate in the market! By 1929, banks had made billions of dollars in risky loans with little collateral to back them up if borrowers defaulted.

104 So what went wrong?

105 Stock Market Crash Black Tuesday, October 29 th The market bubble bursts with a panic sell off of 16 million shares of stock. Investors lose 26 billion dollars (312 billion in 2010 dollars) The crash was not a one day event, stocks falling in September. Wealthy investors stepped in a bought up shares at bargain prices. Those who bought on margin, however, panicked. It is impossible to know exactly what caused the initial panic but the market crash exposed the other problems in the economy setting into motion a deep lack of confidence in the economy.

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107 So Banks made risky loans to borrowers to buy stocks on the margin. Banks used depositors money to speculate in the market When panic shook the market, the banks were left holding the bag Oh my

108 4. Bad Fed Banking Policies With the loss of confidence in stocks, people began to lose confidence in the security of their money being held in banks. Customers raced to their banks to withdraw their savings. (k.a. bank run) Customers closed accounts and banks were left without cash reserves putting them on the brink of failure.

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110 4. Bad Fed Banking Policies In its regulatory role, the Federal Reserve was also established to prevent bank closings. It was suppose to serve as the lender of last resort to banks on the verge of collapsing. However, The Fed lowered the reserve requirement for banks, so the banks did not have the cash to cover customer withdrawals. And the Fed did not provide short term loans to banks to cover the loses the Fed cuts interest rates from 6% to 4% in attempt to increase the money supply So Banks started to close, increasing the panic. 1930, 60 banks fail every month, by 1933 over 9,000 banks fail (40% of the 1929 total)

111 So The Fed fails to manage the bank and currency crisis. Depositors now hide their money at home and banks have no money to lend Banks close and large amounts of money disappear from the economy

112 So Less money = less consumption = less production Businesses go bankrupt People get laid off Thus the economy begins an irreversible downward spiral. Banks close and large amounts of money disappear from the economy By 1931, GNP falls by 18%, unemployment reaches 16%(8 million)

113 4. Bad Political Decisions:

114 Political Decisions The severity of the Depression could have been lessened if policy makers would have been open to new ideas Conservative economic policy Laissez fair, let the market right itself without government intervention Balance the budget, do not spend more than collected in tax revenue Prevailing belief that private charities, churches, state and local governments provide relief and assistance to the poor, not the Federal Government Most of these were ill equipped to deal with the number of people in need

115 The sole function of the government is to bring about a condition of affairs favorable to the beneficial development of private enterprise. ~Herbert Hoover (1930) The Fed will stand by as the market works itself out: Liquidate labor, liquidate stocks, liquidate real estate values will be adjusted, and enterprising people will pick up the wreck from lesscompetent people." ~ Andrew Mellon (1930)

116 Hoover s Political Decisions Contrary to popular history Hoover commitment to laissez fair made the Depression worse Hoover initiated several programs to help the economy recover but it was too little, too late Hoover favored volunteerism, or cooperation between business and government over coercive policy

117 Hoover s Political Decisions Hoover promoted volunteerism. Cooperation between government and business instead of coercive policies. He showed some pro-labor policies: Asked business leaders to hold wages steady even though profits were falling Authorized repatriation for 50,000 Mexicans (and Mexican-Americans) to ease unemployment and cut the relief rolls in California

118 Hoover s Political Decisions Hoover promoted volunteerism to prop up failing banks. National Credit Corporation / Reconstruction Finance Corporation (RFC) 1931, Hoover urged the larger (East Coast) banks to provide low interest loans to struggling rural banks Large banks were unwilling to offer loans without holding the smaller banks most valuable collateral. RFC failed to help the smaller banks.

119 Hoover s Political Decisions Rising unemployment led to homeowners defaulting on mortgages and renters being evicted from apartments. The homeless settled in shanty towns called Hoovervilles 1932, Federal Home Loan Bank Act, was passed to spur new home construction, and reduce foreclosures. Foreclosures dropped briefly in late 1932.

120 Hoover s Political Decisions The Revenue Act of 1932 reversed the Mellon tax cuts. Increase taxes on struggling corporations and the wealthy = more money in the federal treasury to fund aid without deficit spending (more on this later) Emergency Relief and Construction Act of federal money funneled to states to start public works projects (roads, drainage, schools) to put people back to work Problem, it is not that easy to spend large amounts of money quickly on shovel-ready projects Federal money trickled into states as the problem of unemployment grew exponentially

121 Hoover s Three Biggest Mistakes Signing the Smoot-Hawley Tariff Revenue Act of 1932 Balancing the budget

122 Hoover & Smoot-Hawley The Smoot-Hawley Tariff was signed (reluctantly) by Hoover in 1932 It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture into a tailspin. Smoot-Hawley raised tariffs by 50% Congress believed the tariff would make imports too expensive and Americans would buy American goods, increasing demand European countries retaliated with their own tariffs and U.S. exports fell by almost 70%

123 Hoover & Smoot-Hawley The trade war cost American farmers 1/3 of their market causing agricultural prices to fall and putting more farmers into bankruptcy. Tariffs damaged an already shaky economy in Germany. Germany begins to default on reparations payments to England and France required by the Versailles Treaty France and England fall behind in their payments on loans from U.S. banks (used to buy weapons during WWI) Weakening large U.S. banks

124 Billions of Nominal Dollars Smoot Hawley Tariff of 1930 and Trade Reform Act of Exports Imports

125 Revenue Act of 1932 & Balancing the Budget Concern over growing deficits Congress passes and Hoover signs the Revenue Act of 1932 The act reversed Mellon s tax cuts. Raising business taxes from 12% to 13.75% Raised taxes on every bracket Lower income brackets increases form 1% to 4% Raised taxes on the wealthy from 24% to 64% The problem with raising taxes is that it takes money out of the economy. Business facing lower profits had to now pay more taxes. To cut cost they laid off workers Since nothing seemed to help the economy, Hoover and Congress decided to balance the Federal budget. Cut spending (ex. veteran s benefits) This shrunk the money supply even more

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127 So Hoover was not the laissez-fairie He supported government actions to ease the crisis But It was not enough And He fell back on conservative economic policy and tried to balance the budget Smoot-Hawley Ohhh.!!!

128 Let s Review Overproduction Stagnant wages Federal monetary policy Banking practices - Stock market Political decisions

129 Next. The FDR Mystique