The Economy of the 1920s and the Market Crash of 1929 Introduction: The Second Industrial Revolution 1
Learning Objectives Explain the elements of the economic changes of the 1920s. Analyze the weaknesses of the American economy of the 1920s. Examine how weaknesses underlying the prosperity of the 1920s led to the Stock Market crash and the Great Depression. 2
Thematic Questions 1. Analyze the movement toward social conservatism and the cultural conflicts over the issues of race, religion, evolution, and prohibition. 2. Explain the Republican administration s policies of isolationism, disarmament, and high-tariff protectionism. 3. Describe the interrelatedness of international loans, war debts, and reparations payments and how the U.S. dealt with it. 3
The Second Industrial Revolution 4 The first industrial revolution took place when steam was harnessed to run heavy machinery. The second took place in the 1920s when electricity replaced steam and the modern assembly line was introduced for the production of consumer goods. At this time, the U.S. developed the highest standard of living in the world.
The Automobile Industry 5 The auto industry epitomized the changes taking place in the economy. The car was an expensive item, and not quickly replaced. Auto makers relied on model changes and advertising to stimulate demand. The auto industry fostered the growth of other businesses and encouraged the spread of the suburbs farther from the inner cities.
Patterns of Economic Growth 6 Other industries also flourished in the 1920s, including electricity, light metals, and the chemical industry. Professional managers, who believed profit making was compatible with social responsibility, replaced individual entrepreneurs. Corporations became the dominant business form.
Patterns of Economic Growth 7 The success of large business brought standardization and uniformity to America, at a cost of regional flavor. Every town had the same A&P Grocery Store, and the same five and ten store.
Economic Weaknesses 8 Although there was real economic prosperity in the U.S. in the 1920s, there were also disguised economic problems. Traditional industries, like railroads and steel, were in deep trouble, and farmers suffered from a decline in both exports and prices.
Economic Weaknesses 9 Laborers saw their real wages rise, but not as rapidly as the income of middle class managers. The increasing income of the middle class created its own peculiar problem. Because the middle class had so much idle money, much of it went into speculation. It is not surprising that the 1920s ended in a stock market crash.
10 The Unsound Features of the 1920s American Economy
Income 11 Consumers lacked sufficient income to purchase the total output of increasingly efficient corporations. worker s wages failed to keep pace with increased productivity and prices. The new wealth of the 1920s was largely in the hands of a few people.
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Technology and Unemployment 13 Technological unemployment grew steadily in the 1920s. Machine production replaced men (hand production) Between two and four million worker jobs were lost unemployment increased. consumer purchasing power declined. fewer products were purchased
American Agriculture 14 American farmers did not share in the prosperity of the 1920s. Farms became more efficient & mechanized (tractors) Farmers went into debt Increased efficiency and high American tariffs kept agricultural prices low. Farmers had low incomes which resulted in lowered purchasing power.
America & the World 15 International trade declined because of protective tariffs enacted by Republican Administrations (protect the American market) WW I hurt Europe s economy and lessened the ability of many European countries to purchase American-made goods. (early 1920s) As Europe s economy revived, productivity and manufacturing increased. The U.S. closed its market to European trade goods
The Problem of War Debts 16 U.S. loaned Allies $10 billion for armaments and reconstruction purposes. Repayment of loans was difficult High U.S. tariffs prevented Europeans from earning profits by selling their products in the American market. (US buys foreign goods, $ to Allies, Allies repay loans, basically with U.S. loan money) Debtor nations hoped to repay their loans to U.S. using German REPARATIONS payments. U.S. viewed loans as investments; demanded repayment.
The Role of Bankers 17 American bankers made unsound loans, both domestic and foreign. These bank loans later resulted in bank failures. Bank failures wiped out the investment capital of businesses and individual s savings.
U.S. Investors SAVINGS DEPOSITS WALL STREET BANKERS 18 WALL STREET BANKERS MAKE PRIVATE INVESTMENT LOANS GERMANY to finance (GOVERNMENT & BUSINESSES) $ 13 billion total REPARATIONS Payments REPARATIONS Payments GREAT BRITAIN Owes G.B billions FRANCE U.S. TREASURY Owes U.S. 4 billion ALLIED WAR DEBT PAYMENTS
Buying on Credit 19 Installment buying resulted in the overextension of personal debt. Consumers stopped buying once consumer confidence in the economy was shaken. Historians have described the American economy of the 1920s as a house of cards or a PONZI scheme
The 1920s Speculative Boom 20 The 1920s saw a speculative boom in real estate and common stocks. Most Americans believed the bull market would last forever. The boom encouraged investment of savings in overpriced stocks. Increasingly, investors bought stock on margin, where they could purchase the stock with only a small down payment and pay the balance off later (after it had increased in value)
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22 The Stock Market Crash of 1929
The Collapse of the Stock Market 23 By the summer of 1929, the speculative bubble was near the bursting point. Pres. Hoover tried to curb speculation through the Federal Reserve Board (raise interest rates) However, speculative fever caused the stock market to reach its all-time high on Sept. 3, 1929.
The collapse began on Monday, October 21, 1929 and was partially triggered by the British. To gain more capital for investment, British banks raised interest rates paid on savings, Foreign investors began selling American stocks and moving the capital to Great Britain. The Market continued falling until Friday (10/25) 24
The Crash of 1929 25 Through massive buying, bankers and large investors temporarily stopped the decline in stock prices on Fri., 10/25 (stimulate demand) When the Market opened Monday, prices kept falling.
Black Tuesday occurred on Oct. 29 th Panic selling occurred 16.5 million shares were sold (four times the normal trading volume); prices dropped dramatically; brokers called their margin accounts. Stockholders lost $ 40 billion in paper value by January, 1930 (more than the U.S.cost of W.W. I) 26
Cause & Effect: The Great Depression 27 The 1920s economy was out of balance. Americans were increasingly in debt. Speculation on land and in the stock market was on the rise The Stock Market crashed in Oct. 1929 Millions of American workers lost their jobs as businesses reduced production The Nation s Gross National Product fell dramatically.
28 Overproduction by increasingly efficient businesses slowed industrial production. The federal government introduced tight-money financial policy in order to control the growth of credit. The stock mkt. Reached an alltime high on 9-3-29 Many banks failed and closed their doors. Personal and business savings vanished. Increased poverty led to health and social problems. The global economy suffered.
Credits: Instructor s Resources to accompany America Past and Present, Advanced Placement Edition, by Michael Barbour, Anthony Jones, and Gordon Utz. The American Pageant, 12 th ed. By David Kennedy, Lizabeth Cohen, & Thos. A. Bailey. 29