Great Depression

Chapter 17

Herbert Hoover

• Herbert Hoover was elected in 1928 on the prosperity of the nation and his opposition to alcohol. His opponent was Al Smith, a Democrat, but a Catholic. His Catholicism was a disadvantage.

Stock Market Crash of 1929

• The Wall Street Crash of 1929 (October 1929), also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States of America The crash began the 12-year Great Depression that affected all the Western industrialized countries and that did not end in the United States until the US participation in World War II at the end of 1941.

Bank Failures• At the beginning of the 20s, The United States had one bank for

every 1,000 people. • Every small town had a bank or two struggling to take in deposits

and loan out money to farmers and businesses. • As the economic depression deepened in the early 30s, and as

people had less and less money to spend in town, banks began to fail at alarming rates.

• During the 20s, there was an average of 70 banks failing each year nationally.

• After the crash during the first 10 months of 1930, 744 banks failed – 10 times as many.

• In all, 9,000 banks failed during the decade of the 30s. It's estimated that 4,000 banks failed during the one year of 1933 alone. By 1933, depositors saw $140 billion disappear through bank failures.

Stock Market Crash and the Banks.

• There are a couple of things to understand about the crash and the banks.

• The Stock Market crash alone could not completely ruin the American economy. The market crashed farther in 1987 than it did in 1929.

• The problem was the banks had invested the depositors money in the stock market. When the market failed so did the banks.

• The Bank failures are really what caused the Great Depression.

Bull Market

A Bull MarketThis is when the market showing is confidence. prices go up, so market indicators like the NASDAQ go up too.

• Number of shares traded is also high and even the number of companies entering the stock market show that the market is confident. 

• These are bullish characteristics. If there is a run of bullish days then you may hear the market is a bull market.

• Technically a bull market is a rise in value of the market of at least 20%. The huge rise of the Dow and Nasdaq during the tech boom is a good example of a bull market.

Bear Market

• A bear market is the opposite to a bull. • If the markets fall by more than 20% then we

have entered a bear market. • A bear market is a market showing a lack of

confidence. • Prices hover at the same price then go down,

indices fall too and volumes are stagnant. • In a bear market people are waiting for the bulls

to start driving the prices up again.

Margins and Margin Buying

• Margin -

• The face value of a loan minus the value of the pledged collateral.

• Margin Buying -

• A risky technique involving the purchase of securities with borrowed money, using the shares themselves as collateral.

Speculation

• The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market.

• A significant number of them were borrowing money to buy more stocks.

• By August 1929, brokers were routinely lending small investors more than two thirds of the face value of the stocks they were buying.

• Over $8.5 billion was out on loan,more than the entire amount of currency circulating in the U.S. at the time.

Speculation

• Taking large risks, especially with respect to trying to predict the future

• Gambling in assets, in the hopes of making quick, large gains.

• The speculators in the Stock Market drove the prices artificially high to make a profit when they sold.

• This caused the whole market to inflate and make the downfall that much worse.

Predictions

• New York Stock Exchange (NYSE) collapsed in October or 1929.

• However, the days leading up to the 29th there was enormous stock-market upheaval, with panic selling and extremely high levels of trading interspersed with brief periods of recovery.

• the fact that economists were unable to predict it is in itself of great note.

• Some did though, some prominent investors like Joe Kennedy got out before the crash.

• Although some well-known economists, particularly those of the Austrian School, were aware of the situation their warnings went unheeded.

Black Thursday

• October 24, forever called “Black Thursday,” 12,894,650 shares changed hands on the New York Stock Exchange – a record.

• To put this number in perspective, the previous record for trading activity was set on March 12, 1928. On that day, a total of only 3,875,910 shares were traded.

• The market was crashing and the floor of the NYSE was in a state of panic. By noon on Black Thursday, there had been eleven suicides of fairly prominent investors.

Causes – Excessive Investment

• One possible explanation for the severity of the Crash in 1929 is that the preceding period was one of excessive investment—a great economic "boom"—which inevitably led to an equally excessive "bust

Causes – Federal Reserve

• Some claim that the cause of the Great Depression was the Federal Reserve.

• 1. A significant factor may be inflation. • inflation is defined as money creation, the act of which

tends to manifest itself through the fall in the purchasing power of money (PPM).

• Thus for a given demand for money, an increase in its supply lowers the PPM.

• 2. Some economists say that the Crash was bad, but when the Federal Reserve permitted the "Great Contraction" of the money supply it drove the economy into the worst depression in U.S. history:

Causes - Overproduction

• Overproduction was one of the main reasons for the Wall Street crash.

• During the boom, businesses were overproducing, making more goods than they were selling.

• New manufacturing methods, such as production lines allowed factories to produce more in a shorter amount of time.

• While demand remained high this was good, but in the mid 1920s the demand for goods began to decrease.

Causes - Agricultural

• In the 1920s, the agricultural sector in the United States began to have difficulties.

• Many small farmers were driven out of business because they could not compete in the new economic climate.

• advances in technology increased production including overproduction of foods.

• However, demand for food did not increase at same rate as the increases in supply.

• Therefore, food prices fell and farms were unable to make a profit. Farm workers lost their jobs, increasing unemployment.

Causes - Banks

• Before the Great Depression, the American banking system was characterized by having many small to medium sized banks.

• Thus, there were over 30,000 banks. • As a result, they were in danger of going bankrupt if

there was a run in which many customers wanted to withdraw their deposits.

• The agricultural recession led to problems with rural banks, which had a negative impact on the rest of the financial industry.

• Between 1923 and 1930, 5,000 banks collapsed. This clearly contributed to the economic instability that led to the Crash.

Installment Plans

Installment Plans• The installment method of buying large ticket items with a small

deposit and instalment payment plan was a feature of the 1920's.

• Previously only the wealthy could afford to pay cash for items like pianos, phonographs, radios, fridges, vacuum cleaners, and washing machines.

• Manufacturers realized they could expand their profits if they could grow their markets and so installment selling was introduced.

• The problem is that the money spent on installment payments did not get saved for times of economic problems.

• So, when the Crash and Depression occurred, people did not have the savings to ride it out.

By 1933, 25% of ALL Americans were unemployed.

Soup Kitchens

• The Great Depression divided our country into the "haves" and "have nots."

• Most people found it hard to put food on the table. Folks lucky enough to work often toiled long hours far from home.

• Many more found their "daily bread" on food lines. • Roosevelt's New Deal programs often included meal

components.• 1930s soup kitchens were run/funded by charitable

organizations (religious groups, Ladies Aid Societies, Salvation Army etc.), community service groups, government agencies, companies, and private individuals. They relied on volunteers and donations

The Dust Bowl• The Dust Bowl was a period

of severe dust storms causing major damage to American prairie from 1930 to 1936

• It was caused by severe drought coupled with decades of extensive farming without crop rotation, fallow fields, cover crops or other techniques to prevent erosion

• Deep plowing of the virgin topsoil of the Great Plains had displaced the natural grasses that normally kept the soil in place and trapped moisture even during periods of drought and high winds.

Movies had to be fantasyReality was too grim

Grant Wood

Thomas Hart Benton

John Steinbeck

William Faulkner

Margaret Bourke-White

Bonus Marchers

• In 1924, Congress authorized a pension for the veterans of WWI to be paid in 1945.

• In 1932 after 3 years of hard times, the veterans marched on Washington to ask that the Bonus be paid early. They did not want anything more than what they had been promised.

• This was an embarrassment for Hoover, who had been maintaining that the Depression did not exist.

Bonus Marchers

• The Marchers set up tent cities according to their unit during the war.

• They brought their wives and children with them.

• Washington D. C. is a media hub and they covered the Bonus March, to Hoover’s embarrassment

Bonus Marchers

• Hoover ordered the head of the Army, General Douglas MacArthur to move the Bonus Marchers across the river to Foggy Bottom, away from the Media.

• Hoover did not know what MacArthur had in mind.

• The marchers thought MacArthur was coming to make a speech.

• They were surprised when the tanks showed up.

• The army attacked the marchers

Bonus Marchers

• The Army shot tear gas into the shanty towns and started to burn them.

• Many were hurt and one child died in the attack.

• This was covered extensively by the press and did more to destroy Hoover’s presidency than anything else.

Reconstruction Finance Corp.

• Hoover was not an uncaring monster. He knew that people were in trouble, but he was a prisoner of his beliefs.

• He believed that government should do nothing to directly aid the poor.

• He formed the Reconstruction Finance Corp. to lend money to Big Banks and Big Corporations that were in trouble.

Hoover and Relief

• Hoover believed that the states and charities should take care of the poor.

• He felt it was unconstitutional for the Federal government to intervene

• He also felt it was bad for the American character.

Deficit Spending

• The primary reason Hoover opposed relief was because the government had been cutting taxes all through the 20’s and now had no money.

• If the government aided the poor, they would have to engage in Deficit Spending or spending more than the government had.

• Hoover was a traditionalist and a rich man that opposed inflation and taxes.

Public Works

• One thing that Hoover did to help was authorize public works.

• Public Works are construction projects like dams and bridges.

• They provided employment for unemployed people.

• This would have worked if Hoover had done it on a large scale (like Roosevelt did later)

• Hoover was so afraid of deficits that the projects were small and only helped a very few.

Foreclosure

• By 1932, 50% of the assets of the American middle class were in foreclosure

• Foreclosure is the public sale of assets to pay for debts.

• This led to widespread homelessness

• More importantly it led to hatred by the people for the government.

Foreclosure

• Most foreclosures came as a result of banks losing their assets in the Crash

• When a bank failed in those days, the people simply lost their money

• One of the first of the reforms of the New Deal was to change this.

Hobos

• One of the results of the Depression was homelessness and drift.

• Many simply gave up and rode the rails or hopped freight trains.

• Hobo villages sprang up all across the country.