Boom Boom andand BustBust

Causes, Effects and Responses to the Great

Depression

OVERVIEWOVERVIEW

In this lesson you will examine:• The social and economic context before the

Great Depression• The causes of the Great Depression• The effects of the Great Depression• Early attempts at addressing the crisis

The BoomThe Boom

• America was the leading industrial America was the leading industrial power left untouched after the Great power left untouched after the Great WarWar

• After switching from wartime production After switching from wartime production to industrial production, the US to industrial production, the US economy soared while Europe struggledeconomy soared while Europe struggled

• A new era of prosperity was fuelled by A new era of prosperity was fuelled by readily available creditreadily available credit

The Roaring TwentiesThe Roaring Twenties

Increased credit allowed:• Companies to increase

production; American consumer products flooded domestic and world markets

• More working class Americans to buy more consumer products

• The middle class more time to engage in cultural activities like jazz

The First SignsThe First Signs

Beneath the appearance of prosperity were fundamental problems:

• Worker wages did not increase with the increase in production – loss of buying power

• American agriculture was hit by overproduction and environmental problems – loss of productive market

• American protectionism resulted in increased tariffs on foreign exports – loss of foreign markets

The First SignsThe First Signs

The First SignsThe First Signs

LOAN RETURNEDNO LOAN PAYBACK

“Buying on Margin”

Dangerous financial practices contributed to the Great Depression; in particular, people were encouraged to buy stocks “on margin”

Worker has $10

and wishes to

buy 10 shares of Company

X

Company X

STOCK PRICE PER

SHARE: $11

Broker offers to lend money

based on the stock’s margin

or projected growth

If the share price goes up, the worker can sell the stock for profit and

the broker gets its loan

back

If the share price goes down, the worker still owes the broker

Worker’s total

holdings: $110

Worker’s total

holdings: $220

Worker’s total

holdings: $50

SHARE DIVIDENDNO DIVIDEND PAYOUT

The Crash

• Confidence in the market became shaky Confidence in the market became shaky by September 1929 because of by September 1929 because of speculation – e.g. RCA stock in Mar 1928 speculation – e.g. RCA stock in Mar 1928 was around $100/share and by Sept 3, was around $100/share and by Sept 3, 1929, it was $500/share1929, it was $500/share

• On Monday, Oct 28, 1929, stockholders On Monday, Oct 28, 1929, stockholders began to sell their sharesbegan to sell their shares

• On “Black Tuesday”, Oct 29, 1929, share On “Black Tuesday”, Oct 29, 1929, share values dropped drastically by as much as values dropped drastically by as much as 37% causing a chain reaction throughout 37% causing a chain reaction throughout the economythe economy

Loss of share values spread throughout the

economy

Workers could not pay back

their loans to brokers

Banks were unable to loan out money

because no one could return their loans

Corporations could not continue

production without income

or credit

Stockbrokers could not

return their loans to the

banks

Workers became unemployed and

unable to buy products or borrow

money

The Effects of the Crash• Between 1929 to 1932,

American unemployment was around 25-30%

• The working and middle classes saw their assets and investments wiped out overnight

• Those who owned real estate or had non-liquid assets were not as affected

• Soup and bread lines grew around churches and charities for free hand-outs

• The homeless built “Hoovervilles” on public property or by railroad tracks

Brother, Can Brother, Can You Spare a You Spare a

Dime?Dime?

They used to tell me I was building a dreamAnd so I followed the mobWhen there was earth to plow or guns to bearI was always there, right on the job

They used to tell me I was building a dreamWith peace and glory aheadWhy should I be standing in lineJust waiting for bread?

Once I built a railroad, made it runMade it race against timeOnce I built a railroad, now it's doneBrother can you spare a dime?

Once I built a tower to the sunBrick and rivet and limeOnce I built a tower, now it's doneBrother can you spare a dime?

Once in khaki suits, gee we looked swellFull of that yankee doodle dumHalf a million boots went sloggin' through hellAnd I was the kid with a drum

Say, Don't you remember they called me Al?It was Al all the timeSay, don't you remember, I'm your palBuddy can you spare a dime?

Early responses

• The Smoot-Hawley Tariff increased the duties on foreign imports

• President Hoover took minor steps to address the crisis: attempts to increase credit, tax reductions and public works – seemed ineffective

• People at first did not protest, but as the crisis grew, so did discontent

SUMMARY QUESTIONS

• What stimulated the American economy towards its What stimulated the American economy towards its “boom”?“boom”?

• What effects did increased prosperity have on What effects did increased prosperity have on American culture?American culture?

• What signs were present that the American economy What signs were present that the American economy was not stable?was not stable?

• What factors caused the failure of the financial What factors caused the failure of the financial system and the subsequent stock market crash?system and the subsequent stock market crash?

• What were the effects on American society and how What were the effects on American society and how did the government respond? did the government respond?