Chapter 25 Section 1Chapter 25 Section 1

The End of ProsperityThe End of Prosperity

The Roaring 1920s - The Roaring 1920s - ReviewReview

• New products became New products became available to consumersavailable to consumers– AutomobileAutomobile– Washing machineWashing machine– radioradio

• Expensive products became Expensive products became affordable to buyersaffordable to buyers– Assembly lineAssembly line– Installment buyingInstallment buying

• Laissez faire economicsLaissez faire economics– Fewer regulations on Fewer regulations on

businessesbusinesses

• Stock prices soaredStock prices soared

Start of the DeclineStart of the Decline– Herbert Hoover Herbert Hoover

elected president elected president in 1928in 1928

– He promised He promised Americans the Americans the continued continued prosperity of the prosperity of the 1920s1920s

– The stock market The stock market experienced rapid experienced rapid growth with its growth with its rising stock valuesrising stock values

Underlying Economic Underlying Economic ProblemsProblems• Richest 20% of Americans held 80% of the $Richest 20% of Americans held 80% of the $

$$ in the country$$ in the country

• Many farmers were in poverty and couldn’t Many farmers were in poverty and couldn’t sell many of their productssell many of their products

• Improved “efficiency” by businesses caused Improved “efficiency” by businesses caused products to pile up in warehousesproducts to pile up in warehouses

• Consumers bought many items on creditConsumers bought many items on credit

• Europe was already in a Depression, partly Europe was already in a Depression, partly caused by the effects of WWIcaused by the effects of WWI

Speculation / Buying on Speculation / Buying on MarginMargin• In 1920s, Stock market In 1920s, Stock market

kept risingkept rising• People began People began

SpeculationSpeculation: Buying & : Buying & selling of stocks in selling of stocks in hope of making quick hope of making quick profitprofit

• Buying on MarginBuying on Margin: Pay : Pay a small part of the a small part of the stock’s price as down stock’s price as down payment, then borrow payment, then borrow the rest. Then…sell the rest. Then…sell the stock, repay loan, the stock, repay loan, keep profitkeep profit

Buying on Margin ScenarioBuying on Margin Scenario

• You want to purchase $100 worth of stockYou want to purchase $100 worth of stock• You only have $20 – so you borrow the rest You only have $20 – so you borrow the rest

from the bank ($80)from the bank ($80)• The stock goes up 40% (which happened The stock goes up 40% (which happened

frequently during the 1920s)frequently during the 1920s)• Your $100 turns into $140Your $100 turns into $140• You must pay the bank back your loan (80 You must pay the bank back your loan (80

X .10) = 8 (plus the original 80) = 88X .10) = 8 (plus the original 80) = 88• You are left with a net profit of $32 (140-88-You are left with a net profit of $32 (140-88-

20), with only putting in $20 of your own 20), with only putting in $20 of your own moneymoney

The “Crash” of the MarketThe “Crash” of the Market– Stock prices were Stock prices were

drifting down after a drifting down after a peak in the summer peak in the summer of ‘29of ‘29

– Those who bought on Those who bought on margin needed sell margin needed sell stocks faststocks fast

– October 29, 1929 : October 29, 1929 : Black Tuesday – Black Tuesday – investors sold 16.4 investors sold 16.4 million shares of million shares of stockstock

• Banks wanted $$ back Banks wanted $$ back – ran short of money – ran short of money and failed and failed

After the Crash…Chain After the Crash…Chain ReactionReaction

• Banks were failing (going out of business) – so not Banks were failing (going out of business) – so not much $$ was being lentmuch $$ was being lent

• People also became scared about their money, People also became scared about their money, fearing the safety of putting it in banks; they fearing the safety of putting it in banks; they didn’t purchase much anymoredidn’t purchase much anymore

• Businesses sold less and less (many forced into Businesses sold less and less (many forced into bankruptcy)bankruptcy)

• Businesses forced to lay off workersBusinesses forced to lay off workers• People without jobs, unable to pay billsPeople without jobs, unable to pay bills• People became afraid to put their money into People became afraid to put their money into

BanksBanks• The combination of all of these factors leads to a The combination of all of these factors leads to a

DepressionDepression

The Business CycleThe Business Cycle• The The business cyclebusiness cycle is a pattern in U.S. history where is a pattern in U.S. history where

the economy goes up and down repeatedlythe economy goes up and down repeatedly

• When business produce more than they can sell then When business produce more than they can sell then goods pile up, and businesses then cut back goods pile up, and businesses then cut back production and lay off workersproduction and lay off workers

• Laid off workers (and those fearing the bad Laid off workers (and those fearing the bad economy) buy fewer goods causing businesses to faileconomy) buy fewer goods causing businesses to fail

• This slowing of the economy (amount of products This slowing of the economy (amount of products produced by the nation) is called a produced by the nation) is called a recessionrecession

• A longer and deeper recession is called a A longer and deeper recession is called a depressiondepression

• When consumers buy up surplus goods and When consumers buy up surplus goods and businesses can increase production and hire back businesses can increase production and hire back workers the economy recovers (and people begin to workers the economy recovers (and people begin to buy more as they are more confident in the economy buy more as they are more confident in the economy being strong)being strong)

The Business CycleThe Business Cycle

The Causes of the Great The Causes of the Great DepressionDepression

1.1. Overproduction of goodsOverproduction of goods• FarmersFarmers

• farmers produced too much, farmers produced too much, leaving them with surplusesleaving them with surpluses

• This overproduction drove This overproduction drove their prices down (and their prices down (and profits)profits)

• IndustryIndustry

• businesses were producing businesses were producing more consumer goods than more consumer goods than people were consumingpeople were consuming

• assembly line increased assembly line increased productionproduction

The Causes of the Great The Causes of the Great DepressionDepression

4.4. Uneven Distribution of WealthUneven Distribution of Wealth• The wealthiest 20% of the The wealthiest 20% of the

population held 80% of the population held 80% of the nation’s wealthnation’s wealth

• Incomes rose 75% for the Incomes rose 75% for the wealthiest 20%, and only 9% wealthiest 20%, and only 9% for everyone else for everyone else

• Over 60% of the population Over 60% of the population made less than $2500 (and made less than $2500 (and were living below the poverty were living below the poverty line)line)

• The average person didn’t have The average person didn’t have enough money to keep buying enough money to keep buying to keep the economy boomingto keep the economy booming

The Causes of the Great The Causes of the Great DepressionDepression2.2. Overvalued Stock MarketOvervalued Stock Market• Banks and customers who Banks and customers who

bought stocks on margin bought stocks on margin drove up stock prices too drove up stock prices too highhigh

3.3. Individual Consumer Debt Individual Consumer Debt Too High Installment Too High Installment buyingbuying• Installment buying helped Installment buying helped

people buy products they people buy products they couldn’t affordcouldn’t afford

• When they built up too much When they built up too much debt people stopped buying debt people stopped buying more productsmore products

People outside the New York Stock Exchange in 1929

Hoover’s Response (to the Hoover’s Response (to the crash)crash)

– Balanced federal budget – cut gov’t Balanced federal budget – cut gov’t spending – raised taxesspending – raised taxes

– He didn’t believe in giving direct aid to the He didn’t believe in giving direct aid to the poorpoor

– People blamed Hoover for problems (Hoover People blamed Hoover for problems (Hoover Flags, Hoovervilles)Flags, Hoovervilles)

– Hoover also believed…Hoover also believed…• Gov’t should facilitate cooperation, not controlGov’t should facilitate cooperation, not control

• ““Rugged Individualism” – people should succeed through Rugged Individualism” – people should succeed through their own efforts; not depend on gov’t bailing them outtheir own efforts; not depend on gov’t bailing them out

Hoovervilles

Hoover blankets

Hoover flags

Hoover was Blamed for all of the Problems

Hoover’s SolutionsHoover’s Solutions

• Eventually – Hoover Eventually – Hoover began some began some Public Public Works ProjectsWorks Projects – Gov’t – Gov’t funded projects to funded projects to build resources such as build resources such as roads/dams : Result – roads/dams : Result – Creates jobs (but, it’s Creates jobs (but, it’s too little, too late)too little, too late)

• Boulder Dam (AZ/NV)Boulder Dam (AZ/NV)

Hoover and the Bonus ArmyHoover and the Bonus Army• WWI soldiers due payment in 1940 – but they want WWI soldiers due payment in 1940 – but they want

it earlyit early

• Around 15,000 soldiers march to Washington, set Around 15,000 soldiers march to Washington, set up camp to protestup camp to protest

• When the US Senate voted to not pay their When the US Senate voted to not pay their bonuses early, most veterans left, but around bonuses early, most veterans left, but around 2,000 remained2,000 remained

• Gen. MacArthur and Army use gas & bayonets to Gen. MacArthur and Army use gas & bayonets to drive them outdrive them out

• 1 killed, many injured, public angry, Hoover very 1 killed, many injured, public angry, Hoover very unpopular – his fate is sealed.unpopular – his fate is sealed.

• Leads to FDR’s landslide win in election of 1932Leads to FDR’s landslide win in election of 1932

Election of 1932Election of 1932

• President Herbert President Herbert Hoover (Republican)Hoover (Republican)– Warned the nation that Warned the nation that

govt. aid programs govt. aid programs would weaken would weaken Americans’ spirit of Americans’ spirit of self-reliance and would self-reliance and would be too expensivebe too expensive

– Hoover was blamed for Hoover was blamed for the bad economy, his the bad economy, his slow reaction to help slow reaction to help people, and for the people, and for the treatment of the Bonus treatment of the Bonus ArmyArmy

Election of Election of 19321932

• Franklin D. Roosevelt Franklin D. Roosevelt (Democrat)(Democrat)– As Governor of New York As Governor of New York

he took active steps to he took active steps to provide aid to farmers provide aid to farmers and the unemployedand the unemployed

– People believed he People believed he would try to do the same would try to do the same for the whole nation as for the whole nation as PresidentPresident

– FDR won in a landslideFDR won in a landslide

Election of 1932Election of 1932