STANDARD: ECON 3.1 MARKET ECONOMY

3.6 CHANGES IN ECONOMIC ACTIVITY

Opening: The Nation’s Sick Economy

Work Period: Great Depression Notes and video

Closing: Hardship and Suffering During the

Depression

THE NATION’S SICK ECONOMY

Agriculture

Railroads

Textiles

Steel

Mining

Lumber

Automobiles

Housing

Consumer goods

As the 1920s advanced, serious problems threatened the

economy while

Important industries struggled, including:

CONSUMER SPENDING DOWN

By the late 1920s, American consumers were buying less (demand declined)

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 (overproduction)

A SUPERFICIAL PROSPERITY

Many during the

1920s believed the

prosperity would go

on forever

Wages for most

workers fell while

productivity

increased

GAP BETWEEN RICH & POOR

WIDENED

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

Photo by Dorothea Lange

THE UNFORTUNATE CYCLE

Companies did not pass on

their prosperity to their

employees by paying them

more, so workers couldn’t

afford to buy the products

they made.

When consumers reached

their limit of installments,

they had to stop spending.

No spending means lay-

offs for workers.

FARMERS STRUGGLE

During World War I European demand for American crops soared

After the war, they faced international competition, depressed prices, debt and taxes

Farmers defaulted on bank loans causing banks to fail BEFORE the crash in 1929.

Fewer banks= limited number of loans for everyone else. Photo by Dorothea Lange

REPUBLICAN

ADMINISTRATIONS

Gov’t abandoned policy of progressivism and limited regulation of Big Business (unlike Sherman Anti-Trust and trust-busing of TR)

Return to laissez-faire meant corporations became increasingly powerful

The tariff was raised and the Supreme Court overturned child labor and minimum wage laws for women

Income taxes for wealthy slashed, and they invested in luxury goods and the stock market instead of new factories

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 (“get rich

quick”)

SEEDS OF TROUBLE

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

The Stock Market’s bubble was about to

break

THE 1929 CRASH

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

By mid-November, investors had

lost about $30 billion

THE GREAT DEPRESSION

The Stock Market crash signaled the beginning of the Great Depression

The Great Depression is generally defined as the period from 1929 – 1940 in which the economy plummeted and unemployment skyrocketed

The crash alone did not cause the Great Depression, but it hastened its arrival

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 1929- 600 banks fail

By 1933 – 11,000 of the

25,000 banks nationwide

had collapsed Bank run 1929, Los Angeles

THE FEDERAL RESERVE

The Federal Reserve (1913), the nation’s central bank, has the capacity to regulate the money supply by making loans to banks, which then make loans to businesses, which hire workers, who buy products.

Early in the 1920s, the Fed pursued easy credit policies.

Charged low interest rates which helped fuel stock market speculation mania.

In the late 1920s, the Fed tried to tighten money in order to curb stock market speculation, ultimately discouraging lending.

GNP DROPS, UNEMPLOYMENT SOARS

Between 1928-1932, 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

HAWLEY-SMOOT TARIFF

To protect American industry from

foreign competition, 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-limited

international trade.

Foreigners were unable to sell their

goods in US markets and did not

have dollars to buy American goods.

Other countries enacted their own

tariffs and soon world trade fell 40%

PRESIDENT HOOVER

Went farther than any

other president and urged

companies to voluntarily

maintain wages and

hours.

Lower consumer demand

made this impossible and

companies laid off

workers and cut hours.

Advocating “rugged

individualism”, Hoover

urged that prosperity was

“just around the corner”

“Hoovervilles”

“Hooverflags”

“Hooverblankets”

HARDSHIPS DURING DEPRESSION

The Great Depression brought hardship, homelessness, and hunger to millions

Across the country, people lost their jobs, and their homes (25% unemployed) Many wandered from town to town selling apples and pencils door to door.

No system of unemployment insurance

Wages and hours were cut and people bought only essential goods.

“Runs” on the banks (people tried to withdraw all of their money) caused banks to collapse

EFFECTS OF DEPRESSION

Families undernourished

Schools closed (couldn’t pay teachers)

Marriages delayed

Birthrate fell

Men abandoned families

Some families worked together

Women/children forced to work

States and charities couldn’t fix the problem

Needed the gov’t to step up.