The Great Depression Sect 1 Causes of the Depression
M.I. • What goes up, must come down. Many saw the Great Depression as a natural reaction to the excessive 1920s.
Optimism Sweeps Hoover to Victory • Herbert Hoover – Republican • Food Administration in WWI • 8 years Secretary of Commerce • Iowa- orphan –mining engineer- made a fortune Versus • Alfred E Smith – Democrat • 4 times Governor of NY • 1st Catholic ever nominated
Campaign issues • Prohibition • Hoover – Dry – wanted ban on liquor sales • Smith – wet • Religion • People thought that the Catholic Church funded democrats and the church would rule US if Smith won • Hoover a Quaker • Prosperity – Republicans took full credit- Harding and Coolidge- Presidents during the 20s
Hoover won- March 4, 1929 inauguration. • Movie cameras with sound and radios broadcast the event.
Problems Plague the Agricultural Sector • Farmers had increased supply because of WWI. • Bought new tractors, etc. in order to keep up – now in debt • Post war – demand fell sharply but production stayed high • Farmers could not sell surplus • Rural depression- farmers could not afford new stuff. Lived on credit
Wealth Distributed Unevenly • Industrial workers prospered. Purchased cars and other stuff. • Wages rose gradually (8%) but productivity increased astronomically (32%) • Corporate profits went up (65%) • Wealthiest 1% made more money than the bottom 42% • 60% of families earned less than $2000 per year • Wealthy made much more money but did not buy much more stuff.
Easy Credit Hides Problems • Installment plan – 80% of radios and 60% of cars • Buying stock on margin – credit • Debt, debt, debt
The Long Bull Market • Stock market – established to buy/sell shares of companies • Bull market – long period of rising stock prices • By 1929 3-4 million Americans or 10% of households owned stocks • As market went up people bought on margin paying only a small cash down payment 10% • Other percentage on loan from a stockbroker who earned commission and interest • Stockbroker held stock as collateral
As long as stock market goes up – buying on margin OK • If stocks fall….broker issues a margin call demanding that the investor repay the loan at once Therefore • If stocks fell, you had to sell quick or pay the loan
People started to bid up prices without regard for a companies earnings or profits • Speculation – instead of investing in the company whose shares you bought…people counted on the market climbing
The Stock Market Crashes • Late 1929 – running out of new customers • Sept 3 – people began selling stocks- prices slid downward • Monday October 21- stocks went way down- brokers made margin calls • Customers panicked and put stocks up for sale to pay loans • Market went into tailspin • October 24 – Black Thursday • Market plunged further • GE $400/share to $238/share
October 29 – Black Tuesday • 16 million shares sold • Prices took biggest plunge • $30 billion lost – equal to wages earned by America in one year
The Banks Collapse • 1. Banks lent money to brokers • 2. Many banks invested peoples money in the stock market • Banks lost money on loans • Speculators defaulted on loans • Banks cut back on loans they made • Less credit available ……recession • Some banks lost too much and closed • Customers lost savings – not federally insured
People made a run on the banks and withdrew their money • 3,000 banks closed – 10% of nations total • Banks make a profit by lending money given to them by depositors and collecting interest • Only have a small amount on hand daily
Businesses Close and Unemployment Rises • Business had to adjust – cutbacks and layoffs. • Plants close • By 1933 – nearly 25% of Americans had lost their jobs • People stopped buying • Less products meant less demand for parts for products • Jobless had to cut back on purchases
Hawley Smoot Tariff Act • Raised tariff level on foreign imports to highest ever on over 900 manufactured items • Tried to protect US companies from foreign competition, but damaged sales abroad. • Imports cost more…….we bought less • Foreign companies made no money and did not buy exports • 1933 foreign trade down to 1/3 of what it had been
The Depression Goes Global • In 1920’s US banks gave loans to speculators instead of foreign companies • No loans meant that they did not have the currency to buy US products • Reparations, war debt payments and imbalance of trade • Germany ceased payments
What Caused the Great Depression? • No real conclusions • Milton Friedman – contraction of money supply • John Maynard Keynes – lack of govt. interference led to Depression • Govt. needs to keep balance
Mistakes by the Federal Reserve • Could have raised interest rates to stop speculation • Kept them low • Helped cause Depression • 1. By keeping rates low, it encouraged banks to make risky loans • 2. Low rate led people to believe that the economy was growing • People borrowed more which led to • Overproduction • When recession hit the Fed raided interest rates, tightening credit