1920s Republican Decade

and Causes of

The Great Depression

The Great Depression is one of the

most misunderstood events in

American history…

Some point to the Crash of the Stock Market

as the cause of the Depression…

Not true.

Some blame Herbert Hoover,

claiming his “hands-off” economic

policies dragged America into the

Depression…Not accurate.

The 1920 ElectionThe 1920 Election

Soft-Hearted Harding

Warren G. Harding• 29th President• Newspaper owner and editor

from Ohio• U.S. Senator• 1920 Rep Nat’l Convention

Deadlock for a presidential nomination

– Decided on well-liked Harding– Lacked strong convictions– Appealing after 8 yrs of

headstrong Wilson

Isolationism• U.S. wanted to avoid involvement in

foreign affairs.• Harding opposed membership to the

League of Nations• DISARMAMENT -

voluntarily give up weapons• The Washington Conference - 1921

– U.S., Britain, and Japan limit the size of their navies

Theory of isolationism did not apply

Pro-businessAndrew Mellon – Sec. of the Treasury Herbert Hoover – Sec. of Commerce

Promoted world-wide tradeHigh Tariffs plus insistence on repayment of European loans

Fordney-McCumber Tariff – 1922

Economy

The Ohio Gang: President Warren Harding (front row, third from right), Vice-President Calvin Coolidge (front row, second

from right), and members of the cabinet.

The Ohio Gang: President Warren Harding (front row, third from right), Vice-President Calvin Coolidge (front row, second

from right), and members of the cabinet.

The 1920 ElectionThe 1920 Election

Harding used a lack of judgment when making most appointment

Gave important posts to friends

Charles Forbes – Sec. of Veteran Affairs

Later convicted of stealing money for veteran funds

The Ohio Gang

Teapot Dome Scandal• Albert Fall, U.S.

Secretary of the Interior

• Oil magnate Ed Doheny

• The scandal, in which Fall illegally leased land to oil companies, severely tarnished President Warren G. Harding's administration

Just after they are acquitted in November 1926 of criminal conspiracy in the Teapot Dome scandal.

Fall, however, was subsequently sentenced to one year in prison

Silent Cal• A gift public speaker,

but in private a man of few words and ideas

• Former Governor of Mass.

• Shortly after he becomes president his 16-yr-old son dies

• Severely depressed, he neglects his work and becomes increasingly detached

“A man who builds a factory builds a temple”

• Laissez-faire government under Cal– Lowered income and inheritance

tax– Did not regulate stock market as

urged by Hoover– No federal aid to those affected by

natural disasters

– Kellogg-Briand Pact – 15 nation outlawed war•Eventually 60 nations

1924 Election

There are several explanations, but the most obvious causes are four:

1. Overproduction2. Banking & Money Policies 3. Stock Market Actions 4. Political decisions

1. Over-production:

The “roaring twenties” was an era when our country prospered

tremendously.

Average output per worker increased 32% in

manufacturing and corporate profits rose

62%.

But in reality there existed:* Underconsumption of these goods here and abroad, because people didn’t have enough cash to buy all they wanted in the early 1920s…* There still existed an uneven distribution of wealth and income.

Americas’ farms were overproducing, as well.During World War I, with European farms in ruin, the American farm was a prosperous business.

Increased food production

during World War I was an

economic “boom” for

many farmers, who borrowed

money to enlarge and modernize their farms.

So, to summarize it, HIGH DEMAND

for consumer goods and

agricultural products led to

OVERPRODUCTION.

2. Banking & Money Policies

The uneven distribution of wealth

didn’t stop the poor and

middle class from wanting

to possess luxury items, such as cars and radios…

Although wages were not keeping up with the prices of

those goods…”buying on credit”

offer a solutions!

By the end of the 1920s, 60% of the cars and 80% of the radios

were bought on installment credit.

The Federal Reserve Board

was created by Congress

in response to the Banking Crisis of

1907.

The Federal Reserve was suppose to serve

as a protective “watchdog”

of the nation’s economy.

It had the power to set the interest rate for

loans issued by banks.

So,to summarize, banking policies which offered “buying on credit” first with lower interest rates, then raising those rates, caused a dangerous situation in the economy.

Buying on Credit increased

personal debt.

Higher interest rates caused

LESS DEMAND for goods.

3. STOCK MARKET ACTIONS

The Stock Market was an indicator of national

prosperity.

Small investors were more apt to invest in

the Stock Market in large numbers

because the “margin requirement”

was only 10%.

George Olsen and his Music "I'm In The Market For You”

I'll have to see my brokerFind out what he can do.

'Cause I'm in the market for you.With margin I'm all through.

'Cause I want you outright it's true.We'll count the hugs and kisses,

When dividends are due,'Cause I'm in the market for you.

As business was booming in the 1920s and stock

prices kept rising

with businesses’ growing profits, buying stocks

on margin functioned like buying a car on

credit.

The extensive speculation

that took place in the late 1920s

kept stock prices high, but the balloon

was due to burst…

So what went wrong?

The Crash:

“Black Tuesday”

Oct. 29, 1929, the Stock Market

crashed.

Over 16 million

shares sold in massive

selling frenzy.

Losses exceeded $26 billion.

The Stock Market Crash of 1929

was only a symptom- not the cause of the

Great Depression.

Buying on Margin was a

risky market practice.

Bank loans for stock purchases

was an unsound practice.

More Poor Banking Policies…

The Federal Reserve was also established to

prevent bank closings.

It was suppose to serve as the “last

resort” loaner to banks on the verge of

collapsing.

In early 1930, there were 60 bank failures

per month.

Eventually, 5,000 banks closed their doors between 1930 and

1933.

Simply put, when a bank fails, a large amount of money disappears from the economy.

There was no insurance for depositors at this time, so many lost their savings.

As banks closed their doors and more people lost their savings, fear gripped depositors across

the nation.

Business also lost its money and could not finance its activities…

More businesses went bankrupt and closed their doors, leaving more people unemployed…

…Causing unemployment to reach even higher levels.

4. Political Decisions:

1928 ElectionThe Good Times Will Get Better With

Hoover”

The Depression could have been less severe had policy

makers not made certain mistakes…

Leaders in government and business relied on poor advice

from economic & political experts...

“The sole function of the government is to bring about a condition of affairs favorable to the beneficial development of private enterprise.”

Herbert Hoover (1930)

But did Hoover really believe in a “hands-off”

free market philosophy?

Hoover did take action to intervene in the

economy, but it was

too little too late-

Within a month of the crash, Hoover

met with key business leaders to urge them to keep wages high (volunteerism),

even though prices and profits

were falling.

Reconstruction Finance Corporation

(RFC)

Authorized deportation for 50,000 Mexicans (and Mexican-Americans) to ease unemployment and cut the relief rolls in California

-Rising unemployment led to homeowners defaulting on mortgages and renters being evicted from apartments.-The homeless settled in shanty towns called Hoovervilles-1932, Federal Home Loan Bank Act, was passed to spur new home construction, and reduce foreclosures. -Foreclosures dropped briefly in late 1932.

The greatest mistake of the Hoover administration was

passage of the Smoot-Hawley Tariff, passed in

1930.

(It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture into a

tailspin.)

Officials believed that raising trade barriers would force

Americans to buy more goods at home, which would keep Americans

employed.

Smoot Hawley Tariff of 1930 and Trade Reform Act of 1934

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1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

Billio

ns o

f Nom

inal

Dol

lars

Exports

Imports

It virtually closed our borders to foreign

goods and ignited a vicious international

trade war.

Europe had debts from World War I and

Germany had reparations to pay.

Foreign nations were forced to curtail their

purchase of Americans goods.

For example,American

farmers lost 1/3

of their market.

Farm prices plummeted

and thousands of farmers

went bankrupt.

To compound the effects of the economic slump,farmers would

experience one of the worst, longest droughts in history

during the 1930s…

...creating a “Dust Bowl” of unproductive, eroded

farmland.

Three years later, international trade

plummeted to 33% of its 1929 level.

The loss of such trade was devastating and had ripple effects, similar to

the bank failures.

In summary, The Smoot-Hawley Tariff created trade wars and worsened world economic conditions.

Huge increase in taxes hurt companies and individuals.

Let’s Review the MAJOR CAUSES

for the Great Depression:

1. Overproduction (responding to high demand for goods)

2. Banking & Money Policies (low interest rates, buying on credit, raise in interest rates, low reserve rates for banks.)

3. Stock Market Practices (buying on margin, bank loans for stock purchases)

4. Political decisions (Smoot-Hawley Tariff, Increase Income Tax)

1932 Election