Ch. 11 The Great Depression

11.1 Causes of the Great Depression

HERBERT HOOVER ELECTED PRESIDENT, 1928

"We in America today are nearer to the final triumph over poverty

than ever before in the history of any land. The poorhouse is vanishing from among us.“

1928

The New York Times EditorialTuesday, January 1, 1929

“…It has been a twelvemonth of wonderful events, of unprecedented prosperity, in this country at least; of extraordinary practical applications of science, of great and fruitful benefactions, of many advances in the arts and professions which may be called social, and of a more firmly established conviction that the wealth and power of the United States will be found equal to every emergency or responsibility that may arise. If there is no way of judging the future but by the past, this New Year’s Day may well be one of felicitation and hopefulness…”

I. The Long Bull Market

A. In the 1920s, a prolonged bull market convinced many to invest in the stock market

1. Hoping for a quick profit, they engaged in speculation

By the beginning of 1928, speculating in the stock market had become almost a national mania. It was not true that “everybody was in the market,” but it just seemed that way. Only about 3 million people had invested in the stock market.

I. The Long Bull Market…

B. Many began buying on margin1. Investor paid for only a fraction of the cost of the stock &

borrowed the rest from the stockbroker2. People bought more stocks than they could afford

C. In reality, rising stock prices didn’t reflect a company’s worth

II. The Great Crash

A. As stocks began to fall in 1929, investors sold their stocks

1. Brokers issued margin calls, demanding the investor repay the loan

2. On Tuesday, Oct. 29, 1929 (Black Tuesday) stock prices dropped dramatically

WALL STREET ON THE DAY OF THE CRASH,

OCTOBER 1929

II. The Great Crash…

B. The market crash weakened banks

1. Banks had given loans to stock speculators who couldn’t pay them back

2. Banks had invested depositors’ money in the stock market & lost it

3. Bank runs started as worried depositors wanted to withdraw their money, causing banks to collapse

News of bank failures worried Americans. Many rushed to their banks to withdraw their savings, only to find that the banks had no cash reserves & closed.

III. The Roots (Causes) of the Great Depression…

A. Stock market crash led to a decline in economic activity; people weren’t buying goods & businesses were forced to lay off workers

III. The Roots (Causes) of the Great Depression

B. An unequal distribution of income meant most Americans earned little money

1. High debts forced some buyers to stop making new purchases

C. Overproduction – companies made more goods than could be sold

Distribution of Personal Income Earned by All Americans in 1929

Gross Income

Over $10,000

$6,000-$9,999

$5,000-$5,999

$4,000-$4,999

$3,000-$3,999

$2,000-$2,999

Under $1,999

TOTAL

Percent of Population Earning This Income

1%

3%

2%

4%

8%

17%

65%

100%

80% of Americans had no savings at all – just enough to get by

The top 1% received a 75% increase in their disposable income while the other 99% saw an average 9% increase in their disposable income.

III. The Roots (Causes) of the Great Depression…

D. Hawley-Smoot Tariff (1930) raised tariffs on imported goods to help American businesses

1. Foreign countries responded by raising their own tariffs on our goods

2. Fewer American products were sold overseas, resulting in a loss of export sales

III. The Roots (Causes) of the Great Depression…

III. The Roots (Causes) of the Great Depression…

E. The Federal Reserve kept its interest rates low throughout the 1920s

1. This encouraged member banks to make risky loans to people with little income

2. Also led business leaders to borrow more money to expand production beyond market demand