The Great Depression

Causes & Effects

Postwar Econ Boom

20s Prosperity: During post-WWI years, known as the Roaring 20s, many Ams believed the US was a place of unlimited growth, opportunity, and achievement.

‘28, pres candidate Herbert Hoover thought no other society had ever come as close to eliminating poverty as we had by 1928.

•Gave them more $$. Am earnings increased by 43% from 1922-1927. •Due to increase, began spending more on luxury goods (radios, refrigerators, & cars).

o By mid-20s, we owned ¾ of all the world’s automobiles.

•We boosted production in factories. •Technological advances allowed more goods to be produced

o Number of goods a factory worker produced an hour rose by 72% during the 1920s.

•US stock market was at an all-time high & analysts urged Ams to invest as much as they could.

oIn 1927, 550 million shares were traded. In 1929 that number doubled to 1.1 bill•By ‘29, cracks showing in our shiny econ.

oUnemployment rising, farmers losing lands, & stocks losing prices.oDue to rising unemployment, poverty grew causing chain reaction in industry.

-Ams not buying goods at rates they had earlier in 20s. -More industries laid off workers, led to more poverty, & so on

Econ boom affects Ams in # of ways.

Most people think the Stock Market Crash of 10/29 /29 caused G.D. It is considered the true “beginning” of the Depression, but it didn’t start it. The G.D. happened for a # of factors:

• Repub domestic & int’l econ policies Tariffs

• Uncontrolled stock speculation Buying on margin

• Unregulated banking institutions Risky loans

• Overproduction of goods Automobiles

• The decline of farming industry Farms defaulted

• Unequal distribution of wealth Gap b/t rich & poor

Republican Economic Policies

Domestic Econ Policies: • Calvin Coolidge, pres from ‘23 to ‘29, summed up his party’s policies w/,

“The business of America is business.” • He & successor H. Hoover based their administrations on a pro-business

theory called “trickle-down economics.” – Trickle-down econ = if big biz & Am’s wealthiest citizens benefited then rest of

Am would eventually benefit also.

• Secretary of Treasury Andrew Mellon (himself a multimillionaire) instigated a series of tax cuts for the wealthy. Everyone over $60,000.00 a year had taxes reduced.

• Biz got tax breaks also (i.e. US Steel received 15 mill back from govt in taxes)• To make up for loss, Mellon cut govt spending; raised taxes on middle & lower classes. • Mellon’s, Coolidge’s & Hoover’s efforts didn’t work. $ stayed in pockets of rich.

– Instead of expanding or adding employees, corps. devoted their profits to new machines so less employees were needed.

– Additionally, they cont’d to keep wages low & this kept average Am. from ever “getting ahead.”

• In the end, gap b/t rich and poor simply got bigger & bigger.

Repubs just as conservative abroad as they were at home. During WWI, US lent over 11 billion to our Euro allies & b/c of the devastation after the

war; these allies unable to repay the loans. They begged the US to release them from their debts, but the Repubs tried a different

approach- they loaned France & GB more $.

*European country *US loans millions of $$ *European country pays US

owing the US $$ to European country back with $$ we loaned to it

In effect, we paid back our own loans. Coolidge & Hoover also put high tariffs on imports. They wanted to keep Ams from buying foreign products This policy was short-sighted for two reasons.

1. Euro countries unable to pay off their debts b/c they couldn’t sell any products overseas. 2. Euro countries followed our lead & raised their own tariffs, so US biz overseas dropped

International Economic Policies

Real Estate & Stock Speculation Idea of speculation (risky investments in hope of quick profits) gained ground after WWI.

• Real estate speculation went through the roof as over a mill people moved to CA looking for jobs in the mid ’20’s.

• However, soon amount of land for sale exceeded demand causing boom to become a bust.

• Another boom occurred in FL as Henry Flagler brought railroad down to Miami & carved a vacation paradise out of swamps. Potential landowners bought beachfront properties that turned out to be swampland or 6 ft underwater when tide came in.

• By time owners knew, they were stuck w/ land, causing banks to foreclose on loans.

Since Real estate was dying, many investors turned their attention to stock market. • As ‘20s progressed, traders created a frenzy w/in the market by speculating on

which companies would gain best profit & buying those stocks. • Sometimes groups of investors picked a stock & began buying up all available

stock- causing price to rise. When other traders saw price going up, they jumped in & began buying also, causing price to rocket.

• When it reached incredibly high peaks, they sold it off, making large profits. • In both cases the inflated value of the stock was shown to be worth far less than

what the new buyers had paid for it.

Stock Market CrashAnalysts’ warnings about the market made some investors nervous. In ‘29 many investors began selling stocks while they could still get high prices for them.

• Unfortunately, the more stock that was sold, the less it was worth. • As stock prices fell, companies slowed production; causing more price drops. • By October ‘29 stock prices on a downward spiral. • On October 24, 1929, investors flooded market with sell orders- prices

plummeted and investors lost millions. • In a last ditch-effort to save the economy, a group of bankers led by J.P.

Morgan bought up shares of stock for more than they were worth, but it was too little, too late.

• On October 28, investors again rushed to sell their shares at a loss of over 4 billion. The next day, called “Black Tuesday” because of its terribleness, orders to sell at any cost swamped the market.

• End result: by the end of day investors had lost 16 billion dollars. The stock market was in ruins and G.D. had officially begun.

Unregulated Banking Institutions: The stock market crash triggered a similar effect within the banking industry.

• This occurred because the government had a laissez-faire policy (“let things alone”) when it came to banks.

• Very few restrictions on banks & what they were allowed to do with their (actually their clients’) $.

• Consequently, banks had made so many loans to businesses & extended credit to so many investors, when the crash occurred they had no $ left to pay back their patrons.

Stock Market Crash & Banking Collapse

• Unlike stock market, collapse of bank industry affected non-investing Ams• Avg Ams w/ savings accounts lost everything

– B/c banks had made risky loans & extended credit to so many investors (to buy on margin), they had nothing left to pay patrons who came in and wanted their deposits.

• Banks also affected by decline in biz production. As production slowed & workers were laid off, they defaulted on their home loans. This meant banks lost the $ they had loaned workers.

– By 1932, ¼ of the nation’s banks had closed- their patrons’ $ lost.

Stock Market Crash & Banking Collapse

Overproduction After WWI, advances in tech changed the way we lived• Before ‘29, industry’s future was BRIGHT. 3 reasons for this

optimism: o Consumer demand was high after WWI: especially for cars & household appliances.o New machines allowed factories to produce more stuff in less time w/ fewer workers.o Am industrialists’ beliefs in unrestricted capitalism dovetailed w/ govt econ policies

• For a while profits soared. But by end of ‘20s, econ was saturated w/ goods few Ams could afford to buy & companies were left w/ more plants then

needed.

Overproduction (cont)

When G.D. hit, ag industry was hit hard. – Prosperous WWI-era farmers, now found their crops not selling in Europe.

• B/c many had mechanized their farms w/ new tractors & other tech advances, they were

left w/ surpluses of crops to sell. • For most, this meant growing more crops to make up the loss, resulting in even lower

prices.

• When 1920s over-farming was combined with droughts in 1934, 1936, and back to back: 1939-1940, it resulted in a phenomenon known as the Dust Bowl.

– Stretching from Texas to North Dakota, the Great Plains was hit by the erosion of top soil that produced dust storms that carried dust as far as NYC on some occasions.

– As farms failed, farmers migrated to cities & eventually to California to act as migrant workers in orange groves and farms.

Unequal Distribution of Wealth Statistics showed Ams were wealthier than ever during the ‘20s, but most of

the wealth remained concentrated in the hands of a few wealthy people at the top of the country’s economic pyramid.

• In ‘29, 1% of US controlled 59% of wealth. 60% of US lived on/below $2K/year. • ‘20 to ‘29, average Am. saw income increase by 9%. Wealthy Ams rose 75%. • Rich getting richer, but poor staying same, which meant getting poorer.• Am industrial workers lost their jobs as factories mechanized and replaced them

with machines. • Even the arts weren’t safe: 35,000 orchestra members were fired in ‘29, when they

were replaced by “machine music” in the nation’s theaters.• In end, industrial workers were as impoverished as the nation’s farmers.

The Income Gap Today

The Income Gap Today

Unequal Distribution of Wealth cont

• Banks & businesses tried to stem the tide by encouraging Ams to buy goods on credit, but this only made Ams fall deeper into debt.

• As US economy hit bottom & 2 mill homeless people wandered US in search of food or jobs, black clouds of dust were smothering the Midwest & moving East.

• Armed dairymen in Iowa (go figure) blocked roads to Sioux City w/ spiked telephone poles & dumped their milk to raise prices,

• 25K other Ams were gathering in Union Square in NYC to hear comm speakers call for the overthrow of the capitalist system.

Unequal Distribution of Wealth cont

• Hoover, a self-made millionaire refused to consider direct relief for the Am people.

• His own success & philosophy of “rugged individualism” caused him to believe it was un-Am for the govt to interfere in peoples’ lives this way- creating a generation of lazy, people living off of welfare.

• Instead, Hoover tried to get biz leaders to voluntarily cooperate in stabilizing wages & maintaining jobs. Some did. Most forgot.

• Hoover also created Reconstruction Finance Corp providing loans to big biz.

• The problem was this did not solve the problem of under-consumption- Ams simply did not have $ to buy new things, so having biz produce more only added to prob.

• Finally, Hoover’s firm belief in a balanced budget meant he would not spend more $ than the federal government was bringing in, so he was forced to encourage private charities to help.

• Due to a series of interconnected conditions the G.D. was here and it looked like it was going to last a long time.– Failure of trickle-down economics– Decline of int’l commerce– Crazy stock spec– Unreg banking practices– Overprod of goods– Collapse of ag– Unequal dist of wealth

The Presidential Election of 1932

• In ‘32, Ams were offered 3 choices: – the conservative approach of Hoover,– the radical approaches of comm & soc, – the liberal alternative of FDR.

• Roosevelt had offered Ams a “New Deal” to escape G.D. & they bought his ideas.

• Winning 57% of the popular vote & 472 electoral votes (against Hoover’s 40% & 59 electoral votes- you needed 266 to win at that point!)

• FDR promptly introduced a series of fed programs designed to stop the G.D.

The Toll of the Depression on Daily Life

• In ‘32, G.D. going into 3rd year. 25% of Ams unemployed (up from 3.2 in ‘29).

• The stock market had dropped in value from 90 billion to 15.5 billion.

• 1000s of banks closed; Bankrupt families’ homes, farms, and lands confiscated

• Farmers who’d seen crop prices drop during 20s; now saw their livelihood blow away as the Dust Bowl grew

• Families fell apart as economic toll meant husbands/fathers left families

• Juvenile delinquency rose as children quit school to find work that wasn’t there

The Presidential Election of 1932 (cont)

• While Ams’ suffering continued, there were ways to escape it.

• Hollywood made movies designed to escape the harsh reality of life – screwball comedy (Three Stooges)

– sentimental films (Mr. Smith Goes to Washington)

– musicals (Wizard of Oz)

– horror movies (Frankenstein)

– cartoons (Snow White)

• $.10 allowed a person to escape all day.

• Similarly, radio programs and major league baseball provided hours of entertainment to Ams.

• However, for long-term relief Ams turned to the man they’d elected…FDR

• But we’ll learn about him in the next lecture