The Great Crash Ch 21-1
The Main Idea
The stock market crash of 1929 revealed weaknesses in the American
economy and trigger a spreading economic crisis.
Learning Goal/Content Statement
Content Statement 15/Learning Goal(Ch 21):
Describe how the federal government’s monetary policies, stock
market speculation and increasing consumer debt led to the Great
Depression
Ch 21-1 vocab
• Gross National Product: total value of goods and services
produced in a nation during a specific period. Between 1922
and 1928 this rose by 30%.
• Herbert Hoover: 31st president of the U.S. He helped save
Europe from starvation after WWI but as president failed to
deal effectively with the Great Depression.
• Buying on Margin: buying stocks with a loan from stock
brokers.
• Federal Reserve: Nation’s central bank
• Black Tuesday: October 29, 1929. Stock Market crashes.
1.The Appearance of Prosperity
•
•
•
•
•
1.Strong Economy
Between 1922 and 1928 the U.S. gross
national product, or total value of all
goods and services, rose 30-40
percent.
Though farmers and some other
workers didn’t benefit, the overall
economy performed well, especially
for automakers and those who made
auto parts.
Overall unemployment remained low,
averaging around five percent
between 1923 and 1929.
Union membership slowed as
employers expanded welfare
capitalism programs, or employee
benefits.
This feeling of prosperity encouraged
workers to buy new products and
enjoy leisure activities such as movies.
2.Stock Market Expansion
• The stock market, where people buy
stocks, or shares, in companies,
performed very well in the 1920s, with
stock values sharply increasing each
month.
• The value of stocks traded quadrupled
over nine years.
• The steep rise in stock prices made
people think the market would never
drop, and more ordinary Americans
bought stocks than ever before.
• The number of shares traded rose from
318 million in 1920 to over 1 billion in
1929.
• Business leaders said everyone could
get rich from stocks.
High Hopes
3.Faith in business and government
• Many Americans thought the prosperity of the 1920s proved the
triumph of American business, and public confidence in government
was high.
• Presidents Harding and Coolidge both favored policies that helped
business, and both were very popular, easily winning elections.
4.The election of 1928
• When Coolidge didn’t run for reelection in 1928, the Republicans easily
chose Herbert Hoover.
• Hoover had been on Harding and Coolidge’s cabinets, had overseen
America’s food production during World War I, and had an outstanding
reputation as a business-like administrator.
• Hoover’s opponent was New York governor Al Smith, an outgoing politician
with a strong Brooklyn accent, whose support came mostly from cities.
• Smith was the first Catholic to run for president. He faced prejudice
because of his religion, and because of his opposition to Prohibition.
• Hoover easily won the election, but the race clearly demonstrated the
conflicts dividing the nation in that era.
5.Economic Weaknesses
•While many Americans enjoyed good fortune in the 1920s, many serious
problems bubbled underneath the surface.
•One problem in the American economy was the uneven distribution of wealth
during the 1920s.
–The wealthiest one percent of the population’s income grew 60-75
percent, but the average worker saw under a 10 percent gain.
•For most Americans, inflation or rising prices swallowed up any increase in
salary.
•Coal miners and farmers were very hard hit, but by 1929 over 70 percent of
U.S. families had too low an income for a good standard of living.
•Four out of every five families couldn’t save any money during the so-called
boom years.
•Credit allowed Americans to buy expensive goods, but by the end of the
decade many people reached their credit limits, and purchases slowed.
•**Credit given by companies installment buying**
•Warehouses became filled with goods no one could afford to buy.
•Why were stock prices still going up? (Radio business example)
6.Credit and the Stock Market
Investors increasingly used credit to buy stocks as the market rose.
Based on the assumption value of stock market would always rise.
6. Buying on Margin
• Investors were buying on
margin, or buying stocks with
loans from stockbrokers,
intending to pay brokers back
when they sold the stock.
• As the market rose, brokers
required less margin, or
investors’ money, for stocks
and gave bigger loans to
investors.
• Buying on margin was risky,
because fallen stocks left
investors in debt with no
money.
• If stocks fell, brokers could ask
for their loans back, which was
called a margin call.
7.The Federal Reserve
• The board of the Federal
Reserve, the nation’s
central bank, worried about
the nation’s interest in stock
and decided to make it
harder for brokers to offer
margin loans to investors.
• Their move was successful,
until money came from a
new source: American
corporations who were
willing to give brokers
money for margin loans.
• Buying continued to rise.
Stock Price Per Share ($down)
10%
Price Per Share
Profit
1
$10 (1)
6months $20
5
$20x5 =$100 (10)
6 months $40x5 =$200
+$110
25
$40x25=$1,000 (100)
6 months $80x25=$2,000
+1,100
125 $80x125=$10,000 (1000)
+$11
6 months $100x125 =$12,500 +$3,500
Buying on Margin:
Total value of stocks: 125 shares x $100= $12,500. Pay off loan???
Total amount borrowed: $9,000 (10,000-1000 down)
**Magnify** Profit Margin Loan 1,000 down /3,500 profit 350% Return
Profit no loan 10,000 down/2,500 profit 25 % Return
Total Profit (w/loan paid): $3,500
Total Amount of own money spent: $1,000
OCTOBER 29, 1929
VALUE OF YOUR STOCK GOES FROM $100 to $1 per share.
Total value of stocks: $125
Total you owe to stock broker: $9,000
*MARGIN CALL
(9,000-125= $8,875)
AVERAGE INCOME $3,000-5,000 a year
Union Wages and hours NYC
Source: Fite and Reese, An Economic History of the United States. 2nd Edition.
http://historicaltextarchive.com/sections.php?action=read&artid=419
Occupation 1914 per
hour
Hours/ Weekly
Week Wage
1924 per Hours/ Weekly Wage
hour
Week
Bricklayer
$0.75
44
$33
$1.50
44
$66
Carpenter
$0.65
44
$28.73
$1.31
44
$57.77
Painter
$0.50
44
$22
$1.31
40
$52.52
Plumber
$0.69
44
$30.36
$1.38
44
$60.50
Average weekly wage in manufacturing in 1925 was $25. In 1932 it was $17.
8.The Stock Market Crashes
•The steady growth of the early 1920s gave way to astounding gains at the
end of the decade until its September 3, 1929, peak.
•Many people were beginning to see trouble as consumer purchasing fell
and rumors of a collapse circulated.
•On Thursday, October 24, 1929, some nervous investors began selling
their stocks (Joe Kennedy) and others followed, creating a huge sell-off with
no buyers.
•Stock prices plunged, triggering an even greater panic to sell.
•Toward the end of the day, leading bankers joined together to buy stocks
and prevent a further collapse, which stopping the panic through Friday.
•But the next Monday the market sank again, and Black Tuesday, October
29, was the worst day, affecting stocks of even solid companies.
•The damage was widespread and catastrophic. In a few short days the
market had dropped in value by about $16 billion, nearly one half of its precrash value.
Causes of Great Depression/Stock Market Crash
• Uneven distribution of wealth
• Inflation
• Over-extension of Easy credit
• Over speculation in the stock market
Causes of Great Depression/Stock Market Crash
• Uneven distribution of wealth: rich got richer and poor’s
wealth didn’t catch up. This causes inflation. Prices for items
goes up.
• Inflation: most take home money was spent for increased price
of everyday items. If people wanted or needed something they
just used credit.
• Over-extension of Easy credit: This creates artificial demand
for items. Consumer spending stops when credit dries up.
Then economy slows down and stock prices will begin to dip.
Workers get laid off. Can’t pay back loans hurting banks. Bank
Runs. But stocks don’t go down because of buying on
margin.
• Over speculation in the stock market: value of stocks were
overinflated due to buying on margin. Once sell off begins the
stock market’s value plummets.
Effects of the Crash
9.Impact on Individuals
• Though some thought the market would
rally, countless individual investors were
ruined.
10.Effects on Banks
• The crash triggered a banking crisis,
as frightened depositors rushed to
withdraw their money, draining the
bank of funds. Bank run.
• Margin buyers were hit the hardest,
because brokers demanded they pay back • Many banks themselves had invested
the money they had been loaned.
directly or indirectly in the stock
market by buying companies’ stocks
• To repay the loans, investors were forced
or by lending brokers money to loan
to sell their stocks for far less than they
to investors on margin.
had paid, and some lost their entire
savings making up the difference.
• When investors couldn’t repay
margins, banks lost money, too.
• In the end, many investors owed
enormous amounts of money to their
• These failures drove many banks out
brokers, with no stocks or savings left to
of business.
pay their debts.
More Effects of the Crash
11.Effects on Business
• The crash crushed
businesses, because banks
couldn’t lend money.
• Consumers also cut back
their spending on everything
but essentials, and
companies were forced to lay
off workers when demand
decreased.
• Unemployed workers had
even less money to make
purchases, and the cycle
continued.
12. Effects Overseas
• The fragile economies of
Europe were still struggling
from World War I. They had
borrowed a great deal of
money from American banks
that the banks now wanted
back.
• With U.S. buying power down,
foreign businesses were less
able to export their products
and were forced to fire
workers.
• Governments tried to protect
themselves by passing high
tariffs, making foreign goods
expensive.
• In the year after the crash,
American wages dropped by
$4 billion and nearly 3 million
theirtrade
jobs.in the 1930s created misery around the world
Thepeople
declinelost
in world
and contributed to the nation’s slide into the Great Depression.
Hoover’s Response to the Great Depression *Things to Come*
Hoover’s core beliefs—that government should not provide direct aid,
but find ways to help people help themselves—shaped his presidency.
Direct Action
Ideas and Beliefs
• Before the market crash, Hoover
tried to help farmers by
strengthening farm cooperatives.
• Cooperative: an organization
owned and controlled by its
members, who work together for
a common goal
• After the crash, Hoover continued
to believe in voluntary action, and
he urged business and
government leaders not to lay off
workers, hoping that their
cooperation would help the
economic crisis pass.
• Businesses cut jobs and
wages, and state and local
governments cut programs
and laid off workers.
• The crisis persuaded
Hoover to go against his
beliefs and establish the
Reconstruction Finance
Corporation in 1932, a
program that provided $2
billion in direct government
aid to banks and
institutions.
• Later that year he asked
Congress to pass the
Federal Home Loan Bank, a
program to encourage
home building.