Chapter 25, Section 1

“The End of Prosperity”

The Roaring 1920s• New products became available to

consumers– Automobile– Washing machine– radio

• Expensive products became affordable to buyers– Assembly line– Installment buying

• Laissez faire economics– Fewer regulations on businesses

• Stock prices soared

Stock Prices Soared• In 1920s, prices in the

stock market kept rising• Speculation: Buying &

selling of stocks in hope of making quick profit

• Buying on Margin: Pay a small part of the stock’s price as down payment, then borrow the rest. Then…sell the stock, repay loan, keep profit

Stock values and skyscrapers soared in the 1920s in New York

Buying on Margin Scenario• You want to purchase $100 worth of stock• You only have $20 – so you borrow the rest from

the bank ($80)• The stock goes up 40% (which happened

frequently during the 1920s)• Your $100 turns into $140• You must pay the bank back your loan (80 X .10)

= 8 (plus the original 80) = 88• You are left with a net profit of $32 (140-88-20),

with only putting in $20 of your own money

The “Crash” of the Market• Stock prices were drifting

down after a peak in the summer of 1929

• Those who bought on margin needed to sell stocks fast

• October 29, 1929 : Black Tuesday – investors sold 16.4 million shares of stock

• Stocks lost 1/3 of their overall value in a few weeks

After the Crash• Banks were failing (going out of business)

– so people lost their life’s savings• People also became scared about their

money and:– Feared putting it in banks– they didn’t purchase much anymore

• Businesses sold less and less • Businesses forced to lay off workers, and

some businesses went out of business• People without jobs were unable to pay

bills and they bought even less• The combination of all of these factors

leads to the Great Depression

The Business Cycle• The business cycle is a pattern in U.S. history where the

economy goes up and down repeatedly• When business produce more than they can sell then

goods pile up, and businesses then cut back production and lay off workers

• Laid off workers (and those fearing the bad economy) buy fewer goods causing businesses to fail

• This slowing of the economy (amount of products produced by the nation) is called a recession

• A longer and deeper recession is called a depression• When consumers buy up surplus goods and businesses can

increase production and hire back workers the economy recovers (and people begin to buy more as they are more confident in the economy being strong)

The Business Cycle

The Causes of the Great Depression

1. Overproduction of goods• Farmers• farmers produced too much,

leaving them with surpluses• This overproduction drove

their prices down (and profits)• Industry• businesses were producing

more consumer goods than people were consuming

• assembly line increased production

The Causes of the Great Depression

2. Overvalued Stock Market• Banks and customers who

bought stocks on margin drove up stock prices too high

3. Individual Consumer Debt Too High Installment buying• Installment buying helped

people buy products they couldn’t afford

• When they built up too much debt people stopped buying more products

People outside the New York Stock Exchange in 1929

The Causes of the Great Depression4. Uneven Distribution of Wealth• The wealthiest 20% of the

population held 80% of the nation’s wealth

• Incomes rose 75% for the wealthiest 20%, and only 9% for everyone else

• Over 60% of the population made less than $2500 (and were living below the poverty line)

• The average person didn’t have enough money to keep buying to keep the economy booming

People Looked for Help

• From private charity groups who ran soup kitchens and bread lines

• Many searched garbage and city dumps for food

• Still many were starving• They then looked to the

federal govt. for help• They didn’t get it from

President Hoover

Hoover’s Response

• Balanced federal budget by cutting govt. spending and raising taxes (which made the economy worse)

• He didn’t believe in giving direct aid to the poor (should come from private businesses and individuals)

• Hoover also believed…– “Prosperity was just around the

corner”– “Rugged Individualism” – people

should succeed through their own efforts; not depend on gov’t bailing them out

– People should “pull themselves up by their own boot-straps”

Hoovervilles

Hoover blankets Hoover flags

Hoover was Blamed for all of the Problems

Hoover’s Successes• Eventually Hoover began some

public works projects – Gov’t funded projects to build resources such as roads/dams

• These created jobs, but was too little, too late

• Boulder Dam (AZ/NV), now called Hoover Dam, still provides electricity to several western states

• Reconstruction Finance Corp. loaned $1.2 billion to banks and farmers’ mortgage companies to keep them open in 1932

The Bonus Army• WWI soldiers were due payment

in 1940 – but those who were unemployed wanted it early

• Around 17,000 soldiers went to Washington and set up camp to protest

• When the US Senate voted to not pay their bonuses early, most veterans left, but around 2,000 remained

• Gen. MacArthur and Army use tear gas & bayonets to drive them out and a few people died in the process

Election of 1932

• President Herbert Hoover (Republican)– Warned the nation that

govt. aid programs would weaken Americans’ spirit of self-reliance and would be too expensive

– Hoover was blamed for the bad economy, his slow reaction to help people, and for the treatment of the Bonus Army

Election of 1932

• Franklin D. Roosevelt (Democrat)– As Governor of New York he

took active steps to provide aid to farmers and the unemployed

– People believed he would try to do the same for the whole nation as President

– FDR won in a landslide