The Great Depression Signs of Trouble Stock Market Crash The Depression Begins

The Great DepressionThe Great Depression

Signs of TroubleSigns of Trouble

Stock Market CrashStock Market Crash

The Depression BeginsThe Depression Begins

The United States Economy The United States Economy in the 1920’sin the 1920’s

• The United States economy in the 1920’s was very strong

• The growth of the automobile industry had a positive impact on many other industries

• Unemployment was low• People were making more money

and working less

Installment BuyingInstallment Buying

• In the 1920’s Americans began buying items they couldn’t afford through the use of installment buying (buying on credit)

• This increased the demand for goods• But it also increased consumers debt

The Stock MarketThe Stock Market

• The strength of the economy led many people to invest in the Stock Market in hopes of becoming rich

How does the stock market workHow does the stock market work??

You buy 100 shares of stock ofx $5.00 per share

How much money have you invested? $500.00

Scenario #1

stock increases to $20 per share

100 shares of stock

x $20.00 per share

How much are your 100 shares of stock now worth?

$2,000.00

How much profit have you made?

$2,000.00 stock value

- $500.00 initial investment

$1,500.00 net profit

How does the stock market work?How does the stock market work?

You buy 100 shares of stock of x $5.00 per shareHow much money

have you invested?

$500.00

Scenario #2

stock decreases to $1 per share

100 shares of stock

x $1 per share

How much are your 100 shares of stock now worth?

$100.00

How much money have you lost?

$100.00 stock value

- $500.00 initial investment

$400.00 net loss

Buying Stock on MarginBuying Stock on Margin

• People who did not have money to purchase stock could buy stock on margin– Banks and stock brokers would loan

people money to purchase stock– People had to pay back the

bank/brokers with interest

Buying Stocks on Margin: Scenario A

investor stock broker

Hello, sir. I would like topurchase 100

shares of stock in the Ford

Motor Company. How much is it going

to cost me?

http://www.blankpixel.com/images/creations/digital/paintings/slackerdude/slackerdude-cartoon.jpg



Well, Ford stock costs

$10 per share. You

want tobuy 100 shares?

Figure it out yourself,

smart guy!




Ummm…100 shares

x $10 per share

= $1,000.00

Oh, well. I only have $100. I can’t afford

100 shares.




No, problem!

Just give me $100 and

you can owe me the rest!




Like, how muchwould that be? Let me think…

$1,000 worth of stock - $100 paid

= $900 owed

Alright, it’s a deal!!




Six months later, Ford stock doubles to $20 per share.

My 100 shares are now worth... 100 shares

x $20 per share $2,000


Buying Stocks on Margin: Scenario ABuying Stocks on Margin: Scenario A


That’s great! Now pay me the $900 you

owe me!




No problemo! It was a pleasure doing business

with you!

Buying Stocks on Margin: Scenario ABuying Stocks on Margin: Scenario A

investor

Now let’s figure out how much money I made!

$2,000 net worth - $900 owed $1,100 profit

- $100 initial investment

$1,000 net profit

Buying Stocks on Margin: Scenario BBuying Stocks on Margin: Scenario B


Six months later, Ford stock decreasesdecreases to $1 per share.

My 100 shares are now worth... 100 shares

x $1 per share $100



Too bad, hotshot!

You still owe me $900!



But I’m broke! What am I going to

do!



I don’t care what you do as long as

you pay me back!

SpeculationSpeculation

• Many people invested in companies that they believed would some day become profitable rather than in companies that were already profitable

• This can be very rewarding because the stocks are often inexpensive and if the company succeeds you can make large amounts of money

• This is very risky because if the company does not make it you will lose your money


• Although the economy of the 1920’s was very strong signs of trouble began to appear


• Overproduction: Massive business inventories---- Increased Supply

Farms and factories overproduced beyond the demand.

Effects of OverproductionEffects of Overproduction

People had little or no

money to spend.

Demand forgoods fell.

Businesses cut

production

Workers sufferedfrom wage cuts

and lay offs.


• Lack of diversification in American economy--prosperity of 1920s largely a result of expansion of construction and automobile industries


• Not all Americans shared in the Not all Americans shared in the Prosperity of the 1920’sProsperity of the 1920’s 1. Many farmers and factory workers were

unable to purchase cars and houses and thus maintain economic growth

2. Farm income declined 66% from 1920 to 1929

3. By 1929 the top 10% of the nation's population received 40% of the nation's disposable income


• Huge credit problemsHuge credit problems

1. Steady stream of bank failures in late 1920s as customers (many of them farmers) were unable to pay mortgages

2. Many bankers had invested money in the stock market

3. Low margins encouraged speculative investment on the part of banks, corporations, and individual investors


• Decline in demand for American goods in international trade

1. Some nations, particularly Germany, were experiencing financial crises and inflation and they could not afford to purchase American goods

1. Unable to pay wartime debts, many European nations borrowed from American banks, further increasing debt

1. High American protective tariffs discouraged trade * Hawley-Smoot Tariff

The Stock Market CrashThe Stock Market Crash

• By October 1929, margin buying (buying stock on credit) had reached $8.5 billion in loans to stock purchasers

• Stock prices began to fall in September 1929. On October 24 (Black Thursday) and October 29 (Black Tuesday), prices fell drastically as sellers panicked. By December $40 billion in stock value had been lost.



• President Hoover and business leaders attempted to calm Americans by assuring them that the country's economy was fundamentally sound

The Stock Market CrashThe Stock Market Crash•People who had invested all their savings in stock lost everything

•People that had bought stocks on margin could not pay back banks

The Great DepressionThe Great Depression• Economic Downturn accelerated by

stock market crash leads to the Great Depression

• One of the most difficult periods in American history


• Between 1929 and 1933, 100,000 businesses failed

• Corporate profits fell from $10 billion to $1 billon


• Between 1929 and 1933, over 6000 banks failed with over 9 million savings accounts lost ($2.5 billion)


• By 1933, 13 million workers were unemployed (25% of the work force) and many were underemployed

• Malnutrition increased, as did tuberculosis, typhoid and dysentery.– In 1932, 95 people

died of starvation in New York City

– Many turned to soup kitchens and breadlines for food


• Large numbers of homeless workers roamed the U.S., particularly the Southwest, seeking work


The Dust BowlThe Dust Bowl

• An environmental disaster in the southern Great Plains during the 1930’s

• Severe drought during 1931 caused the soil to dry out and swept the soil away– Farmers had cleared

millions of acres of grassland

– Grass had held the soil in place

• Farmers went bankrupt and moved west

President Hoover’s President Hoover’s ResponseResponse

• Did not believe that it was the role of the government to provide relief to Americans

• Urged Americans to turn to community and church resources (Salvation Army, Community Chest, Red Cross) to meet needs of the poor

Hoover’s ResponseHoover’s Response

• Gradually used federal agencies to address issues 1. Met with business and labor leaders to reduce

layoffs and strikes 2. Financed federal work projects, such as

massive dams in the West (Boulder, Hoover, and Grand Coulee)

3. Set up RFC (Reconstruction Finance Corporation) in 1932 to make loans to stimulate economy in a "trickle-down" manner

The Bonus ArmyThe Bonus Army



The Election of 1932The Election of 1932

• President Hoover (Rep) vs. Franklin D. Roosevelt (Dem)

• Hoover refused to accept any responsibility for the economic downturn ("No president must ever admit he has been wrong") and was booed and jeered when he made his few campaign appearances outside Washington 1. Campaign slogans: "The Worst is Past,"

"Prosperity is Just Around the Corner" 2. Accused FDR of seeking the destruction of

capitalism


• Franklin Roosevelt wanted to use the power of the government to solve the crisis.

1. Offered a New Deal for the "forgotten man"

2. Campaign slogan: "Happy Days are Here Again" signaled Democratic optimism in face of economic problems


• Though party platforms were remarkably similar, Democrats supported repeal of Prohibition and an increase in federal relief

• FDR won 57% of the popular vote and Democrats took control of both the House and Senate


The Bank HolidayThe Bank Holiday

• One of Roosevelt’s first actions as president was to declare a Bank Holiday

• Roosevelt ordered that all Banks close for four days

• Congress passed the Emergency Banking Relief Act

• This gave FDR a wide range of power over the banks • Setup a system to protect people’s money that was

deposited in the banks

• The goal was to restore public confidence in the banking system

Fireside ChatsFireside Chats• Roosevelt was

concerned about restoring the American peoples confidence in the economy

• He used the radio to deliver a message of hope and optimism to the American people– “The only thing we have

to fear is fear itself”• These were called

fireside chats because FDR would sit by a fireplace in the White House when he spoke

The First 100 DaysThe First 100 Days

• FDR launched Hundred Days of legislative and administrative changes after taking office

1. Relief – provide assistance to the poor; provide government jobs to get people back to work

2. Recovery- actions to restart consumer demand for products

3. Reform- create laws and government programs to prevent further economic decline

Documents

The Great Depression Signs of Trouble Stock Market Crash The Depression Begins