Transcript The Economy in the Late 1920*s

The Economy in the
Late 1920’s
As you enter the room…
• Pick up the worksheet and answer the bell ringer
question:
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What factors contributed to the booming economy of the 1920’s
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The Economy Seemed Fine…..
Hoover was the Secretary of
Commerce for Harding and
Coolidge, and everyone expected
the economy to get even better with
him as president
Since WWI, wages had risen by more
than 40% and unemployment was
below 4% on average
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About 8% today
Welfare Capitalism – employers
raised wages and provided benefits
to prevent union activity
Hoover: “Poverty will be banished
from this country”
The Stock Market
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Viewed as the “weathervane” of the economy
How does it work?
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At some point, just about every company needs to raise money for some reason
They have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a
stake (issuing shares of stock) in the company.
When you own a share of stock, you are a part owner in the company with a claim (however
small it may be) on every asset and every penny in earnings.
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Individual stock buyers rarely think like owners, and it's not as if they actually have a say in
how things are done.
As a company's earnings improve, investors are willing to pay more for the stock.
In addition, in years in which profits are very high, companies may choose to pay dividends
to their stock holders, or a portion of the profit
The Stock Market in the 1920’s
• Increasing stock values indicated prosperity in the late
1920’s
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1925: $27 billion
1928: $38.5 billion
Oct. 1929: $87 billion
• 1929 was seen as a year “of unprecedented advance, of
wonderful prosperity”
“Everybody Ought to be Rich”
• 1929 article by John Raskob
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“I am firm in my belief that anyone, not only can be rich, but
ought to be rich”
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What does this say about the attitudes and confidence of
Americans in early 1929?
• Raskob exaggerated the power of investment
• This article, among other influences in society, led to an
overconfidence in the stock market
“Hindsight is 20/20”
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6 main factors, looking back that should have been warnings
1. Prosperity was hugely uneven
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65% made $1,999 or less
29% made $2,000-$4,999
5% made $5,000-$9,999
1% made over $10,000
Also,
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0.1% of the population held 34% of savings
Close to 80% of the population had no savings
“Hindsight is 20/20”
2. Buying on credit leads to…
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Personal debt!!!
3. Widespread speculation (high risk investments)
4. Many were buying stocks on margin (credit)
5. Overproduction slowed industries (especially auto and construction)
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Remember supply and demand – in this case supply outpaced demand
6. Farmers struggled due to low farm prices
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6000 rural banks failed
“we were in a depression before 1929, we just didn’t call it that”
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A rural Tennessee farmer
Stock Market Crash
The Dow Jones Industrial Average
• An average of stock prices for major industries in the US
• In early 1928, it was 191 and by September 3, 1929, it was
at an all-time high of 381
• After that peak in September, the stock process began to
fall slowly
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Some banks began to call in loans from speculators, but others
loaned even more
Problems begin…
• Black Thursday, October 24
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Investors were worried about a bad last hour of trading the day
before
They began to sell (General Electric stock fell from $400/share to
$283/share)
The day saw a $3 billion loss on the market
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No serious effects on the general population
Government and economic officials insisted the nation should not
worry
Black Tuesday
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To stop the losses, a group of banks pooled their money to buy
stock, but it only delayed the problem a few days
On Tuesday, October 29, BLACK TUESDAY a record 16.4
million shares were sold (the average in a day was about 4
million)
This collapse of the market is known as the GREAT CRASH
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By the end of the day, Nov. 13 the DOW had fallen from the record
of 381 nearly in half to 198.7
Overall losses totaled $30 billion
The Business Cycle
• The economy expands and contracts over time
• Vocab before clip….
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Real GDP (gross domestic product) - An inflation-adjusted
measure that reflects the value of all goods and services
produced in a given year, expressed in base-year prices.