Transcript The Economic Collapse File

TSWU
Discover how the pattern of conspicuous
consumption in the 1920s led America
into the Great Depression
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The Postwar Economic Boom
• Years following WWI known as “Roaring 20’s”
• Many Americans believed U.S. a place of unlimited growth,
opportunity, and achievement.
• During 20’s Americans were earning more money than ever before.
Between 1922 and 1929 national income rose 43%
• Americans had more $ to spend, especially on automobiles, but also
radios, refrigerators and etc.
• Business profits rose by 80%
• By 1929 stock market was at an all time high.
• The number of stocks traded doubled between 1927 and 1929
• By late 1929 cracks were beginning to show in the
U.S. economy.
• Unemployment was on the rise, farmers were
losing their land & stock prices were dropping.
• Number of Americans living in poverty was on
the rise.
• Stock market crash launched the longest and most
devastating depression in U.S. history.
Postwar Economic Boom
The stock market crash
DID NOT CAUSE THE GREAT DEPRESSION
it was one of many complex factors.
• Historians agree on these key factors:
1) Republican economic policies.
2) Unchecked stock speculation combined with unregulated banking.
3) Overproduction of goods.
4) The decline of the farming industry.
5) Unequal distribution of wealth.
6) The collapse of the stock market system.
Republican Economic Policies
•
•
•
“The business of America is business.”
Calvin Coolidge
Republicans implemented many pro-business policies.
– Andrew Mellon, secretary of Treasury, key proponent of trickle down economics,
believing that economic policies that benefited big business and America’s wealthiest
citizens would eventually benefit all Americans.
– Prosperity would “trickle down” from upper classes to the middle and lower classes.
– Mellon slashed taxes for big business & reduced personal taxes for wealthy people.
Despite Mellon’s projections, the wealth did not trickle down to the American worker
– Corporations devoted profits to expanding facilities, increasing production, and lining
their own pocketbooks.
– Owners kept workers’ wages low.
– Trickle-down economics simply increased the income gap between rich and poor.
Coolidge’s administration refused to forgive war debts from WW I.
– Rather than forgive them, as other European nations had, he simply rescheduled loan
payments and pushed Europe deeper in debt.
– America’s economy is directly effected by other nation’s economic activity
Stock
Exchange
Speculation
Real Estate Speculation
• The practice of speculation- a person or organization makes a
risky investment in the hope of making a quick, large profit
– Early in the decade many investors speculated on real estate.
• The migration to California of over one million people prompted investors to
buy massive tracts of land and sell them sight unseen.
• The California real estate boom belly-up in the mid 1920’s when the amount
of land for sale far exceeded demand for new housing.
– In 1925 many investors left California and went to Florida.
Many bought land sight unseen, which made scams inevitable.
– Unsuspecting buyers owned alligator infested swampland.
– Others held “beachfronts” that were actually 6 ft under at high tide.
– Eventually there were no more buyers and the boom was followed by
a crash and decline in property values.
Stock Market Speculation
• Real estate speculators turned to the stock market.
– Investors believed stock market would continue to go up indefinitely and
companies’ profits would continue to increase.
– Speculators bought large amounts of stocks they thought would go up.
– Then they turned around and sold the stock at a higher price making a
quick, easy profit.
• In this system the value of many companies' stock became
artificially inflated and did not reflect companies actual
worth.
– Rampant speculation drove stock prices higher and higher.
– Some analysts and investors predicted the market was headed for a
fall.
• Even President Hoover warned investors to curb their
speculation and began to sell some of his own stock.
This…
Leads to this
Overproduction
• During the 1920’s U.S. industry enjoyed a postwar
boom that lasted until the end of the decade.
– Postwar technological changes completely changed the way
American people lived and worked.
• By 1929 companies had more plants than they actually
needed, and the market was saturated with goods that
few Americans could afford to buy.
– Companies had no concept of the Supply-Demand curve
– New technology also helped farmers produce more goods
than ever before.
– Farmers were often stuck with surplus crops they couldn’t
sell or could only sell at a low price = loss of profit.
– Government had not issued any subsidies
Farming
• Farming has historically been the backbone of the
American economy.
– By 1929 farming was in deep decline.
– During 20’s farmers borrowed billions to pay for
new, technologically advanced equipment.
• As farmers failed to sell surplus crops they
became unable to repay their bank loans,
including mortgages.
– Banks often could not auction off foreclosed farms and
ended up taking a loss.
– Many banks collapse under pressure of non-backed
loans
Farmers
• Farmers situation grew worse as the 20’s continued.
– Between 1929 and 1933 farmers income dropped by 50%
– Couldn’t farm due to the lack of rain & depletion of topsoil
• Property values decreased by billions of dollars.
– A severe drought, known as the Dust Bowl, hit Midwestern
and southwestern U.S.
– Over 1 million families lost farms between 1930 and 1934.
• The unrelenting poverty of the American farmer
contributed to the nation’s overall economic decline and
dramatized the gap between “haves” and “have-nots”.
Distribution of Wealth
• During the 1920’s most of country’s wealth remained
in the hands of a few people at top of economic
pyramid.
– As decade wore on, the gap between rich & poor grew wider,
and the distribution of wealth grew increasingly unequal.
• 1929 FTC reported that 1% of American population
possessed over 59% of country’s wealth.
– Experts also estimated that over 60% of U.S. families
lived on or below the minimum subsistence level of
$2,000/year.
– Like farmers, other workers struggled to survive in the
30’s.
– Many workers were replaced by machines. Low wages
made workers as impoverished as farmers.
Richest
3%
Middle Class
7%
Poor
&
Poverty
90%
The Crash
• Analyst’s warnings that the bull market could not
continue forever made some investors nervous.
– In 1929 many investors began selling their stocks while
they could still get a high price.
– As investors began withdrawing from the market,
prices started to fall.
• As stock prices fell, companies slowed production,
which in turn led to additional price drops.
– By October,1929 prices were on a devastating
downward spiral.
Buying on Margin
1. Small % down payment for stock / bond, then the rest on credit
2. i.e.: $100.00
a. 10% down for purchase (Cash)
b. 90% credit (Margin)
* Repay the margin when you cashed in on the stock
3. Allowed almost everyone to participate—Bull Market
October 1929
1. Economy begins to “overheat”; govt. slowly raises the interest rate to lower the
circulation of liquid cash….FISCAL POLICY
2. Stock Market analyst Roger Babson warned of a “crash coming, which is going
to be immense”
3. Buyers in the market become worried, and buy fewer stocks = lower points =
lower prices = concern b/c this means they are not getting the return they hoped
for.
4. October 24, 1929—Black Thursday
a. Nervous…buyers begin to sell
b. By the end of the day the market has dropped 31 points
c. Friday, Oct 25; the market levels off, and investors are ok, but anxious
d. Monday, Oct 28; the market looses 11points
Bank loans
broker
money at x%
interest
Broker loans you
money
at x% + y% interest
You pay broker
back;
Broker makes $$
Broker pays
bank back;
Bank makes $$
October 29, 1929-Black Tuesday
- After three days of stagnant growth, the market plummets 49 points
- People panic, begin to sell all of their stock…but there is a problem
a. As prices fall, lenders begin to collect on their margins; but when
lendee’s try to sell, they are not able to collect as much of a return/loss
b. When they cannot collect the full return of their bond / stock they cannot
pay the full margin back to the lender
c. When all is said and done on Tues—15 million shares “dumped”
Banking Crisis
1. Customers were beginning to default on loans / Banks loose liquid assets
2. When word that lenders are not getting their money back, they go w/d
i. All at once means the bank cannot give you your money / banks
begin to close
3. People across the nation hear that banks are closing…
4. By the Spring of 1930, over 25%of banks have been forced to close
5. Domino Effect of the banking system