Great Depression 2 Causes and Effects

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Published on February 20, 2008

Author: Gulkund

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The Great Depression:  The Great Depression Causes & Effects Postwar Econ Boom :  Postwar Econ Boom 20s Prosperity: Post-WWI years, known as the Roaring 20s, many Ams believed the US was a place of unlimited growth, opportunity, and achievement. ‘28, pres candidate Herbert Hoover thought no other society had ever come as close to eliminating poverty as we had by 1928. Slide4:  1. Gave them more $$. Am earnings increased by 43% from 1922-1927. Due to increase, began spending more on luxury goods (radios, refrigerators, & cars). By mid-20s, we owned ¾ of all the world’s automobiles. 2. We had the ability to produce more. Technological advances allowed more goods to be produced Number of goods a factory worker produced an hour rose by 72% during the 1920s. 3. Boom affected the stock market. US stock market was at an all-time high. Econ analysts thought stock market was key to US prosperity & urged Am citizens to invest as much as they could. In 1927, 550 million shares were traded. By the time the bottom dropped out of the market in 1929 that number had doubled to 1.1 billion Econ boom affects Ams in # of ways. The Depression Foreshadowed:  The Depression Foreshadowed By end of ‘29, cracks were showing in the shiny dream that was our economy. Unemployment was on rise, farmers losing lands, & stocks were losing prices. Due to rise in job loss, poverty grew causing chain reaction w/in biz industry. Ams no longer able to buy luxury goods at rates they had earlier in 20s. Caused more industries to lay off workers, led to more poverty, & cycle spiraled downward more. Slide6:  Most people think the Stock Market Crash of 10/29 /29 caused the G.D. It is considered the true “beginning” of the Depression, but it didn’t start it. The G.D. happened for a # of factors: Repub domestic & int’l econ policies Tariffs Uncontrolled stock speculation Buying on margin Unregulated banking institutions Risky loans Overproduction of goods Automobiles The decline of farming industry Farms defaulted Unequal distribution of wealth Gap b/t rich & poor Republican Economic Policies :  Republican Economic Policies Domestic Economic Policies: Calvin Coolidge, pres from ‘23 to ‘29, summed up his party’s policies w/, “The business of America is business.” He & his successor H. Hoover based their administrations on a pro-business theory called “trickle-down economics.” Trickle-down economics = if big biz & Am’s wealthiest citizens benefited then rest of Am would eventually benefit also. Idea was that wealthy would take their riches & reinvest them to expand their business, creating new jobs & consequently, raising the standard of living for more average people. Coolidge’s (and Hoover’s) Secretary of Treasury Andrew Mellon (himself a multimillionaire) instigated a series of tax cuts for the wealthy. Everyone who made over $60,000.00 a year had their taxes reduced. Corporations got tax breaks also. For instance, US Steel received 15 million back from the government in taxes. To make up for the loss, Mellon cut govt spending and raised taxes on the middle and lower classes. Domestic Economic Policies (cont):  Domestic Economic Policies (cont) Mellon’s, Coolidge’s & Hoover’s efforts didn’t work. $ stayed in the pockets of rich. Occurred for # of reasons. Instead of expanding or adding employees, corps. devoted their profits to new machines so less employees were needed. Additionally, they cont’d to keep wages low & this kept average Am. from ever “getting ahead.” In the end, gap b/t rich and poor simply got bigger & bigger. International Economic Policies:  Repubs just as conservative abroad as they were at home. During WWI, US lent over 11 billion to our Euro allies & b/c of the devastation after the war; these allies unable to repay the loans. They begged the US to release them from their debts, but the Repubs tried a different approach- they loaned them more $. *European country *US loans millions of $$ *European country pays US owing the US $$ to European country back with $$ we loaned to it In effect, we paid back our own loans. Besides this policy, Coolidge & Hoover also imposed high tariffs on imports. They wanted to keep Ams from buying foreign products and concentrating on our own goods. This policy was short-sighted for two reasons. 1. The European countries would be unable to pay off their debts because they couldn’t sell any products overseas. 2. European countries simply followed our lead and raised their own tariffs, so US business was hurt overseas. International Economic Policies Real Estate and Stock Speculation :  Real Estate and Stock Speculation The idea of speculation (making a risky investment in hopes of a quick profit) gained ground after WWI. Real estate speculation went through the roof as over a million people moved to CA looking for jobs in the mid ’20’s. However, soon amount of land for sale exceeded demand causing the boom to become a bust. Later, another boom occurred in FL as Henry Flagler brought the railroad down to Miami and carved a vacation paradise out of swamp and jungle. Soon potential landowners were buying up beachfront properties that would turn out to be swampland or 6 ft underwater when the tide came in. When potential buyers realized, landowners were stuck with land & causing banks to foreclose on the loans they’d made. Real Estate and Stock Speculation:  Real Estate and Stock Speculation Unchecked Stock Market Speculation: Real estate was dying, so many investors turned their attention to the stock market. As the ‘20s progressed, traders created a frenzy w/in the market by speculating on which companies would gain the best profit & buying those stocks. When that occurred, the prices of those stocks rose. Sometimes groups of investors simply picked a stock and began buying up all the available stock- causing the stock price to rise. When other traders saw the price going up, they jumped in and began buying also, causing the price to increase even more. When it had reached incredibly high peaks, they sold it off, making large profits. In both cases the inflated value of the stock was shown to be worth far less than what the new buyers had paid for it. Analysts warned that stock prices could not continue to rise at the rate they were doing. They predicted the market was headed for a fall, and called for an end to speculation. Even Herbert Hoover began selling off his stock and in the fear that “possible hard times [are] coming.” Stock Market Crash & Banking Collapse :  Stock Market Crash & Banking Collapse Analysts’ warnings about the market made some investors nervous. In ‘29 many investors began selling their stocks while they could still get high prices for them. Unfortunately, the more stock that was sold, the less it was worth. As stock prices fell, companies slowed down production; this led to even more price drops. By October ‘29 stock prices were on a downward spiral. On October 24, 1929, investors flooded the market with sell orders- prices plummeted and investors lost millions. In a last ditch-effort to save the economy, a group of bankers led by J.P. Morgan bought up shares of stock for more than they were worth, but it was too little, too late. On October 28, investors again rushed to sell their shares at a loss of over 4 billion. The next day, called “Black Tuesday” because of its terribleness, orders to sell at any cost swamped the market. The end result: by the end of the day investors in the market had lost 16 billion dollars. By the end of Oct., the stock market was in ruins and the G.D. had officially begun. Slide16:  Unregulated Banking Institutions: The stock market crash triggered a similar effect within the banking industry. This occurred because the government had a laissez-faire policy (“let things alone”) when it came to banks. They put very few restrictions on banks and what they were allowed to do with their (actually their clients’) $. Consequently, banks had made so many loans to businesses & extended credit to so many investors, when the crash occurred they had no $ left to pay back their patrons. Stock Market Crash & Banking Collapse Slide17:  The Bank Industry Collapse: Unlike the stock market, the collapse of the bank industry affected people who had not speculated. Avg Ams who had set up savings accounts lost everything because their banks had made risky loans to businesses & extended credit to investors so they could buy on margin (buy 10% of a share of stock and borrow the rest against the assumed profit). Also, banks were also affected by the decline in business production. As production slowed & workers were laid off, they defaulted on their mortgages. This meant the banks lost the $ they had loaned workers. By 1932, ¼ of the nation’s banks had closed- their patrons’ $ lost. Stock Market Crash & Banking Collapse Overproduction :  Overproduction Industrial Goods: During the ‘20s, the US enjoyed a postwar boom that lasted until the end of the decade. During WWI, technological advances in aviation and ground transportation changed the way we waged war. Afterwards, advances in agriculture, electrical power, transportation, and factory production changed the way we lived and worked. Before ‘29, industry was like the stock market and the economy it looked like the sky was the limit. There were three reasons for this optimism when it came to industry. Consumer demand was high after the war: especially for cars and household appliances. Newly invented machines allowed factories to produce more goods in less time with fewer workers. American industrialists’ beliefs in unrestricted capitalism and unrestricted growth dovetailed nicely with the government’s own beliefs on laissez-faire economics. For a while industrialists’ profits soared. However, there is only so much a market can stand before it is flooded. By the end of the ‘20s, our economy was saturated with goods too few Ams could afford to buy and the companies that produced them were left with more plants then they actually needed. Overproduction (cont):  Overproduction (cont) The G.D. intensified overproduction probs of the ag industry. Farmers who had prospered during WWI, now found their crops no longer needed by Euro markets. B/c many had mechanized their farms w/ new tractors & other tech advances, they were left w/ surpluses of crops to sell. For most this meant growing more crops to make up the loss, resulting in even lower prices. When the G.D. hit, the farming industry was already vulnerable & was hit particularly hard. Unequal Distribution of Wealth :  Unequal Distribution of Wealth Statistics showed Ams were wealthier than ever during the ‘20s, but most of the wealth remained concentrated in the hands of a few wealthy people at the top of the country’s economic pyramid. In ‘29, 1% of the country controlled 59% of the country’s wealth. Meanwhile 60% of the country lived on or below $2000/year. From ‘20 to ‘29, the average Am. saw his income increase by 9%. However, the income of wealthy Americans rose by 75%. In summary, the rich were getting richer, but the poor were staying the same, which meant in essence, getting poorer. Am industrial workers lost their jobs as factories mechanized and replaced them with machines. Even the arts weren’t safe: 35,000 orchestra members were fired in ‘29, when they were replaced by “machine music” in the nation’s theaters. In the end, industrial workers were soon as impoverished as the nation’s farmers. Unequal Distribution of Wealth cont:  Unequal Distribution of Wealth cont Banks & businesses tried to stem the tide by encouraging Ams to buy goods on credit, but this only made Ams fall deeper into debt. Due to a series of interconnected conditions the G.D. was here and it looked like it was going to last a long time. Failure of trickle-down economics Decline of int’l commerce Crazy stock spec Unreg banking practices Overprod of goods Collapse of ag Unequal dist of wealth Unequal Distribution of Wealth cont:  Unequal Distribution of Wealth cont As US economy hit bottom & 2 mill homeless people wandered US in search of food or jobs, black clouds of dust were smothering the Midwest & moving East. Armed dairymen in Iowa (go figure) blocked roads to Sioux City w/ spiked telephone poles & dumped their milk to raise prices, 25K other Ams were gathering in Union Square in NYC to hear comm speakers call for the overthrow of the capitalist system. Hoover, a self-made millionaire refused to consider direct relief for the Am people. His own success & philosophy of “rugged individualism” caused him to believe it was un-Am for the govt to interfere in peoples’ lives this way- creating a generation of lazy, people living off of welfare. Instead, Hoover tried to get biz leaders to voluntarily cooperate in stabilizing wages & maintaining jobs. Some did. Most forgot. Hoover also created the Reconstruction Finance Corporation providing loans to big businesses. The problem was this did not solve the problem of under-consumption- Ams simply did not have the $ to buy new things, so having businesses produce more only added to prob. Finally, Hoover’s firm belief in a balanced budget meant he would not spend more $ than the federal government was bringing in, so he was forced to encourage private charities to help. The Presidential Election of 1932 :  The Presidential Election of 1932 In ‘32, Ams were offered 3 choices: the conservative approach of Hoover, the radical approaches of comm & soc, the liberal alternative of FDR. Roosevelt had offered Ams a “New Deal” to escape the G.D. & they bought his ideas. Winning 57% of the popular vote & 472 electoral votes (against Hoover’s 40% & 59 electoral votes- you needed 266 to win at that point!) FDR promptly introduced a series of fed programs designed to stop the G.D. The Toll of the Depression on Daily Life: In ‘32, the G.D. had been in effect for four years. 25% of Americans were unemployed (up from 3.2 in 1929). The stock market had dropped in value from 90 billion to 15.5 billion. Thousands of banks closed; whiles others had seized bankrupt families’ homes, farms, and lands in an attempt to stay open. Farmers saw crop prices drop during literally blew away before their eyes as the Great Plains became “the Dust Bowl.” The Presidential Election of 1932 (cont):  The Presidential Election of 1932 (cont) While Ams’ suffering continued, there were ways to escape it. Hollywood made movies designed to escape the harsh reality of life screwball comedy (Three Stooges) sentimental films (Mr. Smith Goes to Washington) musicals (Wizard of Oz) horror movies (Frankenstein) cartoons (Snow White) $.10 allowed a person to escape all day. Similarly, radio programs and major league baseball provided hours of entertainment to Ams. However, for long-term relief Ams turned to the man they’d elected…FDR But we’ll learn about him in the next lecture

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