The Great Depression Begins Causes Life Hoovers Response

The Great Depression Begins Causes Life Hoover’s Response

Warning Signs Ignored n Farm Industry of the 1920 s ¨ Over-extended ¨ Crop mortgages Surplus ¨ Failure to meet debts ¨ Farm Foreclosures

Warning Signs Con’t n n Coal and Textile Industry Layoffs Stock Prices going up (Bull Market) ¨ Should be a good thing - should mean that companies are worth more but… ¨ Larger number of people investing in hopes of getting rich (hopefully quick!) = SPECULATION n n Bet is that the markets will continue to climb Causes a demand for more stock ¨ Stocks n n - over-inflated not necessarily based on companies true value House of cards waiting to fall

Speculation and Playing the Stock Market n n 10% of population in stock market by 1929 Not everyone could afford full price stock ¨ “Buy on Margin” n Make a down payment on the stock and pay the rest when the stock rises enough to cover the loan (Taking out a loan to buy stock) n Money to buy comes from a stock broker who gets this money from the bank n All is good if the stock goes up n What if the stock goes down? ? ? ¨ Stock broker calls for repayment of loan = margin call ¨ If investor cannot pay the stock is put up for sale

Election of 1928 n Herbert Hoover - (R) vs. Alfred E. Smith (D) ¨ Hoover - Sec, of Commerce/Food Admin. ¨ Alfred E. Smith - Governor NY/Catholic ¨ Hoover runs on Republican tide of prosperity ¨ Hoover predicts that poverty will one day be eliminated ¨ Hoover wins landslide (444 to 87)

The Great Crash - 1929 n September 1929 ¨ The selling off begins n Investors selling to pay off interest on loans n Professional investors ¨ ¨ n Stock market was cooling Sensed danger October 1929 ¨ Prices drop further ¨ Brokerage houses issue mass margin calls n Drives prices down further ¨ Nervous investors look to unload stock and get out

The Great Crash - 1929 con’t n October 29, 1929 = Black Tuesday ¨A heart attack for a very sick economy ¨ 16 million shares of stock go up for sale n n Stock market loses $10 -$15 Billion in value Mid November ¨ $30 Billion in losses

The Banking Spiral n n n Stockbrokers issue margin calls People unable to pay - broker defaults on loan Banks issued the loan - cannot absorb this many defaulted loans PLUS!!! Banks had invested depositors savings into stock market Banks cut back on loans big time! ¨ Affected businesses in particular ¨ Economy goes into a recession --> Depression

The Banking Spiral Con’t n More banks go under ¨ No insurance to protect deposits so if you had $$ in the bank your $$ is GONE! ¨ Crisis of Confidence in the Banking System Leads to “runs on the bank” n Banks do not have the $$ on hand to give n More banks go under n More deposits lost n n By 1932 - 10% (3, 500) failed

Worst is yet to come n 1930 -1933 ¨ Stocks lose 80% of value ¨ 9 million savings accounts wiped out ¨ 86, 000 businesses fail

Causes of the Great Depression n Overproduction and Underconsumption ¨ More goods being produced than Americans could buy (consume) Due to labor saving machinery n How much do people need? Can they afford? n

Causes of the Great Depression n Uneven Distribution of Wealth Workers and farmers income falls behind industrial production and profits n 1/2 of nation at or below the poverty level n Not enough disposable income ¨ installment buying tries to stimulate but people can only afford to extend themselves so far ¨ Just not enough purchasing power to “consume” and keep the economy going - underconsumption § Industries cut back but it affects other industries>>>ripple effect and more layoffs ¨

Causes of the Great Depression Con’t n Loss of Export Sales ¨ Other countries not buying U. S. products b/c Shift from being a debtor nation to creditor nation n Government policies affect purchasing power overseas n

Causes of the Great Depression Con’t n Government Policies affecting Export Sales ¨ Fordney Mc. Cumber Tarriff (see earlier notes) ¨ Hawley Smoot Tarriff (see Hoover notes) n Other Government Policies ¨ Mellon tax policies n Didn’t help the uneven distribution of wealth n Encouraged reckless speculation by some ¨ Opposition to labor unions keep wages and purchasing power low

Mistakes by the Federal Reserve n Before the Depression ¨ Low interest rates create easy credit n Banks lent too freely n Business leaders thought the economy was expanding ¨ n Really? ? ? Was it? ? ? After the Depression begins ¨ Raised interest rates tightens credit n Serious reduction of loans n Businesses look for other solutions ¨ Lay off workers (Will this help consumption? )

Life During the Depression n n “Want in the land of plenty” Human costs ¨ 25% unemployment rate ¨ African Americans jobless rate 6 X higher ¨ Most kept jobs but found hours and wages reduced ¨ Families unable to pay rent - evicted n n Set up shanty towns called“Hoovervilles” Unable to find work/shelter become “wanderers” called “hobos” ¨ Confidence n Some unemployable n Businesses afraid of opening new factories n Bankers unwilling to lend money

Life Con’t n Starvation - What about all of the surplus? ¨ Farm prices are so low farmers n Heat homes by burning crops n Tried to prevent milk shipments n Slaughter sheep n destroy crops Jobless on edge of starvation turn to ¨ Begging ¨ Hunger riots - grocery store break-ins ¨ Breadlines n Funded by charity or RFC money (see Hoover notes)

Life Con’t n Turn to a wide variety of escape ¨ Movies - Hollywood film industry ¨ Literature n John Steinbeck - Grapes of Wrath ¨ Radio Lone Ranger n Green Hornet n Soap Operas - The Guiding Light n

Review Questions – Everyone is on the hook. Use your notes and/or book List three human costs of the Great Depression. n What are five causes of the Great Depression? n How can tariffs negatively impact overseas trade? n If you were President, what would be your first course of action? n

Hoover’s Response to the Depression n Tries to paint a picture of optimism ¨ Goal is to restore confidence ¨ Used slogans like “prosperity is just around the corner” n Fell on deaf ears. What corner are you looking around Mr. President?

Hoover’s Response Con’t n Asked for cooperation from key business leaders ¨ Industry leaders – keep employment high ¨ Finance leaders – continue lending ¨ Labor leaders - hold off on wage demands

Hoover’s Response Con’t n Policies – Actions Taken ¨ Passed the Hawley Smoot Tariff n Highest protective tariff in history intended to protect farmers n Many objections (economists, bankers, newspapers) n Hoover signs into law n Builds a tariff wall around the country ¨ ¨ Foreign countries restrict purchase of U. S. goods Foreign trade drops rapidly ¨ Increased funding for public works projects n Created a small # of jobs to replace losses in private sector n To be more effective would require deficit spending ¨ Hoover refuses to do this thinking that it would delay recovery

Hoover’s Response Con’t ¨ Calls n n on Federal Reserve to inject currency Federal Reserve refuses Hoover sets up the NCO – National Credit Corporation ¨ ¨ Pool of money that allows banks to lend in communities Not enough to meet the needs ¨ Reconstruction n Finance Corporation – RFC Makes loans to railroads, state, local agencies, insurance companies, banks, building organizations ¨ ¨ funds projects that would eventually pay for themselves Too little, too late

Hoover’s Response Con’t n Affected by his philosophies ¨ Depression is part of an economic cycle and would eventually recover without significant interventions n n Laissez Faire Rugged Individualism ¨ Direct gov’t handouts would destroy people’s motivation n n Weaken self-respect Reduce local responsibility to help the unfortunate Vetoed Garner Wagner Bill – Direct Aid to unemployed Vetoed Norris Bill – gov’t control of electricity producing dams in the Tennessee Valley

Hoover’s Response Con’t n 1932 – Emergency Relief and Construction Act ¨ $1. 5 billion for public works projects ¨ $300 million emergency loans to states for direct relief ¨ Too late

Outcry and Protests n Hunger Marches – D. C. ¨ n “Feed the hungry – tax the rich” The Bonus Army –Bonus Marchers ¨ ¨ ¨ WWI veterans who had been promised a bonus to be paid in 1945 Bill in front of Congress to pay the bonus early 15, 000 camp out in D. C. in support of the bill Senate votes down the bill Most go home, some remain n n Hoover orders their removal Police try, two shot In comes the Army ¨ ¨ Calvalry, Infantry, Tanks, Tear gas Nail in the coffin for Hoover’s reelection campaign

Hoover’s Grade? n Failed to fix the economic crisis ¨ But really…. . who could? Is it fair to blame him? ¨ Expanded role of Federal Gov’t in the economy (more than any Pres. before) n Failed to connect with the American people ¨ In a way that said he understood their Feelings of failure, shame, humiliation n Disappointment in the system n ¨ So…. we go shopping for a new candidate