2011 U.S. History Learning Module Prepared by: Philip Go School: Frederick Douglass High School...

2011 U.S. History Learning Module

Prepared by: Philip GoSchool: Frederick Douglass High School #450

The Great Depression(1929-1941)

causes, consequences and

government responses

Migrant Mother. Dorothea Lange, 1936. Library of congress

http://www.loc.gov/pictures/item/fsa1998021539/PP/

Timeline

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Warm Up

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The Great Depression is one of the most misunderstood events in

American history…There are several causes, here are some of

those:

1. Overproduction2. Banking Practices & Fed Policies3. Stock Market 4. Political Decisions

Great Depression begins…

Great DepressionGreat Depression

Overproduction

Political DecisionsStock Market

Banking Practices& Fed Policies

1. Over Production The “roaring twenties” was an era

when our country prospered tremendously.

US Industrial Production

Eventually businesses produced more than consumers could purchase. You can only own so many radios, cars,

and appliances.

Although many Americans appeared prosperous during the 1920’s, they were living beyond their means. They often bought goods on credit. Many people then had trouble paying off their debts. Faced with debt, consumers cut back on spending.

They also spent less because their incomes were not rising fast enough. During the 20’s, nearly half the nation’s families earned less than $1,500 per year (considered the minimum amount needed for a decent standard of living).

This unequal distribution of income meant that most Americans could not participate fully in the economic advances of the 1920’s. Many people did not have the money to consume the flood of goods that factories produced.

The Roaring Twenties

Farm Overproduction • In 1929, Agriculture still makes up half of the US economy• During World War I, with European farms in ruin, the American

farm was a prosperous business.• Increased food production during World War I was an economic

“boom” for many farmers, who borrowed money to enlarge and modernize their farms.

• The government had also subsidized farms during the war, paying high prices for wheat and grains.

• When the subsidies were cut, it became difficult for many farmers to pay their debts when commodity prices dropped to normal levels.

So, to summarize it, HIGH DEMAND

for consumer goods and

agricultural products led to

OVERPRODUCTION.

Therefore…• Over production of consumer goods and

agricultural goods means…• Supply was greater than demand.• A surplus of goods in the market begins to

drive prices down.• Declining prices means declining profits• Declining profits means stock values (for

corporations) begin to fall.

2. Banking Practices & Fed Policies

Consumer Credit• The uneven distribution of

wealth didn’t stop the poor and middle class from wanting to possess luxury items, such as cars and radios…

• But, wages were not keeping up with the prices …and that created problems!

Consumer Credit• One solution was to let products be purchased on credit. • The concept of “buying now and paying later”

caught on quickly.• By the end of the 1920s, 60% of the cars and 80% of the radios

were bought on installment credit.• Consumerism in the New Era saw a change in US buying

behavior. Thrift, saving, and frugality were replaced with consumption and buying on credit.

The Federal Reserve System• The Federal Reserve System was created by Congress 1913 in

response to the Banking Crisis of 1907.• The Fed was created as the US central bank with two primary

functions:– 1) Regulate and inspect the nations commercial banks,

by assuring banks had sufficient cash reserves– 2) Regulate the amount of money circulating in the

economy. Known as Monetary Policy• To stimulate growth the Fed increases money in circulation by

lowering interest rates for member banks, and decrease in the amount of money banks are required to keep in reserve.

Fed Monetary Policy• The Federal Reserve was suppose to serve as a

protective “watchdog” of the nation’s economy. • It had the power to set the interest rate for loans

issued by banks.• In the 1920’s, the Fed encouraged buying on credit by lowering

interest rates (discount rate)• Eventually so many people were buying on credit that inflation

increased.

therefore…• By 1929 the Fed decided to slow the rapid growth by

increasing interest rates.• Raising interest rates means that it cost more to

borrow and raises the price of existing debt.• Therefore people borrowed less and purchased

fewer goods. • They also started using available cash to pay off debt

and therefore purchased fewer goods.• Less demand = surplus goods = deflation = declining

profits = declining stock prices = lay offs = rising unemployment !

3. STOCK MARKET

The Stock Market• The Stock Market is seen as an indicator of the nation’s

economy. • As an investment the goal is to buy low and sell high.• The value of stocks soared in the 1920’s as corporate profits

rose, fueled by mass consumption. (Fueled by credit.)• Once a rich man’s game, everyone was “in the market” in the

1920’s• Optimism was high, and speculation was rampant • A continuing rise in stock market prices is called a bull

market• During a bear market, there is a continuing drop in stock

prices

Stock Market: Buying on Margin• Purchasing stocks on credit with a loan from a broker is

buying on margin.• The Margin Requirement in 1926 was 10%. So a $100 share of

stock could be yours with only a $10 down payment• Speculators expect the value of the stock to go up in price

enough (at least 90% to break even) covering the balance.• Buying on the margin encouraged thousands of small time, new

(inexperienced) investors to purchase stocks. People were making money on almost all stocks therefore they were putting more and more money into the market. Many went so far as to borrow money to buy stocks.

Stock Market: Banks & Margins• In 1927 banks did two mistakes:

– 1) Banks began letting customers borrow money to buy stocks and used the customers stock holdings as collateral for the loan. They gave money to people with no money to gamble

– 2) Banks started to use depositors money to speculate in the stock market. Normally banks pay you interest for savings. Then they loan it to businesses or families that were good risks to buy homes or start companies etc.

Not speculate in the market! • By 1929, banks had made billions of dollars in risky loans with

little collateral to back them up if borrowers defaulted.

http://1.bp.blogspot.com/-13Y8IWqGyFo/TbXMiKVQDlI/AAAAAAAAAAs/y7VkMbVb49M/s1600/wall1.gif

Stock Market Crash• Wednesday October 23, 1929 people begin to sell and market drops 5

billion in 5 hours!• Following day October 24, 1929 also known as Black Thursday, people

abandon the market and prices of stocks plummet.• The one-day stock market crash turned into the Panic of 1929• The market bubble bursts with a panic sell off of 16 million shares of

stock.• Investors lose 26 billion dollars (312 billion in 2010 dollars)• The crash was not a one day event. Large bankers stepped in to

stabilize the market. The stabilization was only temporary. The following Monday and Tuesday the market dropped even more. Wealthy investors stepped in a bought up shares at bargain prices.

• It is impossible to know exactly what caused the initial panic but the market crash exposed the other problems in the economy setting into motion a deep lack of confidence in the economy.

Quiz1

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Bad Fed Banking Policies• With the loss of confidence in stocks, people began to lose

confidence in the security of their money being held in banks.• Customers raced to their banks to withdraw their savings.

(also known as bank run)• Customers closed accounts and banks were left without cash

reserves putting them on the brink of failure.

Negative Fed Banking Policies• In its regulatory role, the Federal Reserve was also established

to prevent bank closings.• It was suppose to serve as the lender of last resort to banks on

the verge of collapsing.However,• The Fed lowered the reserve requirement for banks, so the

banks did not have the cash to cover customer withdrawals. And the Fed did not provide short term loans to banks to cover the losses.

• 1930 the Fed cuts interest rates from 6% to 4% in attempt to increase the money supply

Therefore,• Banks started to close, increasing the panic. • 1930, 60 banks fail every month, by 1933 over 9,000 banks fail

(40% of the 1929 total)

The result

• The Fed fails to manage the bank and currency crisis.

• Depositors now hide their money at home and banks have no money to lend

• Banks close and large amounts of money disappear from the economy

Therefore…• Less money = less consumption = less

production• Businesses go bankrupt• People get laid off• Thus the economy begins an irreversible

downward spiral.• Banks close and large amounts of money

disappear from the economy• By 1931, GNP falls by 18%, unemployment

reaches 16%(8 million)

4. Bad Political Decisions:

Hoover’s Political Decisions The severity of the Depression

could have been lessened if policy makers would have been open to new ideas

Conservative economic policy Laissez fair, let the market

correct itself without government intervention

Balance the budget, do not spend more than collected in tax revenue

Prevailing belief that private charities, churches, state and local governments provide relief and assistance to the poor, not the Federal Government Most of these were ill

equipped to deal with the number of people in need

“The sole function of the government is to bring about a condition of affairs favorable to the beneficial development of private enterprise.” ~Herbert Hoover (1930)

“The Fed will stand by as the market works itself out: Liquidate labor, liquidate stocks, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people."

~ Andrew Mellon (1930)

Rising unemployment led to homeowners defaulting on mortgages and renters being evicted from apartments.

The homeless settled in shanty towns called Hoovervilles

1932, Federal Home Loan Bank Act, was passed to spur new home construction, and reduce foreclosures.

Foreclosures dropped briefly in late 1932.

Hoover’s Three Biggest Mistakes

• Signing the Smoot-Hawley Tariff• Revenue Act of 1932• Balancing the budget

Hoover & Smoot-Hawley• The Smoot-Hawley Tariff was signed (reluctantly) by Hoover in

1932• It came on top of the Fordney-McCumber Tariff of 1922.• Smoot-Hawley raised tariffs by 50%• Congress believed the tariff would make imports too expensive

and Americans would buy American goods, increasing demand• European countries retaliated with their own tariffs and U.S.

exports fell by almost 70%

Therefore…

• Hoover supported government actions to ease the crisis

But• It was not enough And• It was too late.

Franklin D. Roosevelt defeats Herbert Hoover to become the 32nd President of the United States

Roosevelt promised the American people a “New Deal.”

FDR quickly shifted from a policy of non-intervention to one of government regulation and relief.

During the first hundred days of his Presidency, FDR and his highly trusted advisors, known as the Brain Trust created the New Deal.

To restore public confidence in the government FDR introduced his “fireside chats.” These were radio talks where the President spoke directly to the public.

Primary Source Document

“Fireside Chats”

Address of President Roosevelt by radio, delivered from the President’s study in the White House at 10 p.m. March 12, 1933

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Primary Source Quiz-Fireside Chats

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The New Deal

Three Goals of the

New Deal

3 Rs

1. Relief for the Needy2. Recovery for the Economy3. Reform for the financial

System

In 1932, Americans elected a new president who promised them a “New Deal”. This President was Franklin D. Roosevelt . He gave hope to Americans and said, “All we have to fear is fear itself.” Soon after taking office, he kept his promise to take immediate action against the country’s economic problems. To do this, he called Congress to meet in a special session. He then asked Congress to pass laws aimed at three goals:

1. Relief laws were necessary for people without food, housing or other basic necessities.

2. Recovery laws were necessary to help business and agriculture start up again.

3. Reform laws were necessary to solve the country’s economic problems and prevent their re-occurrence.

New Deal

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Reflection on the Great Depression

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True or False

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2011 U.S. History Learning Module Prepared by: Philip Go School: Frederick Douglass High School...

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