Causes of the Great Causes of the Great DepressionDepression

Chapter 22 Section 1Chapter 22 Section 1

Election of 1928Election of 1928A chicken in every pot and a car in every garage.A chicken in every pot and a car in every garage.

-Herbert Hoover -Herbert Hoover

Herbert Hoover Alfred E. Smith

The election of 1928 brought prohibition, immigration, religion, and a clash of rural and urban values into sharp focus.

Herbert Hoover 1929-1933Herbert Hoover 1929-1933► 3131stst President President

► Hoover attended Stanford University Hoover attended Stanford University where he studied geology.where he studied geology.

► Lou, his wife, was brilliant. She was Lou, his wife, was brilliant. She was the first woman to graduate from the first woman to graduate from Stanford.Stanford.

► She spoke five languages and often She spoke five languages and often assisted her husband in his geology assisted her husband in his geology work and engineering.work and engineering.

► Herbert was the first President born Herbert was the first President born west of the Mississippi River.west of the Mississippi River.

► Nickname: “Chief”Nickname: “Chief”

► During WWI Pres. Wilson placed During WWI Pres. Wilson placed Hoover in charge of the Food Hoover in charge of the Food Administration – agricultural Administration – agricultural production for the war effort.production for the war effort.

► Hoover was immediately Hoover was immediately successful.successful.

► Hoover promoted the idea of Hoover promoted the idea of rationing and convinced the rationing and convinced the people that it was the patriotic people that it was the patriotic thing to do. This became known thing to do. This became known as “Hooverizing.”as “Hooverizing.”

► Following the Great War, Hoover Following the Great War, Hoover turned the U.S. Food turned the U.S. Food Administration into a relief Administration into a relief organization for post-war organization for post-war Europe.Europe.

► American aid fed two million American aid fed two million people per day in Poland alone.people per day in Poland alone.

► When criticized for also feeding When criticized for also feeding “the enemies” as well, Hoover “the enemies” as well, Hoover responded, responded, “Twenty million “Twenty million people are starving, whatever people are starving, whatever their politics, they will be fed.”their politics, they will be fed.”

The only thing wrong with Capitalism is capitalists. The only thing wrong with Capitalism is capitalists. They’re too damn greedy. –Herbert HooverThey’re too damn greedy. –Herbert Hoover

““We in America today are nearer to the final triumph We in America today are nearer to the final triumph over poverty than ever before in the history of any over poverty than ever before in the history of any

land.”land.” -Hoover-Hoover

► Hoover with America’s sweetheart Actress Mary

Pickford

► Hoover with Babe Ruth

Stock MarketStock Market

►Stock market – established as a Stock market – established as a system for buying and selling shares of system for buying and selling shares of companiescompanies Hoover is elected, optimism creates a bull Hoover is elected, optimism creates a bull

market market leads many Americans to invest leads many Americans to invest heavily in stocksheavily in stocks

Bull market – circumstances in the stock Bull market – circumstances in the stock market lead to a long period of rising market lead to a long period of rising stock pricesstock prices

Buying on MarginBuying on Margin

►Buying stocks on margin – they made Buying stocks on margin – they made only a small cash down paymentonly a small cash down payment The other part would come as a loan from The other part would come as a loan from

a stockbroker a stockbroker ►The broker earned both a commission on the The broker earned both a commission on the

sale and interest on the loansale and interest on the loan►The broker held the stock as collateralThe broker held the stock as collateral

Margin CallMargin Call

►Buying on margin was safe as long as Buying on margin was safe as long as stock prices continued to risestock prices continued to rise If the stock prices b/g to fall it b/c a If the stock prices b/g to fall it b/c a

problemproblem Margin callMargin call

►Demanded the investor repay the loan at onceDemanded the investor repay the loan at once►To protect the loanTo protect the loan►Issued by the brokerIssued by the broker

If prices started to fall at all investors sold If prices started to fall at all investors sold quicklyquickly

SpeculationSpeculation

►Late 1920’s hordes of new investors in Late 1920’s hordes of new investors in the stock marketthe stock market Buyers hoped to make a fortune overnight Buyers hoped to make a fortune overnight

and engaged in speculationand engaged in speculation Speculation – instead of investing in the Speculation – instead of investing in the

future of the companies whose shares future of the companies whose shares they bought, speculators took risks they bought, speculators took risks betting the market would continue to betting the market would continue to climbclimb

►If it continued to go up they could sell the If it continued to go up they could sell the stock and make money quicklystock and make money quickly

Professionals Get Out!Professionals Get Out!►The bull market lasted as long as The bull market lasted as long as

investors continued putting new money in investors continued putting new money in itit By late 1929, the market was running out of By late 1929, the market was running out of

new customersnew customers

►September 1929 – professional investors September 1929 – professional investors sensed danger and b/g to sell their stockssensed danger and b/g to sell their stocks Prices slippedPrices slipped

►Other investors sold shares to pay the Other investors sold shares to pay the interest on their brokerage loansinterest on their brokerage loans Prices fell furtherPrices fell further

The Great CrashThe Great Crash

►Monday, October 21, 1929Monday, October 21, 1929 The stock market plunged and people The stock market plunged and people

were trying to sell off their stocks as were trying to sell off their stocks as quickly as possible, for much less than quickly as possible, for much less than they had paid for themthey had paid for them

Drove the market into a tailspinDrove the market into a tailspin

Black Thursday► October 24, 1929 – the

market plummeted further

► As prices suddenly dropped, As prices suddenly dropped, trading grew more and more trading grew more and more panicky. Some stocks found panicky. Some stocks found no buyers at all.no buyers at all.

► Mounted police broke up the Mounted police broke up the uneasy crowds outside the uneasy crowds outside the New York Stock Exchange.New York Stock Exchange.

► Their faces frozen with Their faces frozen with anxiety, speculators huddled anxiety, speculators huddled around the ticker tape around the ticker tape machines in brokers’ machines in brokers’ offices… offices… “like friends around “like friends around the bedside of a stricken the bedside of a stricken friend.”friend.”

BLACK TUESDAYBLACK TUESDAY► Tuesday, October 29, 1929 Tuesday, October 29, 1929

Prices took the steepest dive Prices took the steepest dive yetyet

Stocks lost $10-$15 billion in Stocks lost $10-$15 billion in valuevalue

► The climax came on Tuesday The climax came on Tuesday when a record 16,410,030 when a record 16,410,030 stocks changed hands in stocks changed hands in frantic trading at inconceivably frantic trading at inconceivably low prices.low prices.

► Hoover issued the first of what Hoover issued the first of what would become a monotonous would become a monotonous series of optimistic series of optimistic statements… statements… “The “The fundamental business of the fundamental business of the country is on a sound and country is on a sound and prosperous basis.” prosperous basis.” But Hoover But Hoover was wrong!!was wrong!!

Richard Cory – written by Edwin Arlington Richard Cory – written by Edwin Arlington RobinsonRobinson

Whenever Richard Cory went downtown,Whenever Richard Cory went downtown,

We people on the pavement looked at him:We people on the pavement looked at him:

He was a gentleman from sole to crown,He was a gentleman from sole to crown,

Clean favored, and imperially slim.Clean favored, and imperially slim.

And he was always quietly arrayed,And he was always quietly arrayed,

And he was always human when he talked;And he was always human when he talked;

But still he fluttered pulses when he said,But still he fluttered pulses when he said,

““Good morning,” and he glittered when he walked.Good morning,” and he glittered when he walked.

And he was rich – yes, richer than a king,And he was rich – yes, richer than a king,

And admirably schooled in every grace:And admirably schooled in every grace:

In fine, we thought that he was everythingIn fine, we thought that he was everything

To make us wish that we were in his place.To make us wish that we were in his place.

So on we worked, and waited for the light,So on we worked, and waited for the light,

And went without meat, and cursed the bread;And went without meat, and cursed the bread;

And Richard Cory, one calm summer night,And Richard Cory, one calm summer night,

Went home and put a bullet through his head.Went home and put a bullet through his head.

Banks in a TailspinBanks in a Tailspin

►The market crash weakened the The market crash weakened the bank in 2 waysbank in 2 ways 1. Many banks had lent money to 1. Many banks had lent money to

speculators and the speculators speculators and the speculators defaulted on their loansdefaulted on their loans

2. Banks lost money on their stock 2. Banks lost money on their stock market investments and banks b/g to market investments and banks b/g to cut back drastically on loanscut back drastically on loans

►Leads to a recessionLeads to a recession

The Banks CollapseThe Banks Collapse

►Bank run – people go to get all their Bank run – people go to get all their money out of the bankmoney out of the bank

►Bank doesn’t have the money to give Bank doesn’t have the money to give themthem People lose all their moneyPeople lose all their money Banks collapseBanks collapse

How Did We Get Here?How Did We Get Here?

►The stock market crash…The stock market crash… Not the major cause of the Great Not the major cause of the Great

DepressionDepression Helped put the economy into a recessionHelped put the economy into a recession Other forces in the economy of the 1920’s Other forces in the economy of the 1920’s

led to the long-lasting depressionled to the long-lasting depression

Causes 1 and 2►1. Uneven distribution of wealthUneven distribution of wealth

1929 – top 5% of all American households 1929 – top 5% of all American households earned 30% of the nation’s incomeearned 30% of the nation’s income

The rest were left with little expendable The rest were left with little expendable moneymoney

►2. Overproduction 2. Overproduction W/ most of the population having little W/ most of the population having little

expendable wealth, there was no one to buy expendable wealth, there was no one to buy the goods that were being mass producedthe goods that were being mass produced

►Mass production requires mass consumptionMass production requires mass consumption

Low demand leads to employee layoffsLow demand leads to employee layoffs

Cause 3

►3. Buying on installment plans (credit)3. Buying on installment plans (credit) Many put themselves in a situation where Many put themselves in a situation where

paying off their debts forced them to paying off their debts forced them to reduce other purchasesreduce other purchases

Manufacturers then cut production and Manufacturers then cut production and laid off employeeslaid off employees

Cause 4Cause 4

►4. No foreign loans4. No foreign loans US banks made high interest loans to US banks made high interest loans to

speculators instead of lending money to speculators instead of lending money to foreign companiesforeign companies

W/o these foreign loans from US banks, W/o these foreign loans from US banks, foreign companies purchased fewer foreign companies purchased fewer products from American manufacturersproducts from American manufacturers

Cause 5Cause 5►5. Hawley-Smoot Tariff – raised the 5. Hawley-Smoot Tariff – raised the

average tariff rate to the highest level average tariff rate to the highest level in American historyin American history Made matters worseMade matters worse Meant to protect American manufacturers Meant to protect American manufacturers

from foreign competition, but damaged from foreign competition, but damaged American sales abroadAmerican sales abroad

►Americans bought fewer imports b/c they cost Americans bought fewer imports b/c they cost so much moreso much more

►Foreign countries responded by raising their Foreign countries responded by raising their tariffs on American goodstariffs on American goods

Fewer American products sold overseasFewer American products sold overseas

Cause 6Cause 6►6. Federal Reserve Board does not 6. Federal Reserve Board does not

raise interest rates (bad!!!)raise interest rates (bad!!!) Encouraged banks to make risky loansEncouraged banks to make risky loans Business leaders think the economy was Business leaders think the economy was

still expandingstill expanding►They borrow more money to expand They borrow more money to expand

productionproduction►Leads to overproduction when sales are fallingLeads to overproduction when sales are falling

Depression hits – Federal Reserve Board Depression hits – Federal Reserve Board finally raised interest rates (bad!!!)finally raised interest rates (bad!!!)

►Tightening creditTightening credit►The economy continued in a downward spiralThe economy continued in a downward spiral