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THE NATION’S SICK ECONOMY Chapter 14, Section 1
Decreased Demand in Industry Key BIG industries like mining, lumbering, railroads, textiles, steel, struggle: Though at an all-time high during WWI, no longer in high demand Railroad and coal industries suffering due to replacement technologies like the automobile and hydroelectric or natural gas
Consumer Industries decline Consumer industries (new home construction, automobiles, electrical appliances) had falling sales Housing starts (new homes being built) declined starting in 1926, which was a sure sign of recession Deflation: In 1930 average new house cost $7, 145. 00 and by 1939 was $3, 800. 00
Impact of Buying Less: Production of consumer goods: fell 36% from 1929 to 1930 fell another 36% from 1930 to 1931. Deflation: consumer prices fell 24. 4% by 1934
The 1931 -1935 Buick Eight
1930 s Washing Machine Washing by hand
A 1934 kitchen with electric appliances
Farmers’ Problems During WWI: High Demand for food = high prices (inflation) Improved farming methods = Farmers can produce more = they need loans for land equipment = surplus food Post WWI: Low demand = low prices - deflation of 40% Farm income declined from 10 billion to 4 billion (1919 – 1921) farmers can’t pay back loans = foreclosure and land seizure by the bank Farmers increased production to make more money = even higher surpluses of foods
Mc. Nary Haugen Bill: 1928 To aid farmers, Congress tries to pass price-supports government buys surplus products and sells on the world market – on key goods like wheat, corn and cotton vetoed by President Coolidge. 1925 1929 1930 1931 Wheat (Bushel) Corn (Bushel) Raw Cotton (Pound) $1. 67 $1. 18 $0. 90 $0. 606 $0. 70 $0. 80 $0. 60 $0. 32 $0. 235 $0. 19 $0. 135 $0. 085
Farm equipment is auctioned off in Nebraska.
Living on Credit Americans were living “beyond their means” due to buying on credit Credit was very easy to get = fueled a consumer buying boom Installment plans - paying a small percentage to take the item home then making monthly payments (plus interest) to pay for it over time Often don’t actually “own” the item / car / house Consumers in the late 1920 s have less to spend because of: inflation (higher prices) wage deflation growing unemployment unbalanced distribution of income (the poor largest part of the population had very little buying power) personal debt. Many consumers already had too much stuff Consumers spend less = vicious cycle that causes more businesses to reduce number of workers
Consumer Debt 1929: $3 Billion (Consumer Credit owed) 1927: 15% of all consumer goods bought on installment payments 60% of automobiles bought on installment payments 80% of radios bought on installment payments Consumer debt today (very depressing): http: //www. nerdwallet. com/blog/credit-carddata/average-credit-card-debt-household/
Uneven Distribution of Income 1920 s return to “laissez faire style” government benefited wealthy industrialists Gap between the rich and the poor – not enough money “trickling down. ” The rich got richer and poor got poorer Wealthiest 1% income went up 75% compared to only 9% for the rest of the population Huge number of lower class ignored by the “prosperity of the 1920 s” because wages didn’t increase and farm prices were low 70% earned less than $2, 500 per year (minimum a “middle class” family could live on) 80% have no savings!
Wage deflation: 1930 s average family income dropped 40% Many different estimates of average income per year $1, 970. 00 dropped to $1, 730. 00 $2, 300 dropped to $1, 500 Other estimate: $1368 as average Book says: Average income fell to $1, 500 in 1933 from $2, 300 in 1929.
• Industrial workers in the mass-production industries–steel, automobiles, rubber, and electrical equipment–were organized during this time. Year 1930 1935 1940 Union membership Rates 12. 3 13. 8 27. 6
The Stock Market Bull Market (doing well) during the late 1920 s = Prices rising Dow climbed almost 300 points – up to 381 By 1929, 4 million people owned stock But there was no regulation of the stock market and only limited regulation of business practices Over-Inflated Stock Market: People used speculation—buying stocks to make quick profit People who could not afford stock began “buying on margin” - paying a small percent of a stock’s price as a down payment and then borrowing the rest $8. 5 billion dollars were loaned out to investors = more than all the circulated currency in the US at the time From 1920 to 1929 stocks more than quadrupled in price http: //www. c 2 vtrader. com/1929 -Crash. php
Warning Signs on the Stock Market By 1925, the real estate market was already falling (a sure predictor that the economy is weak) March 1929: market drops Industries were down, car sales dropped, debt was rising But by summer the market was back – and there was a rush to buy September 1929: On September 3 the market hit its all time high and then suddenly dipped (the crash had begun, but no one realized) September 25, the market briefly climbed
Crash of 1929 caused by PANIC October 24, 1929: prices dropped as nervous investors began to unload shares Led to a lack of confidence in the market = investors sell more October 29, 1929—Black Tuesday Prices drop as investors tried to sell 16 million shares People who had bought “on margin” were now in huge debt because the stock price dropped below what they had paid By mid-November, investors had lost $30 billion dollars Crash ends in 1932 when stock market had lost about 90% Black Tuesday didn’t “cause” the Great Depression; It was a symptom of a sick economy
Boom and Bust In the years leading up to 1929, the stock market was the new gold rush. People bought shares with the expectations of making more money. The market got caught up in a speculative bubble. Prices were not being driven by economic fundamentals but the optimism / exuberance of investors. When some companies posted disappointing results, some investors tried to cash in on their profits. This initial selling caused a fall in prices which caused other investors to panic and sell
Front page of the Brooklyn Daily Eagle newspaper on Oct. 24, 1929 (also known as Black Thursday) reads "Wall St. in Panic as Stocks Crash. "
Stock Prices Drop: General Motors: 73 points to 8 US Steel: 262 points to 21 RCA: 101 to 2. 5
Albert H. Wiggin: The Market Crash Millionaire http: //www. investopedia. com/articles/stocks/09/insider-trading. asp many people did “coattail investing” (copying big banks’ strategies) Unfortunately, many investors didn’t know about hidden sell orders that protected the banks if the stock price fell.
“Short sell” when you short sell a stock, your broker will lend it to you. The shares are sold and you get the money. Then later you "close" the short by buying back the shares and returning them to your broker. If the price drops, you buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Wiggins After the crash it was revealed that Albert Wiggin, head of Chase Bank, had done a short sell on 40, 000 shares of his own company (he was betting the stock would go down). This is like a boxer betting on his opponent. There were no specific rules against shorting your own company in 1929, so Wiggin legally made $4 million from the 1929 crash This and similar cases led to a revision of the 1933 Securities Act
JP Morgan Bank and Insider Trading In May 1933, U. S. Senate Banking Committee found out that JP Morgan & Co. reserved shares at reduced prices for certain clients including former President Calvin Coolidge, and the CEOs of General Electric, AT&T, and Standard Oil investigators turned up a 'preferred list' of highly placed Americans allowed to buy low and sell high on insider information. http: //insidertrading. procon. org/view. resource. php? resource. ID=0023 91#1800
What is insider trading? Mr. Smith works for XYZ Company and knows they company is going broke before it becomes news. Mr. Smith tells his friend Mr. Jones what is going on and Jones shorts a million stocks of XYZ Company. A few days later, XYZ company’s stocks plummet making Z a millionaire in less than a month.
Banks Failed By 1933 almost half of the nation’s banks had gone bankrupt People with money in savings lost it all because: Banks were not insured by the government Banks had invested in the stock market people panicked and tried to withdraw all of their money in a “run on the bank” causes the bank to run out of cash Banks were owed money by people (buying on margin, installment buying, house loans, etc. ) and were not being paid back Between 1929 and 1933, 10, 763 of the 24, 970 commercial banks in the United States failed. 9 million bank account owners lost their entire saving
Businesses Failed Companies went bankrupt (90, 000) or began to cut production and services = eliminated jobs Unemployment rate went from 3 percent in 1929 to 25% in 1933; in some areas it reached 50% Toledo, Ohio peaked at 80%!
Unemployment Real Numbers of Unemployment: • 3 million in 1929 • 4 million in 1930 • 8 million in 1931 • 12. 5 million in 1932. Population: 123, 188, 000 http: //www. bls. gov/opub/cwc/cm 2003 0124 ar 03 p 1. htm Year Unemployment rate 1923 -29 3. 3 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 8. 9 15. 9 23. 6 24. 9 21. 7 20. 1 17. 0 14. 3 19. 0 17. 2 14. 6 9. 9 4. 7
Europe’s Depression Countries faced great debts due to WWI and relied on two factors to help: Germany to pay war reparations, which they could not (printed more money = inflation) German unemployment hit 25% Selling goods in the United States, which they could not because of the Hawley-Smoot Tariff which was the highest protective tariff in U. S. history Many countries retaliated and raised their tariffs which reduced U. S. imports to Europe further hurting American companies In May 1930, Canada, retaliated by imposing new tariffs that impacted 30% of U. S. exports to Canada by 1932 the total value of world trade had fallen by more than half
Impact of Smoot Hawley U. S. imports decreased 66% from US$4. 4 billion (1929) to US$1. 5 billion (1933) U. S. imports from Europe decreased from a 1929 high of $1. 3 billion to just $390 million in 1932 US exports decreased 61% from$5. 4 billion to $2. 1 billion, exports to Europe decreased from $2. 2 billion in 1929 to $784 million in 1932. Though these are big numbers, Imports during 1929 were only 4. 2% of the United States' GNP and exports were only 5. 0% - the tariff hurt European nations far more
Dust Bowl Great Plains Drought Hardest hit region: Kansas, Oklahoma, Texas, New Mexico, Colorado Caused many to abandon their farms Many travelled West to California, becoming migrant workers
What caused the Dust Bowl? https: //www. youtube. com/watch? v=f. JMidfqi. Nio (Video on youtube) Over-settlement of the Great Plains due to government land giveaways throughout the late 1800 s like the Homestead Act Over-farming of the land because of high prices during WW 1 Plowing in and removing sod / trees left ground susceptible to erosion • 1930 s weather: serious drought lasts for years 1934 drought = worst in U. S. history, covering more than 75% of US (27 states affected) • When windstorms hit = top soil erosion April 14, 1935: Black Sunday. The worst "black blizzard"
Descriptions of the Dust Bowl Storms could last from hours to days. Dust storms could by hundreds of miles wide and thousands of feet high Planes would have to turn back rather than fly above, around or through due to risk of static electricity Dust storms caused huge increases in static electricity – touching a barbed wire fence could electrocute animals Dust storms caused dunes so high they buried some houses and farm equipment Children and the elderly began to die of “dust pneumonia” which was caused when inhaled dusted caused microscopic cuts inside lungs and infections People and animals caught in storms could be blinded or suffocated
The "Yearbook of Agriculture" for 1934: "Approximately 35 million acres of formerly cultivated land have essentially been destroyed for crop production. . 100 million acres now in crops have lost all or most of the topsoil; 125 million acres of land now in crops are rapidly losing topsoil. . . ”
Why was it “Great” when other depressions had occurred before (1893, 1907 etc)?
Why “Great” Depression: Length of time: 1929 – start of WWII Number of people impacted: 25 – 40% unemployment Denial – Hoover kept telling America they had “turned the corner” toward prosperity Prior to the 1930 s, America had overcome depressions because most people lived on farms and could grow / make what they needed in hard times; with huge urban populations, Americans needed jobs to buy basics It spread across Europe as countries enacted tariffs