PROSPERITY SHATTERED

CHAPTER 15 SECTION 1PAGES 442-447

ECONOMIC TROUBLES ON HORIZON

Some voices warned of problems within US economy Nations agricultural crisis “Sick” industries Reliance on credit Stock speculation on overheated

market Widespread prosperity led most

Americans to believe economy would continue to grow

CREDIT

By 1929 total number of credit purchases was 6 times higher that 1915

Reached a total of $7 billion Federal government kept interest

rates low during 1920s Experts said that easy credit would

promote business, but credit load could hurt consumers in a downturn

People ignored and continued to buy on credit

PLAYING THE MARKET

Investors paid millions into market Bull Market– upward trend in prices Bear Market– downward trend

Speculation– buying and selling to make a quick profit

Inflated prices– some were selling for more than they were worth

Margin buying– purchasing stock with borrowed money As little as 10% of price Once prices fell investors found themselves

deep in debt

STOCK MARKET CRASH

October 24, 1929 “Black Thursday”Large number of shares sold by nervous investors

Confidence fell and prices plunged– Panic set in

J.P. Morgan and other Bankers bought stocks at end of session to stop plunge

“BLACK TUESDAY” OCTOBER 29, 1929 Investors dump more than 16

million shares of stock on market

Chain of events Brokers demand cash to payoff

loans given to margin buyers Investors sold stock to cover losses Repeat steps 1 and 2, over and

over By mid November stocks had

lost $30 billion

DEPRESSION BEGINS

Officials called it temporary and minor Herbert Hoover– “We have now passed

the worst and… shall rapidly recover”

BANKING CRISIS Only a small percentage had

money invested in stock market

Banks suffered significant lossesWorst crisis came when

borrowers defaulted on loansSome banks were forced to

close Depositor wanted their savings

Between 1930-32– 5,000 banks failed

BUSINESS FAILURE

Consumers were unwilling to buy products– especially on credit

Businesses forced to trim inventories and scale back production and layoff workers 26,000 business went bankrupt in 1930 28,268 in 1931

1929 Gross National Product was $103 billion by 1933 fell to $56 billion

Unemployment reached 23.6% by 1932– 3.2% in 1929

WHAT CAUSED GREAT DEPRESSION?

Stock Market crash was not sole cause of our depressionGlobal DepressionIncome gapConsumer debtThe business cycle

GLOBAL DEPRESSION

U.S. Depression blamed on state of finances following WWI World trade declined– foreign

consumers unable to buy American products

Industry stuck w/ large surpluses Smoot-Hawley Tariff of 1930

Highest in U.S. history U.S. tariffs contributed to global

depression Eliminated U.S. market for

imported goods– accelerating depression

INCOME GAP

Unequal distribution of incomeBetween 1923-29 disposable income of wealthiest 1% of America grew by 63%

Meanwhile poorest 93% disposable income decreased by 4%

CONSUMER DEBT

Most people did not have buying power needed to boost economySome bridged gap by buying on

creditReliance on credit contributed to

economic chaos Once depression hit government

raised interest rates and consumers could not pay debts

THE BUSINESS CYCLE

Some experts believe depression was inevitable part of business cycleAll economies go through ups

and downs with free enterprise Length and severity of Great

Depression went beyond normal rhythms of business cycle