The Great Depression

Herbert Hoover – won the election of 1928 because people were pleased with the economy and didn’t want a lot of change

-promised “a chicken in every pot, and a car in every garage”-also said, “I have no fears for the future of our country, it is bright with hope.”

I. Life in the 1920s:

Hoover, viewed as having a strong belief in “big business”

and “small government”, was considered by some to have a “laissez-faire” viewpoint as the Great Depression took hold.

Hoover feared that too much intervention or coercion by the government would destroy individuality and self-reliance, which he considered to be important American values.

As the economy quickly deteriorated in the early years of the Great Depression, Hoover declined to pursue legislative relief, believing that it would make people dependent on the federal government.

I. Life in the 1920s

A. Hidden Causes:1) Unequal distribution of wealth:

-people were very rich or very poor -20% of the nation lived in poverty (late 1920s)

II. The Great Depression:

2) Installment buying:

-the buyer pays a certain amount down, and then pays the rest in installments (payments) with interest -easy credit-some people created huge debts

II. The Great Depression:

the public invests in cos. by purchasing stocks; in return for this they expect a profit

b/c of booming 1920's economy, $ was plentiful, so banks were quick to make loans to investors

also investors only had to pay for 10% of the stock's actual value at time of purchase

this was known as BUYING ON MARGIN, and the balance was paid at a later date

this encouraged…Stock Speculation-people would buy and sell stocks quickly to make a quick buck

b/c of all this buying & selling, stock value increased

(Ex: G.E stock $130 $396/share)

this quick turnover didn't aid cos. they needed long term investments so they could pay bills (stock value was like an illusion)

unscrupulous traders would buy and sell shares intentionally to inflate a given co.'s stock value

all of this gave a false sense of security/confidence in the American market

beginning in Oct. 1929, investors’ confidence dropped, leading to a market collapse

all tried to sell at once and bottom fell out of market = panic selling… (many bankruptcies as banks called in loans)

only a tiny minority of people traded on the stock exchange, but they possessed vast wealth, and the crash had a ripple effect on the economy

3) Bank failures:

-banks were poorly managed-people lost money (sometimes their life savings) when their bank closed-7,000 banks closed in the 1920s

II. The Great Depression:

4) Increase in unemployment:

-new factory machinery required fewer workers

5) High tariffs (tax on imports) on foreign goods:-decreased competition, which increased prices of certain goods

II. The Great Depression:

6) Huge farm surpluses:

-led to a drop in farm prices -many farmers lost their farms because no one needed their food

II. The Great Depression:

B. Immediate Cause – the Stock Market Crash: Prices of stock rose throughout the 20s By Sept. 1929, the Dow Jones average

reached 381-Dow Jones – the price of stocks from 30 of the largest companies in the U.S.

II. The Great Depression:

Thursday, October 24, 1929 – some

stockholders began to pull out of the market – afraid of a crash

Tuesday, October 29, 1929: -“Black Tuesday” -the day the stock market crashed-investors panicked and started selling before their stock became worthless-Dow Jones fell to 261 (41 in 1932)-between $6 and $9 billion was lost

II. The Great Depression:

III. Daily Life during

the Depression: Children were forced to work Many people became homeless

-many of the homeless lived in small villages made of cardboard boxes and crates nicknamed “hoovervilles” (named after Pres. Hoover who was blamed for the Depression)

III. Daily Life during

the Depression: Some men and families became hobos – rode

the rails looking for work and food Many farmers had more food than they could

sell-people didn’t have the money to buy it-some food was destroyed in an effort to decrease the supply so prices could increase

III. Daily Life during

the Depression: Droughts occurred on the Great Plains

-this region became known as the Dust Bowl because it was so dry-many moved west to CA looking for work because the dust storms destroyed their crops-these people were often called okies because most were from OK

III. Daily Life during

the Depression: The Grapes of Wrath (1939) – novel written by

John Steinbeck about one family’s struggle in moving to CA

Pres. Hoover wasn’t willing to spend enough money to provide relief to the people (believed economy would fix itself)

III. Daily Life during

the Depression: Bonus Army March:

-in 1924 Congress approved a bonus payment to all who served during WWI-the money was to be paid in 1945-June 1932- 20,000 veterans marched into Wash. D.C., set up camps, and said they wouldn’t leave until they received their bonus

III. Daily Life during

the Depression:-Hoover ordered the police to remove the protesters-2 veterans were killed – made Hoover look bad

The General Theory of

Employment, Interest, and Money

In the classical model, the unemployment caused by the Great Depression should have been solved by wage reductions that would rapidly clear the labor market. However, this did not seem to be happening.

Keynes argued that market forces are not an adequate ‘adjustment mechanism’; only government has the capacity and the responsibility to stabilize the economy.