Chapter 21 Sec 1 Bellringer

What economic factors and conditions made the American economy appear prosperous in the 1920s?

What were the basic economic weaknesses in the American economy in the late 1920s?

What events led to the stock market crash of October 1929?

What were the effects of the crash on the economy of the United States and the world?

High gross national product; low unemployment;satisfied workers; performance of the stock marketUneven distribution of wealth; easy credit; too easy to buy stock on margin

Sale of consumer goods declined; rumors spread; fears grew; investors began selling stocks; stock prices plunged

Banks failed; investors lost money; consumers stopped buying; nearly 3 million Americans lost their jobs; rest of the world was affected

THE GREAT CRASH 21.1

An Appearance of Prosperity

Between 1922 and 1928 the U.S. gross national product, or total value of all goods and services, rose 40 percent.

Overall unemployment remained low, averaging around five percent between 1923 and 1929.

Union membership slowed as employers expanded welfare capitalism programs, or employee benefits.

This feeling of prosperity encouraged leisure activities such as movies.

The value of stocks traded quadrupled over nine years.

The steep rise in stock prices made people think the market would never drop.

The number of shares traded rose from 318 million in 1920 to over 1 billion in 1929.

The False Sense of Security

Positive economic trends masked the trouble that lay ahead

The stock market had been booming for a decade.Corporate profits soared.Unemployment was low.Welfare capitalism and credit increased workers’ buying power.

Election of 1928

Herbert Hoover Alfred Smith

VS.

Hoover vs. Smith

• When Coolidge didn’t run for reelection in 1928, the Republicans easily chose Herbert Hoover.

• Hoover had been on Harding and Coolidge’s cabinets, had overseen America’s food production during World War I, and had an outstanding reputation as a business-like administrator.

• Hoover’s opponent was New York governor Al Smith, an outgoing politician with a strong Brooklyn accent, whose support came mostly from cities.

• Smith was the first Catholic to run for president. He faced prejudice because of his religion, and because of his opposition to Prohibition.

• Hoover easily won the election, but the race clearly demonstrated the conflicts dividing the nation in that era.

In what ways did the election of 1928 represent a conflict over values?Hoover and Smith represented different backgrounds, religions, ideas; each appealed to different groups of Americans.Do you think that the president should be responsible when major issues happen in the US?

Wealth Distribution

Only a small # of people made money in the 20’s.

1% Population=60% of the National Income

By 1929 70% were below a good standard of living.

Farmers and Coal miners were some of the hardest hit.

In what way was the easy availability of credit a blessing and a curse?It allowed Americans to by products, fueled economic growth; when consumers could not pay their debts, purchasing slowed; warehouses were filled with goods.

Do you think advertising played a significant role in mounting consumer debt?Yes, people wanted to buy things that were advertised.

Credit and the Stock Market

How it all works?

Investor buys 100 shares in Company A @ $10 a share. Total Price $1000.

Investor would put down $500 and borrow $500 from a stockbroker.

Buying on margin.

Company A Example:

If the stock price rose to $15 then the buyer would be at $1500 allowing them to pay back the borrowed $500 and make a $500 dollar profit.

Company A Example: Loss

If the Stock price dropped to $5 a share then the buyer would be at $500 dollars. This means that the buyer would loose $500 dollars and make just enough to pay back the loan.

The Federal Reserve

Nations Central Bank

Today the Federal Reserve Board puts strict limits on the practice of buying on margin.

Late 1920’s the Fed. Reserve Board made it much more difficult to buy stock on margin.

Roger Babson warned America that a crash was in the future.

What was a margin call?Demand for payment of a margin loan if a stock’s value fell below a certain point.Why do you think many people ignored Babson’s warnings of a stock market crash?Because the economy had been so strong they probably thought any slump would be temporary.

Impact of the Stock Market Crash Video

Stock Market crashes•September 3, 1929 was the peak in the market.

•Thursday, October 24, 1929 some nervous investors began selling their stocks.

•October 29, 1929 Black Tuesday

•Within a week the market had dropped in value by about $16 billion.

Stock Market Crashes

Causes of the 1929 Stock Market Crash

Economic FactorsPoor distribution of wealthMany consumers relied on creditCredit dried upConsumer spending dropped.Industry struggled

Financial Factors

Stock markets rise in mid-1920’s

Speculation in stock increases

Margin buying encouraged by Federal Reserve policies

Stock prices rise to unrealistic levels

Why did some people expect economic trouble in 1929?Sales were declining; rumors that big investors were going to take money out of the market.Do you think a stock market crash could occur today?Yes, large #’s of people could sell stock and prices would plunge; No, there are safeguards to prevent it.

The Effects of the Crash

Impact on IndividualsMany people were ruined

In the end many people owed enormous amounts of money to

their brokers. Effects on Banks

The crash triggered a banking crisis.

When investors couldn’t repay margins, banks lost money, too.

These failures drove many banks out of business.

Impact on Business The crash crushed businesses, because banks couldn’t lend money.

Consumers also cut back their spending on everything but essentials and companies were forced to lay off workers.

In the year after the crash, American wages dropped by $4 billion and nearly 3 million people lost their jobs.

What Impact did the stock market crash have on individual investors?Almost all suffered; lost savings; went into debt

Closing

•A dollar today compared to 1929 would be worth $11.38.

•$16 billion that was lost in 1929 would be equal to $180 billion dollars today.

Bring a Calculator Next Time!