Crash and Depression 1929 1933 I. The Economy in the Late 1920s A. Continued Prosperity Expected

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Crash and Depression 1929 - 1933

I. The Economy in the Late 1920s

A. Continued Prosperity Expected – the economy had remained strong throughout the decade. People had a great deal of confidence in American businesses and felt that prosperity would continue for the foreseeable future.

  • The average of real wages had risen 40% since 1914 and unemployment averaged below 4%.

  • The stock market soared to record high levels.

B. Underlying Weaknesses – although the U.S. economy appeared very strong on the surface, by the end of the 1920s there were a number of problems that would contribute to the economy’s failure.

  1. Overuse of credit – Americans bought many items on credit, causing many people to have large personal debts.

  2. Speculation in the stock market – prior to WWI, mainly wealthy people dealt in the stock market. During the 1920s, the practice of buying on margin (credit) led millions of average Americans to purchase stocks. The fact that these stocks were bought with borrowed money inflated the value of the stock market.

  3. Overproduction – by the late 1920s U.S. factories were producing goods faster than consumers were willing or able to buy them. This led to large surpluses and many industries began to reduce production, meaning fewer jobs.

  4. Farmers – faced hard economic times throughout the 1920s. Many farmers had taken out loans during WWI when demand and prices for their goods were high. When demand decreased dramatically after the war, farmers were unable to pay back their loans. This caused many banks in rural areas to fail.

  5. Distribution of Wealth – Much of the wealth generated during the 1920’s was concentrated in the upper classes.

  • Although conditions had improved overall for American workers, many still faced difficult working conditions, and relatively low pay. Many Americans could not afford to partake in the consumerism of the 1920’s.

  • This led to a market that simply could not support the tremendous supply that the American economy was capable of generating.

II. The Stock Market Crash

A. The Crash – For most of 1929, the stock market continued to soar. It peaked on September 3 and then prices began to fall gradually.

  • On Thursday, October 24 many investors sold their stock out of concern over falling prices.

  • Black Tuesday – on October 29 panic set in among investors and stock prices plummeted as over 16 million shares were sold. By November 13 American investors had lost over $30 billion.

  • This crash, combined with other weaknesses in the American economy, would cause the Great Depression, which would last throughout the 1930s.

B. Cycle of Failure – The American economy became locked in a cycle of negative events/behaviors that would feed off each other, preventing any chance at recovery.

  • In response to economic uncertainty, American consumers reduced their spending, leading businesses to lose profits.

  • Businesses, faced with severe reductions in profits, began to cut wages and hours and lay off workers.

  • Reduced wages and high unemployment meant that consumers had even less to spend.

  • Banks – the stock market crash meant that many businesses and private individuals could not pay their loans. At the same time, depositors began flooding into the banks to withdraw their savings. The banks did not have nearly enough money to repay the huge number of depositors, and were forced to close.

C. Worldwide Effects – The economies of European nations relied heavily on U.S. investments while providing an important market for American products.

  • After the stock market crash, U.S. companies were not able to continue investing in Europe. This caused European economies to fail and they no longer provided a market for U.S. goods.

  • U.S. banks stopped lending money to European nations which halted the re-payment from Europe of previous loans.

  • In an attempt to protect domestic industries, Congress passed the Hawley-Smoot Tariff (1930), the highest tariff in U.S. history. This did not have the desired effect, as European countries countered with their own tariffs and international trade declined even further.

III. Effects of the Depression

After 1929, the Depression grew steadily worse as unemployment rose and banks continued to fail.

A. Social Effects

  • Many people who had become unemployed were now homeless; they relied on organized and individual charity to survive. Some states provided relief programs to the poor, but soon ran out of money.

  • As the number of homeless increased, shelters became full and “Hoovervilles” developed all over the country.

  • Many families broke apart as a result of the depression.

  • Many minorities (Blacks, Hispanics, Asians) faced increased discrimination. Many lost their jobs, as white workers were given preference.

  • A number of Mexican immigrants and some Mexican-Americans, who were citizens, were deported to Mexico in order to open up more jobs to other groups.

B. Farmers - many farmers throughout the country faced bank foreclosures on their farms because they could not pay their loans or taxes.

  • The Dust Bowl – Many farms in the Great Plains were destroyed as overuse of the land and drought led to severe topsoil erosion.

  • Farmers who lost or abandoned their land moved around the country looking for work especially in California. Over 2.5 million people left the Great Plains region during the 1930’s.

C. Political Impact

  • A number of Americans turned to alternative political parties, such as the Communist, and Socialist Parties. However this did not greatly effect national elections. (It did lead to persecution of some individuals after WWII)

  • In 1933, the 18th Amendment (Prohibition) was repealed by the 21st Amendment.

IV. Hoover’s Response

Hoover, along with many others, believed it was not the government’s role to directly provide relief to people in the form of welfare or jobs.

  • Hoover’s initial approach was to encourage private businesses to provide jobs and maintain wage levels, while also trying to encourage the American people to have confidence in business and banks.

  • As the Depression worsened, Hoover reluctantly changed his approach and approved increased government spending on construction projects to create jobs.

  • In 1932, the Reconstruction Finance Corporation (RFC) was established and gave government credit to banks so they could extend loans. The RFC also lent money to states to allow some unemployment relief to be paid out.

A. The Bonus Army - Congress had voted to give veterans from WWI a bonus payment, but it was not scheduled to be paid until 1945.

    • A group of veterans from Portland, Oregon decided to go to Washington D.C. to demand payment of the bonus. Many other veterans from around the country joined in the protest and set up a camp of 20,000 people near the White House.

    • The House of Representatives passed a bill to pay the bonus that year, but the Senate rejected the bill.

    • When some of the veterans said they would stay in their camp until the bonus was paid, President Hoover sent the police to clear them out. This led to a disturbance in which 2 veterans were killed by police.

    • Hoover next sent the Army under its Chief of Staff, Douglas McArthur, to evacuate the Bonus Marchers. McArthur used cavalry, tanks and tear gas to drive out the WWI veterans and set fire to their camp.

B. Election of 1932

  • Hoover ran for re-election against Democratic candidate Franklin Delano Roosevelt, the governor of New York.

  • In his campaign, FDR promised a “New Deal” for the American people that would greatly increase the government’s role in the economy and in providing relief.

  • FDR won by 7 million popular votes, and took 89% of the Electoral College votes.

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