26. 1 The End of Prosperity
Lesson 1: The End of Prosperity
The Big Idea
The collapse of the stock market in 1929 helped lead to the start of the Great Depression.
Main Ideas
The U.S. stock market crashed in 1929.
The economy collapsed after the stock market crash.
Many Americans were dissatisfied with Hoover's reaction to economic conditions.
Roosevelt defeated Hoover in the election of 1932.
Key Terms and People
buying on margin: Purchasing stocks on credit or with borrowed money, betting on rising stock prices.
Black Tuesday: The date of the stock market crash on October 29, 1929, characterized by panic selling.
business cycle: The fluctuation in economic activity that an economy experiences over a period. It consists of expansions and contractions.
Great Depression: The severe worldwide economic depression that took place during the 1930s.
Bonus Army: A group of World War I veterans who marched to Washington, D.C. in 1932 to demand early payment of a bonus due in 1945.
Franklin D. Roosevelt: The Democratic presidential candidate who defeated Herbert Hoover in the 1932 election, known for his New Deal policies to recover from the Great Depression.
Contextual Narrative
If YOU were there…
You have been working part-time to support your family while attending school. Upon arriving at work, your boss informs you that due to poor business conditions, he can no longer pay you. Your family, already facing financial difficulties with your father out of work, is relying on your earning.
The Stock Market Crashes
In the Roaring Twenties, a General Motors executive claimed, "Anyone not only can be rich, but ought to be rich," exemplifying the optimism surrounding stock investment.
Stock Market Definition: A marketplace for buying or selling shares of ownership in a company.
The stock market experienced a bull market during most of the 1920s, leading many to believe investing in stocks was a quick path to wealth.
Example: Shares of the Radio Corporation of America increased from $85 in 1928 to $549 in 1929, showcasing potential profits.
Encouraged by the potential for enormous profits, many individuals began buying on margin, where they bought stocks with borrowed money, planning to repay loans by selling stocks at a higher price.
The Federal Reserve Board became alarmed at the risks associated with margin buying and attempted to reduce it, but this practice persisted leading to intensified risks when stock prices began to drop.
Black Tuesday
On October 29, 1929, known as Black Tuesday, over 16 million shares were traded, marking the beginning of the stock market crash. Within weeks, approximately one-third of the stock market's value vanished.
Stock Market Values (Week of Black Tuesday):
September 1929: Total Value = $87 billion
Post-Crash: Over $30 billion lost in value.
Journalistic Account: Jonathan Norton Leonard describes the panic-loaded atmosphere during the crash, illustrating the widespread panic and lack of buyers.
The Economy Collapses
President Herbert Hoover attempted to reassure the public about the strength of the economy: "The fundamental business of the country… is on a sound and prosperous basis."
The immediate effect of the crash was a banking crisis. Banks had heavily invested in the stock market and lent money on margin, leading to significant losses. When customers failed to repay loans, many banks failed, resulting in widespread panic as people withdrew their deposits and much of their life savings were lost.
In 1931 alone, more than 2,200 banks closed.
From late 1929 to 1933, U.S. unemployment dramatically rose from under 0.5 million to over 4 million, indicating economic despair.
Economic Understanding
Definition of Unemployment: Individuals actively seeking work but unable to find jobs are classified as unemployed. High unemployment negatively impacts economic vigor, causing businesses to lose revenues due to reduced consumer spending.
Unemployment trends from 1929 to 1941 illustrate peaks during the Depression years.
Recession Defined: A downturn in economic activity leading to reduced production and employment. A prolonged and deep recession is termed a depression.
The business cycle: The economy's recurring pattern of expansion and contraction.
Major Causes of the Great Depression
Historical patterns of the economy indicate a cyclic nature of ups and downs. Multiple factors contributed to the 1929 Great Depression:
Overproduction in a time of decreasing demand.
Wealth distribution inequalities; in 1929 the top 5% earned one-third of total income while the bottom 40% garnered just one-eighth, affecting purchasing power.
Declining world trade exacerbated conditions, as European markets were struggling post-World War I with high tariffs preventing reciprocal trade with the U.S.
Critics contended that government monetary policies and protectionist measures also played roles in the economic downturn.
Hoover's Reaction
As hardship engulfed the nation, public discontent mounted towards Hoover due to his hesitance to provide direct governmental aid.
Charitable organizations provided soup kitchens and breadlines, reflecting the dire situation many faced.
Hoover's limited government intervention philosophy, despite actions like the establishment of the Reconstruction Finance Corporation (RFC) in 1932, wasn’t welcomed by an increasingly desperate populace. The RFC supported banks and mortgage firms with $1.2 billion in loans.
Hoovervilles, shantytowns named in disdain for Hoover, encapsulated the suffering from increased homelessness, exemplified by the Bonus Army incident where veterans marched for relief and were forcibly removed by military troops under Hoover's orders, further tainting his reputation.
Election of 1932
The Republican Party nominated Hoover again; however, his chances were grim. Hoover remarked on his bleak prospects, noting the contest represented diverging philosophies of governance.
In contrast, Roosevelt’s administration in New York actively pursued remedial actions for those affected. Roosevelt emphasized a paradigm shift—proclaiming a promise of a "new deal" that resonated hope amongst voters.
Roosevelt's campaign culminated in a landslide victory, winning 57% of the popular vote and claiming majority victories in Congress.
Summary and Preview
The culmination of overproduction, margin investing, and governmental economic policies initiated the Great Depression.
Franklin Roosevelt’s commitment to national revitalization through progressive programs brings hope as future lessons will examine his approaches further.
The Stock Market Crashes
In the 1920s, a bull market fueled speculation, with many investors buying on margin (using borrowed money). On Black Tuesday (October 29, 1929), the market collapsed, losing over 30 billion in value.
Economic Collapse and the Banking Crisis
The crash triggered a banking crisis as banks lost investments and loans went unpaid, leading to over 2,200 bank failures in 1931. Unemployment rose from 0.5 million in 1929 to over 4 million by 1933. This downward trend in the business cycle became the Great Depression.
Major Causes of the Depression
Overproduction: Businesses produced more than consumers could buy.
Wealth Inequality: The top 5\% earned 33\% of income, limiting overall purchasing power.
Trade Decline: High tariffs and struggling European markets stifled international trade.
Hoover’s Response and the Election of 1932
President Herbert Hoover minimized government intervention, favoring local charity over direct federal aid. Although he created the Reconstruction Finance Corporation (RFC) to lend 1.2 billion to institutions, public dissatisfaction grew, fueled by "Hoovervilles" and the forceful removal of the Bonus Army.
In the 1932 election, Franklin D. Roosevelt (FDR) won a landslide victory by promising a "new deal" for the American people, signaling a shift toward progressive government action.