networks - Print Lesson (2024)

Although the 1920s were prosperous, speculation in the stock market, risky lending policies, overproduction, and uneven income distribution eventually undermined the economy and led to the Great Depression.

The Long Bull Market

What economic choices caused the economy to become unstable in the late 1920s?

The economic collapse that began in 1929 seemed unimaginable months before. In the 1928 election, both presidential candidates painted a rosy picture of the future. Republican presidential nominee Herbert Hoover declared, “We are nearer to the final triumph over poverty than ever before in the history of any land.”

The Election of 1928

For the presidential election of 1928, the Democrats chose Alfred E. Smith, governor of New York. Smith was the first Roman Catholic to win a major party’s presidential nomination. He faced a tough challenger, as Herbert Hoover was secretary of commerce and former head of the Food Administration.

Smith’s religious beliefs became a campaign issue. Some Protestants claimed the Catholic Church financed Smith’s campaign and would have inappropriate influence on American politics. The attacks embarrassed Hoover, a Quaker, and he tried to quash them, but the charges damaged Smith’s candidacy.

The prosperity of the 1920s—for which the Republicans took full credit—was a bigger challenge to Smith’s candidacy. Hoover won in a landslide. On March 4, 1929, an estimated 50,000 onlookers stood in the rain to listen to Hoover’s Inaugural Address. “I have no fears for the future of our country,” proclaimed Hoover. “It is bright with hope.”

The Stock Market Soars

The optimism that swept Hoover into office also drove stock prices to new highs. Sometimes the stock market has a long period of rising stock prices, or a bull market. The bull market of the 1920s convinced many to invest in stocks. By 1929, approximately 10 percent of American households owned stocks.

Before the late 1920s, stock prices generally reflected their true values. In the late 1920s, however, many investors failed to consider a company’s earnings and profits. Buyers engaged in speculation, or betting the market would continue to climb, thus enabling them to sell stock and make money quickly.

Many investors bought stocks on margin, making only a small cash down payment (as low as 10 percent of the price). With $1,000, an investor could buy a sum of $10,000 worth of stock. The remaining $9,000 came as an interest-bearing loan from the stockbroker. Quick profits were possible if stock prices kept rising, but problems came when prices began to fall. To protect a loan, a broker could issue a margin call, demanding the investor repay the loan at once.

The Great Crash

How did the stock market crash trigger a chain of events that led to the Depression?

The bull market lasted only as long as investors continued putting new money into it. In September 1929, the market peaked. Prices then began an uneven downward slide. As investors decided the boom was over, they sold more stock, causing prices to decline even further.

The Stock Market Crash

On Monday, October 21, 1929, the comedian Groucho Marx was awakened by a telephone call from his broker. “You’d better get down here with some cash to cover your margin,” the broker said. The stock market had plunged. The dazed comedian had to pay back the money he had borrowed to buy stocks, which were now selling for far less than he had paid for them. Other brokers made similar margin calls. Customers put stocks up for sale at a frenzied pace, driving the market into a tailspin.

On October 24, a day that came to be called Black Thursday, the market plummeted further. Marx was wiped out. His earnings from plays and films were gone, and he was deeply in debt. His son recalled his visit to the brokerage firm, as Groucho spotted his broker:

The following week, on October 29, a day that was later dubbed Black Tuesday, prices took the steepest dive yet. That day, more than 16 million shares of stock were sold, and the value of the industrial index (a measure of the value of leading industrial companies) dropped by 10 percent. By mid-November, the market price of stocks had dropped by more than one-third. Some $30 billion was lost, a sum roughly equal to the total wages Americans earned in 1929. Although the stock market crash was not the major cause of the Depression, it undermined the economy’s ability to overcome other weaknesses.

Banks Begin to Close

The market crash weakened the nation’s banks in two ways. First, by 1929, banks had lent billions to stock speculators. Second, many banks had invested depositors’ money in the stock market, hoping for high returns. When stock values collapsed, banks lost money on their investments, and speculators defaulted on their loans. Having suffered serious losses, many banks cut back drastically on loans. With less credit available, consumers and businesses were not able to borrow as much money, sending the economy into a recession.

Some banks could not absorb the losses they suffered and had to close. The government did not insure bank deposits, so if a bank failed, customers, including even those who did not invest in the stock market, lost their savings. As a growing number of banks closed in 1929 and 1930, a severe crisis of confidence in the banking system further destabilized the economy.

News of bank failures worried Americans. Some depositors made runs on banks, thus causing the banks to fail. A bank run takes place when many depositors decide to withdraw their money at the same time, usually out of fear that the bank will collapse. Most banks make a profit by lending money received from depositors and collecting interest on the loans. The bank keeps only a fraction of depositors’ money in reserve. Usually, that reserve is enough to meet the bank’s needs. If too many people withdraw their money, however, the bank will collapse. By 1932, about one in four banks in the United States had gone out of business.

The Roots of the Great Depression

What were the underlying conditions that led to the collapse of the U.S. economy?

The stock market crash played a major role in putting the economy into a recession. Yet the crash would not have led to a long-lasting depression if other forces had not been at work. The roots of the Great Depression were deeply entangled in the economy of the 1920s.

The Uneven Distribution of Income

Overproduction was a factor leading to the onset of the Great Depression. More efficient machinery increased the production capacity of factories and farms. Most Americans did not earn enough to buy up the goods they helped produce. Manufacturing output per person-hour rose 32 percent, but the average worker’s wage increased only 8 percent. In 1929 the top 5 percent of all American households earned 30 percent of the nation’s income. In contrast, about two-thirds of families earned less than $2,500 a year, leaving them with little disposable income.

Farmers, in particular, did not share in the prosperity of the 1920s, as many had gone into debt to buy land or equipment during World WarI, when demand for their products was high. When prices fell, they tried to produce even more to pay their debts, taxes, and living expenses. Prices dropped so low that many farmers went bankrupt and lost their farms.

During the 1920s, many Americans had purchased high-cost items, such as refrigerators and cars, on the installment plan. Purchasers could make small down payments and pay the remainder of the item’s price in monthly installments. Paying off such debts eventually forced some buyers to stop making new purchases. Because of the decrease in demand for their products, manufacturers in turn cut production and laid off employees.

The slowdown in retail sales reverberated throughout the economy. When radio sales slumped, for example, orders for copper wire, wood cabinets, and glass radio tubes slowed. Montana copper miners, Minnesota lumberjacks, and Ohio glassworkers lost jobs. Jobless workers cut purchases, further reducing sales. This put even more Americans out of work. Unemployment insurance was nonexistent. Many families had little or no savings. Lost jobs often meant dire circ*mstances. In 1930 alone, about 26,000 businesses failed.

The Loss of Export Sales

Many jobs might have been saved if American manufacturers had sold more goods abroad. As the bull market of the 1920s sped up, however, U.S. banks made loans to speculators rather than loans to foreign companies. Loans from U.S. banks had helped European nations make war reparations and pay down war debts. They had also secured foreign markets for U.S. exports. Without these loans from U.S. banks, foreign companies purchased fewer American products.

In 1929 Hoover wanted to encourage overseas trade by lowering tariffs. Congress, however, decided to protect American industry from foreign competition by raising tariffs. The resulting legislation, the Hawley-Smoot Tariff, raised the average tariff rate to the highest level in American history. In the end, it failed to help American businesses, because foreign countries responded by raising their own tariffs. This meant fewer American products were sold overseas. By 1932, exports had fallen to less than half the level that they had been in 1929. A decrease in exports hurt both American companies and farmers.

Mistakes by the Federal Reserve

Just as consumers were able to buy more goods on credit, access to easy money propelled the stock market. Instead of raising interest rates to curb excessive speculation, the Federal Reserve Board kept its rates low throughout the 1920s.

The Board’s failure to raise interest rates significantly helped cause the Depression in two ways. First, by keeping rates low, the Board encouraged member banks to make risky loans. Second, the low interest rates led business leaders to think that the economy was still expanding. As a result, they borrowed more money to expand production. This was a serious mistake because it led to overproduction when sales were falling. When the Depression finally hit, companies had to lay off workers to cut costs. Then the Federal Reserve made another mistake: it raised interest rates, thus tightening credit. The economy continued to spiral downward.

Reviewing Vocabulary

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TEKS: 16B, 16C

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Using Your Notes

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Answering the Guiding Questions

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Writing Activity

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