Lesson 1: Hooking Lesson

Major Causes of the Great Depression

1)Government Policies (“Pro-Business 1920s Presidents”):

A series of Republican presidents- Harding, Coolidge, and Hoover- believed in government-business cooperation. During these years, government was more of a compliant coordinator than an active manager. In other words, government policies helped protect the interests of businesses by cutting taxes on corporations and wealthy individuals. For instance, Harding's Treasury Secretary, financier Andrew Mellon, cut income tax rates for the wealthiest Americans from 73% to 25%. This exacerbated the misdistribution of wealth between rich and poor—by 1929, the richest one-tenth of one percent of Americans owned as much wealth as the bottom 42%—and may have created an unsustainable financial bubble that led directly to the Great Depression.

Further, the Progressive-era anti-trust stance was largely abandoned. Furthermore, many corporations successfully avoided regulatory legislation and government interference in the market economy. Harding, hostile to the government regulation of business instituted under the Progressive administrations of Teddy Roosevelt, Taft, and Wilson, filled the federal regulatory agencies with officials from the industries meant to be regulated. Many of these anti-regulation regulators proved to be not only philosophically opposed to government regulation but also deeply corrupt. Under Harding's administration, scandal tainted many departments of the government, with the corrupt looting of public property costing taxpayers hundreds of millions of dollars. In the most infamous incident, the memorably-named “Teapot Dome”scandal, Harding's Interior Secretary accepted bribes of nearly half a million dollars from cronies in the oil industry in exchange for giving away drilling rights in the invaluable federal oil reserves at Teapot Dome, Wyoming, and Elk Hills, California.Due to endemic corruption such as that of Teapot Dome, historians today usually consider Warren G. Harding to be a leading candidate for the dubious title of “Worst President Ever.”Harding himself did not live to receive this judgment; he died of a stroke while on a speaking tour of the country after less than three years in office, before the worst revelations of corruption in his administration were widely publicized.

Key Terms: Deregulation, Tax-cuts, “Teapot Dome” scandal

2) Industries in Trouble:

Numerous key basic industries such as textiles, steel, and railroads struggled to make profits. Some of these key industries, such as the railroad, struggled to make profit due to new competition from emerging transportation industries such as airlines and shipping industry. These freight and passenger airplanes and ships competed for the same customer base thus decreasing the customer base for railroads. Unfortunately this same pattern was repeated for main industries that had provided hundreds of jobs for Americans in the previous decades.

Other industries such as mining and coal, which had expanded to supply wartime needs during WWI, faced diminished demand for goods during peacetime thus leading to a surplus of goods. Coal for instance, had been in great demand during World War I, but after the war ended the demand decreased leading to closure of coal mines and processing plants. Even “boom industries” of the 1920s such as automobiles, construction, and appliances began to weaken as consumer demand decreased.

The decline of all these struggling industries was significant because one struggling industry could create a chain reaction that would cause other industries to suffer. For example, construction of new houses declined so demand for building materials, new furnishings and appliances, and construction workers declined too. (see the chart below). The health of these industries was important because prosperity of the economy depended excessively on these few basic industries.

Key Terms: Industry, consumer demand, profits, chain reaction

3) Agricultural Issues:

For farmers hard times had started about ten years earlier. During World War I, the government guaranteed farmers high prices for their crops and livestock. Farmers put more acres in cultivation and increased the size of their herds. They borrowed money from local banks to buy more land and machinery. As the demand for land increased, so did its price, and sales of farmland rose sharply.

In 1920, however, the government ended its guarantees. Farm prices were allowed to drop back to natural prices—determined by supply and demand. In this case, there were big supplies. Farmers continued to produce at high levels and soon surpluses appeared. As a result, prices for crops and for land fell. Those who had borrowed money could not pay off their loans. Even if they sold their farms, the money they received sometimes was less than what they owed. When banks could not collect the money they borrowed, they could not repay the people who had deposited money in their bank accounts. Many banks closed, and depositors lost their money. In the state of Iowa alone, 167 banks closed in 1920. That number rose to 505 in 1921. For several more years the number of bank failures remained high.

Low crop prices hurt farmers, but there were other factors at work. Farm families had to pay high prices for farm machinery through the 1920s. And rates to haul grain were much higher than they had been before the war. Many rural areas had built new schools and put gravel on country roads when times were good. Because they were still paying for those improvements, taxes were high. Many local school boards asked teachers to accept less pay for their work. Sometimes teachers resigned rather than accepting lower wages.
What made many Midwesterners angry was that the eastern cities seemed to be doing well. Before the collapse in 1929, wages for city workers were rising, and businesses were doing well. Most farm families still did not have electricity in their homes, and rural schools were clearly falling behind the educational instruction that town schools could offer.Average annual income for an American family was $750, but for farm families it was only $273.

WWI also played another vital role in terms of consumer demand for American crops. During WWI, international demand for crops like wheat and corn soared, causing prices to rise. Farmers planted more crops and took out more loans to buy land and equipment in hopes of capitalizing on Allies’ need for food. After the war ended, demand for farm products fell and consequently crop prices fell too.Also, agricultural production in Europe began to recover. Therefore, the demand for American crops decreased as Europeans became more self-sufficient.Essentially, farmers have a surplus on their hands and no one to sell it to.

*Farmers strapped for cash cannot pay property taxes or mortgages or pay off their debts and are forced to auction off their land. For example, in Mississippi, it was reported in 1932 that on a single day in April approximately one-fourth of all the farmland in the state was being auctioned off to meet debts.

Key Terms: Foreclosure, consumer demand, surplus

4) International Problems:

Following WWI, European demand for American goods began to decline because European industry and agriculture were regaining their footing and becoming more productive. When the war ended, European nations allied with the U.S. owed large sums of money to American banks. Their shattered economies couldn’t produce this money so they insisted on reparations payments from Germany and Austria to help them pay of their own debts. But, the economies of Germany and Austria were also in shambles and they could not pay reparations.

On top of all this, the U.S. passed the Hawley-Smoot Tariff Act, which established very high protective tariffs. The act raisedU.S.tariffson over 20,000 imported goods to record levels. The tariff level was the second highest in the U.S. in 100 years and the great majority of economists then and ever since view the Act as responsible for reducing American exports and imports by more than half. This high tariff made it difficult for European countries to sell goods in the U.S. and create any profit to pay back their debts. In addition it created hostility with foreign nations as they refused to buy American products as a way of protesting the high U.S. tariffs.

Key Terms: Tariff, imported goods, reparation payments

5) Consumers issues:

During the 1920s, most people enjoyed a higher standard of living relative to previous generations. Motivated by advertising and buying on credit, Americans eagerly bought radios, automobiles, real estate, and stocks.

BUT, by the late 1920s, Americans were buying less. Why? Because they had less money to spend!

a) Prices kept rising while wages remained the same:

Consumers spent less because incomes were not rising fast enough in comparison to prices. During the 1920s, nearly half of the nation’s families earned less than $1500/year (minimum amount for decent standard of living). Even families earning twice as much could not afford many products manufacturers produced. Average man/woman bought a new outfit of clothes only once a year. Scarcely half of the homes in cities had electric lights or a furnace for heat. Only one in ten had an electric refrigerator.

In contrast, rich Americans were doing very well. Between 1920-1929, income of the wealthiest 1% of the population increased by 75% compared with a 9% increase for Americans as a whole. In 1929, the wealthiest 5% of families took in nearly a third of the nation’s income.

*Large increase in income (~$74 billion to $89 billion), but as shown in the previous graph, only a small percentage of the population experienced a large increase in income. Contrastingly…

Consequently, unbalanced distribution of income emerging:

Unequal distribution of wealth meant that most Americans couldn’t participate fully in the economic advances of the 1920s because they didn’t have the money to buygoods that factories produced. One solution to this problem was buying on credit…

b) Overbuying on credit in the preceding years:

Although many Americans appeared prosperous during the 1920s, they were actually living beyond their means. They frequently bought goods on credit- an arrangement in which consumers agreed to buy now and pay later for purchases, often on an installment plan (usually in monthly payments) that included interest charges. Credit was easily available, encouraging people to pile up a large consumer debt. People then struggled to pay off this debt and often went bankrupt.

Key Terms: Standard of Living, Income, credit, unequal distribution of wealth

6) Stock Market:

Through most of the1920s, stock prices rose steadily and as a result more people bought stocks and bonds, taking advantage of rising prices. However, several problems emerged:

1) More and more investors engaging in speculation: buying stocks and bonds on the chance that they might make a quick and large profit, ignoring any risks.

2) Buying on margin: paying a small percentage of the stock’s price as a down payment and borrowing the rest. Stockbrokers willing to lend buyers up to 75% of stock’s purchase price.

If stock price rose, could sell it to make a profit and pay back off debt. But if prices declined, no way to pay off the loan you used to buy it in the first place.

*This graph demonstrates how stock prices rose steadily beginning around 1918 (with minor fluctuations throughout) and peaked sharply in 1928 and ‘29. You can see a sharp decline toward the end of 1929. Stock prices began to decline and confidence in the market begins to waver: some investors sell their stocks and pull out. In October, market takes a plunge and panicked investors try to unload their stocks. Black Tuesday, October 29th, worst day in the crisis: people and corporations frantically trying to sell their stocks before prices plunge even further. As stock prices drop, people are not able to sell their stocks for the same price that they purchased them and are therefore losing money.

Key Terms: Stocks, Bonds, Buying on margin

7) Black Tuesday

*Panicked crowds outside NY Stock Exchange on “Black Tuesday”.

*Bank run: people rushing to the bank to withdraw their savings.

October 1929: In September confidence in the market began to waver; in response, some investors sold their stocks and pulled out. In October, the market took a plunge and panicked investors tried to sell all of their stocks. Black Tuesday, October 29th, was the worst day in the crisisbecause people and corporations frantically tried to sell their stocks before prices plunged even further. Individual investors who bought stocks on credit acquired huge debts and people who put their savings into the market lost them. 16 million shares were dumped that day. By mid-November, investors had lost $30 billion, an amount equal to U.S. expenditures in WWI.

This event also caused banks to collapse becausemany Americans panicked and withdrew their money from banks, forcing over 9,000banks to go bankrupt or close to avoid bankruptcy. Many banks couldn’t cover customers’ withdrawals because they had invested money in the stock market and lost it. 9 million individual savings accounts were wiped out as banks closed.

By 1933, 100,000 businesses had closed down. As businesses failed or cut back, they laid off workers. Unemployment leapt from ~3% (1.6 million workers) to ~25%in 1929 (13 million workers). One out of every four workers was without a job. Those who managed to hold onto jobs had to accept pay cuts and reduced hours.

Key Terms: Stock Market, investors, bankruptcy,

*Examples of unemployed men eagerly looking for jobs.

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