(AH 12-13)
The Bubble Bursts:
The Start of the Great Depression
Essential Questions:
1. What happens when traditional and modern cultures interact?
2. What influences do economic excesses have on American society?
3. What is the proper role of the government in people’s lives?
4. Did America move closer to or further away from its founding ideals during the interwar period?
Enduring Understandings:
Students will understand that …
1. Economic excess (overspending) and the unequal distribution (uneven spreading) of wealth can lead to
instability in society.
2. Liberals (people who are more likely to want change) and Conservatives (people who are more likely to want to keep older
traditions) have different beliefs about individual responsibility and the proper role of the government.
3. As a result of the New Deal, the United States government took on greater responsibilities for promoting the general
welfare (well-being) of people and society.
Knowledge:
All Students will know …
1. How can economic excesses contribute to hardship (challenges/suffering) and instability in America?
- Impact of the economic policies of the Harding and Coolidge Administrations on wealth distribution, investment,
and taxes.
- Basic operation of the stock market.
-Causes and consequences of the Great Depression and Dust Bowl.
- Reasons for the deepening crisis of the Great Depression and the Hoover administration’s responses.
2. What is the proper role of the government in people’s lives?
- Leadership qualities of Franklin D. Roosevelt.
- Philosophy, successes and failures of the New Deal.
- Significance of New Deal policies and their arguments.
3. Did the New Deal move America closer or further away from its founding ideals?
- How the ideals of liberty, equality, opportunity, rights and democracy were exemplified or contradicted during this
time period.
- Significance and legacy of the New Deal, including the Social Security Administration, FDIC and minimum wage.
Advanced Students will know …
1. Location of ideologies (belief systems) including conservative, liberal, moderate, radical, reactionary on the
political spectrum.
2. Basic operation of the banking system.
3. Characteristics of the First and Second New Deal.
NOTE: Almost every word in this packet that is printed in bold print is a key concept (or at least a very major point), so know them.
PROCEED TO THE NEXT PAGE
“The Stock Market Crash and Great Depression”
Unit Outline/Organizer (for Preview and Review)
I. Causes of the Crash
A. over-speculation (the main cause)
1. includes buying on margin
B. mob psychology
II. Stock “Crash” Actually Not the Cause of the Great Depression
A. The “Crash” was NOT the cause of the Great Depression. It was a noticeable symptom that showed people that the
economy had actually been sick for a long time.
III. Long-term Causes of the Great Depression
A. over-speculation/buying on margin E. overproduction of agricultural and industrial products
B. uneven (unequal) distribution of wealth F. buying on margin/installment plan
C. high tariffs and war debts G. banking system crisis
D. farm crisis H. domino (chain-reaction) effect
IV. Daily Life/Hard Times
A. nation-wide unemployment up to 25% by 1932
B. people saw Great Depression as a permanent breakdown of our economic system (capitalism/free enterprise)
C. “Hoovervilles” pop-up in just about every major city
D. Dust Bowl destroys farming in the West and Midwest and leads to an increased interest in conservation
V. Hoover and the Great Depression
A. Hoover’s belief in “rugged individualism” caused federal government not taking much direct action to stop the crisis
1. led to him losing the election and the Great Depression getting much worse
B. believed in indirect relief more than direct relief
1. indirect relief [“community chests”, Boulder (a.k.a. “Hoover”) Dam, RFC, Federal Home Loan Act] not enough
to fix economy
C. Hoover’s handling of the Bonus Army incident helps destroy his chances of getting re-elected
VI. FDR, the Great Depression, and the New Deal
A. Believes government should take bold action to end the Great Depression and that it had the responsibility of helping people and society to be strong economically and socially
B. First Hundred Days – FDR and Congress passed 15 major laws; all future presidents are measured against this
C. FDR’s plan to end the Great Depression is called the “New Deal”
1. based upon the “Three R’s: Relief, Recovery, and Reform”
2. New Deal Programs You Must Know:
a. “Bank Holiday” and the Emergency Banking Act d. Civilian Conservation Corps (CCC)
b. Glass-Steagall Act e. Social Security Act
c. Agricultural Adjustment Act (AAA)
D. Criticisms of the FDR and the New Deal
1. deficit spending (a.k.a. “Keynesian economics”) is used to “jump-start” the economy
E. Labor Unions and Workers made major gains during the time of the New Deal
1. National Labor Relations Act – protected the right of workers to create- and to be in – unions
2. Fair Labor Standards Act – maximum hours set at 44 hours, overtime pay, federal minimum wage, and
employment rules for children under age 16
VII. Significance and Effects of the New Deal and Great Depression
A. Extension of the Power of Federal Government E. Greater Concern for Workers (Labor)
B. Extension of the Power of the President F. Conservation Gains
C. Deficit Spending G. Renewal of Faith in Democracy
D. Federal Social Programs
I. A False Sense of Security and Optimism
A. Many people believed that the U.S. economy was on an upswing that was going to continue, and which would result in
many people becoming wealthy. Both the Democrats and Republicans were supportive of the economic policies that
eventually led to the worst financial disaster in U.S. history.
II. Hoover Takes the Nation: The Election of 1928
A. The Candidates and the Election
1. Herbert Hoover, the Republican nominee for President, beat Al Smith, the Democratic nominee
a. Hoover’s political platform/beliefs:
1. wanted to continue the limited role of government (laissez faire) in society and the economy
a. apparently the majority of voters agreed with this idea
Visual: President Herbert Hoover (1929-1933)
Source: http://eurekainn.com/aboutus.aspx
III. The Crash
A. What does the Dow Jones Industrial Average (the “Dow”) measure? Why is it useful? In what condition was it as of
September 1929?
- average dollar value of stocks from the nation’s 30 largest corporations (mostly industrial companies);
- is often used by economists and investors as a way of identifying investors’ opinions/mood about the
condition/health of the economy, both now and for the near future
- value of Dow tends to go up when investors are confident about the economy’s current and future health
- value of Dow tends to go down when investors are pessimistic (not confident) about the economy’ current
and future health
- value had increased by 370% over 5 years!; (much faster than normal; we now know it was too fast)
Recent Connection: the Dow Jones still exists today (dropped by about 50% during from Sept. 2008- March 2009)
1. Define “bull market” and “bear market”. Which kind of market was the U.S. economy in during most of the
1920’s?
“bull market” – a nickname for an extended period of time when the average value of stocks is going up
“bear market” – a nickname for an extended period of time when the average value of stocks is going down
- The U.S. had been in a “bull market” for most of the 1920’s
B. What was “buying on margin”? What was it and exactly what role did it play in causing the Crash?
- an investor was only required to give a stock broker or bank a fraction (marginal amount) of the real value of
stocks to make an investment; the rest is borrowed from the broker or a bank
- in the example below, $5,000 of your own money is invested and $5,000 is borrowed from the broker
- buying on margin allowed many people to invest much more money than they should have been able to invest; it
caused market to rise too fast (to “overheat”) because this caused too much money to be invested in stocks (higher
demand mixed with limited supply of shares = big increase in stock prices)
-this is related to the concept of over-speculation
over-speculation:
- too many investors in the market spending too much money (much that was not theirs) in the hope of
making quick profits (instead of making stable, long-term investments)
1. buying on margin’s role in “The Crash”:
- when stock values began to drop, brokers and banks demanded to be paid back (“margin call”) for the
money they had lent, but investors had lost it;
- caused banks to fail, which caused bank customers to lose their life savings;
- that caused a negative “chain-reaction” effect in our economy, which caused more investors to sell their shares of stock for a loss, which caused the Dow to drop even more
IMPORTANT: The graph below shows the effects of buying on margin – a fast increase in the Dow followed by
a panic and a fast drop.
C. What is “mob psychology” and how did it contribute to the Crash?
- the actions of a few cause many others to react without thinking; often seen during large-scale riots; people
take actions but cannot tell you why other than that they are doing them because somebody else was too
- look at what is currently happening over in Egypt (riots, mobs, looting, violence, protests)
- caused people to panic (and sell stocks) when other people began to sell large numbers of shares; this caused an
oversupply of available stocks, which resulted in the very thing that people feared – a stock market crash
D. Important: Why is October 29, 1929 known as “Black Tuesday”? Describe in detail what happened.
- “black” has a negative meaning in this case, as in it is a “dark” day
- prices and values of stocks plunged; value of losses between $6-8 billion ($68-102 billion in today’s money!)
- This marked the start of the Great Depression;
***- it WAS NOT, however, the true cause of it
IV. The Depression Takes Hold (Note: This is a VERY important section.)
A. The Great Depression (definition):
- the longest period of economic decline in U.S. history (1929-1941); became world-wide in scope
- it led to massive unemployment, starvation, homelessness, etc.
*B. Explain why some economists believe that the Crash WAS NOT necessarily the cause of the Great Depression.
- there were already existing underlying problems with the economy before the Crash took place; the Crash was
just a symptom that the economy was sick, not necessarily the real cause of it being sick
- the assassination of Franz Ferdinand was similar to this in regards to the start of WWI;
- his assassination was not the true cause of WWI; it just marked the start of it; other long-term causes
(“M.A.I.N”) were already in place just ready to explode
C. Explain how each of the following things were potentially long-term causes of the Great Depression (old, pp. 344-346).
1. over-speculation/buying on margin:
(REFER TO THE PREVIOUS DESCRIPTION)
- this recently happened in our nation’s stock market and housing industry; this caused prices to skyrocket,
only to then crash down
2. the uneven (unequal) distribution of wealth (see “Economic Background” reading on pp. 466):
- richest 1% had 14.5% if nation’s wealth; the rich invested into stocks or savings accounts, causing not
enough money to go to farmers or workers, who would have bought consumer goods and, therefore, kept
money in circulation (money = fuel for our “economic engine”)
- still a problem today
Distribution of Wealth (source: http://bss.sfsu.edu/tygiel/hist427/texts/1920seconomy.htm)
Rise in per capita (per person) income for top 1% of population, 1920-1929: 75%
Rise in per capita income for nation as a whole: 9%
Percentage of American families with no savings: 80%
Percentage of savings held by top 0.1% of Americans: 34%
Percentage of savings held by top 2.3% of Americans 67%
3. high tariffs (Fordney-McCumber Tariff) and war debts:
- 1922 Fordney-McCumber Tariff set high tax rates that discouraged European companies from selling in
U.S.; made it difficult for them to re-pay war debts (nearly all of Europe was in debt to us)
- Europeans passed high tariffs in retaliation, which slowed international trade; this meant the flow of
money went down across the world, which slowed our economies even more
4. the farm crisis:
- farmers had bought more land and equipment to meet demand for products during WWI’; demand
dropped after war, but production had remained high (overproduction), which caused prices to fall; led to
financial crisis for farmers; this hurt other industries because farmers began placing fewer orders for
equipment
5. overproduction in industry and agriculture:
- production of industrial products/consumer products increased rapidly after WWI, but wages did not rise
as much; problem was hidden somewhat by credit being available (installment plan), which allowed
people to buy products, which boosted the economy, but left people in debt; this, however, reduced their
buying power in the future
6. buying on credit/installment plan:
- caused people to spend beyond their means (overspend and go into debt); this affected their ability to
spend in the future; leads, in the long-run, to a decrease in spending and, therefore, less economic activity
- overspending and debt is a massive problem facing both regular people and the government today
Consumer Credit: (source: http://bss.sfsu.edu/tygiel/hist427/texts/1920seconomy.htm)
1925: $1.38 billion (consumer credit outstanding, meaning not yet paid back)
1927: 15% of all consumable durables (long-lasting products) bought on installment plans
60% of all automobiles bought on installment plans
80% of all radios bought on installment plans
1929: $3 billion (consumer credit outstanding; more than 100% higher than in 1925)
$7 billion (total consumer goods purchased on credit)
Visual: The cartoon below demonstrates the consumerism of the 1920’s. These women are