14.1 The Nation’s Sick Economy

• Demand decreased after WWI, equipment bought to meet WWI demand needed to be pay for in the post WWI environment
• McNary-Haugen price support bills, 1927, 1918 Govt support of price, sell on world market, to be paid for by tax on domestic food sales.

Americans gambled on the stock market

Industries in trouble:

• Coal, mining (hydro power, fuel oil, gas supplied more than half, by 1930s, of energy that had once come from coal)
• Railroads (new forms of transportation, trucks, buses, autos)
• Textiles faced foreign competition from Asia and Latin America
• Housing starts began to decline in mid 1920s
• As farmers incomes fell, they bought fewer goods and services.
• As debt increased from credit buying, Americans stopped some spending
• Incomes were not rising with prices
• Widening gap between rich and poor; 5% of Americans took in 1/3 of the wealth; poorest 40% had 1/10 the wealth)
• Therefore most Americans could not participate fully in the economic advances of the 1920s

(Only half of American homes had electric lights or a furnace for heat; most could afford one new set of clothes a year..)

1928 Alfred E. Smith vs. Herbert Hoover (frugal, R, prosperity, "poorhouse is vanishing…")

Against Smith: D, Roman Catholic

Hoover’s election: Americans were happy with R admin…

STOCK MARKET

• The visible symbol of a prosperous economy
• Stocks rose steadily in the 20s. (Bull market)
• The unrestrained buying of stocks for speculation fueled the market’s rise…
• As prices rose, wealth was generated on paper, but it bore little relation to the real worth of companies or the goods they produced, or the dividends the stocks paid.
• Many investors bought stock on margins. Works good while stocks rise
• In Sept 1929 the market began to decline…On Oct 24 market plunged
• On Oct 29, 1929, Black Tuesday, the bottom fell out
• Record 16 million shares dumped in one day…
• By mid November investors had lost $30 billion, an amount equal to all the spending of WWI.

Causes of the Great Depression

• Stock market crash
• A decaying industrial base; outmoded equipment made some industries less competitive
• Crisis in farm sector; overproduction
• Availability of easy credit
• Unequal distribution of wealth – too little money in the hands of working people, who were the vast majority of consumers.
• Fed gov making loans too easy, allowing borrowing leading to debt and even stock speculation

DJIA

• After the crash Americans panicked and withdrew their money from banks.
• Banks closed. By 1933, ¼ of the nation’s banks closed.
• 9 million individual bank accounts wiped out.
• Between 1929 and 1932, the nation’s GNP was cut in half. ($104 billion to $59 billion)
• Railroad companies and auto companies went out of business
• Millions of workers lost their jobs, at least ¼ of all Americans

Worldwide effect.

• Hawley Smoot Tariff Act, 1930, highest tariff in US history. Backfired.
• Meant to keep out any foreign competition for farmers and industry
• But had opposite effect…since no goods from abroad were coming in, none of those powers had the money to buy American products.
• Other countries raised their tariffs; within a few years world trade had fallen more than 40%
• Hoover proposed a moratorium on war debts
• Britain and France went off the gold standard…gold could no longer be exchanged for dollars
• Gold dropped in value, so Europeans could buy American goods cheaper.
• Worldwide great depression.