Mr. McCormack
American History II
Central Dauphin High School
Chapter 15 – Crash and Depression
I. Stock Market Crash
A. Stocks Generally
1. A stock is a share of ownership of a company
2. A company will issue shares (stocks) to raise money
3. A stock holder (owner) can vote on issues affecting a company (i.e. appointments to the board of directors) but has no claim to the assets of the company
4. A stock’s value rises or falls depending on what other people are willing to pay for it – when a company is profitable, people will pay more for its stock
5. Some companies pay dividends (a share of its profits) to stock holders
B. Measuring the Crash
1. Dow Jones Industrial Average (DJIA)
a. Average of stock prices of 30 major industries (“blue chips” “industry leaders” “respectable companies”)
b. Created by journalist Charles Dow on May 26, 1896
c. Useful for tracking major trends in the stock market
d. All time low of 28.48 reached on August 8, 1896
e. All time high of 11,722.98 reached on January 14, 2000
2. DJIA climbs through the 1920s (Bull Market)
a. In early 1928, DJIA had climbed to 191
b. March 4, 1929 – DJIA hits 313
c. September 3, 1929 – DJIA hits 381
d. Climbing stock prices dominates the news and fuels speculation
3. The Great Crash of 1929 (Bear Market)
a. Stocks slowly decline through the end of September
b. Some brokers (stock traders) begin cutting back on credit
c. October 23, 1929 – DJIA drops 21 points in one hour
d. October 24, 1929 – Black Thursday
i. Stock exchange loses $3 billion in value in one day
ii. A group of bankers pool money to buy stocks, stop panic
iii. President Hoover assures country that economy is sound
iv. Stocks stabilize for a few days
e. October 28, 1929 – Black Monday
i. Stock losses resume
ii. Stock market loses about 13% of its value
f. October 29, 1929 – Black Tuesday
i. A record 16.4 million shares were sold
ii. Normal trading days: 4 to 8 million shares sold
iii. Stock market loses an additional 12% of its value
g. By November 13, 1929, DJIA fell to 198.7
h. In two months (September and October) the market lost over 40% of its value – over $100 billion of paper assets
i. Stock Market will bottom at 41.22 (down 89.2% from previous high) in July, 1932, and not recover its previous high for 22 years
C. Economics and the Business Cycle
1. For a variety of reasons, economies usually alternate between periods of expansion and contraction (measured by change in Gross National Product)
a. Also called the Boom and Bust Cycle
b. Contractions are called Recessions or, if very serious, Depressions
2. The government now tries to curb the business cycle by stimulating weak economies and cooling strong ones
a. The government can use fiscal policies (taxing and spending, controlled by Congress)
b. The government can also use monetary policies (changing the money supply and interest rates, controlled by the Federal Reserve Board, our central bank)
c. The government can often seem to be working against itself (providing a stimulus to spending by cutting taxes while simultaneously making it harder to borrow money by raising interest rates)
D. The Ripple Effect of the Crash
1. Initially only those who had heavily invested in the stock market were affected
a. Approximately 4 million people out of the 120 million living in the US
b. Many investors were completely ruined
i. Will Rogers observed that “When Wall Street took that tail spin, you had to stand in line to get a window to jump out of, and speculators were selling space for bodies in the East River.”
ii. Despite popular belief, there was no great rash of suicides
2. The impact of the Crash spread to affect everyone
a. Banks that lent money for high-risk businesses can’t recover their deposits from bankrupt companies
b. Banks are unable to recover deposits from cash-poor consumers who had outstanding debts
c. Fearing the banks’ inability to redeem deposits, many account holders withdraw their entire amounts, leading to panicky “Bank Runs”
d. With no way to cover their deposits, many banks (5,500) failed
e. When banks fail, all savings deposits are wiped out (over 9 million accounts disappear by 1933)
f. With no banks able to make loans, businesses cut back on their plans to expand
g. Cutbacks in business expansion lead to higher unemployment
h. Higher unemployment leads to less consumer spending
i. With less consumer spending, businesses cut back on production, leading to even deeper cuts in employment (downward spiral)
3. The Crash marks the end of the Roaring Twenties and the start of the Great Depression
a. Great Depression lasts from 1929 until 1941
b. The Depression is the most severe economic contraction in American history
c. GNP falls from $103 billion in 1929 to just $56 billion in 1933
4. Impact on Workers and Farmers
a. Unemployment grows as businesses scale back
i. August, 1931 – Henry Ford closes Detroit factories, 75,000 lose their jobs
ii. By 1932 about 25% of the labor force (12 million people) is unemployed
iii. Small businesses (i.e. restaurants) lose customers and close
iv. Economists consider 4 to 6% unemployment acceptable
b. As spending power decreases, prices are driven downward – Deflation
i. In 1929, a bushel of wheat sold for $1.18, but only $0.49 in 1932
ii. In 1929, a pound of cotton sold for $0.65, only $0.19 in 1932
c. Lower prices bring disaster to many farmers
5. Impact on the World
a. International banking, manufacturing, and trade tied the world’s economies together by the 1930s
i. Latin America depended on American manufacturers for goods
ii. European businesses depended on American investors for loans
iii. Collapse of American economy, the world’s largest, crippled many other countries’ economies
iv. Some nations eventually recover from the Depression with more diversified economies (developing nations no longer depend on developed nations for so many manufactured goods)
b. Repaying war debts kept European economies weak
i. Still recovering from war damage and unable to trade with America because of high tariffs, the Allies rely on German reparations for income
ii. When American investment drops off, German banks and businesses fail
iii. Industrial production falls in Europe (40% in Germany, 29% in France, 14% in Britain) as businesses close
iv. Germany suspends reparations, Allies suspend repayments
E. Underlying Causes of the Depression
1. Economy might have survived the Crash but for deeper problems
2. Economic Instability
a. National wealth was heavily concentrated among the wealthy who were more inclined to save and invest than purchase goods (overall, less consumer spending)
b. Industry produced more than consumers wanted or could afford
c. Many economic sectors (i.e. farming) were already weak or failing in the 1920s
3. Overspeculation
a. Speculators bought stocks with borrowed money and then used those stocks as guarantees for additional loans to buy more stocks
b. Brokers’ loans grew from 5 billion in mid-1928 to $850 billion in September, 1929
c. The Stock Market bubble was based on borrowed money and optimism instead of real value
4. Government Policies
a. The government, through the Federal Reserve, cut interest rates to spur the economy in the 1920s (stimulating an already growing economy)
b. The Federal Reserve raised rates in 1929, making it harder for speculators to borrow money (but also cooling an already crashing economy)
II. Social Effects of the Great Depression
A. Poverty Spreads
1. Many Americans wrongly assumed that the Depression would be short-lived
2. People from all levels of society (professionals, laborers, etc.) are reduced to poverty (savings lost, property repossessed, homes taken, etc.)
3. The poorest, unable to pay rent or buy a home, became vagrants or moved into shanty towns
a. New York City was estimated to have 15,000 homeless
b. Shanty towns were often no more than card-board construction
c. Shanty towns were called Hoovervilles because people blamed the President for not solving the crisis
d. Vagrants called hobos moved from one area to another by hitch-hiking or jumping on rail cars
4. Farmers were particularly hard hit
a. Many had borrowed money to buy more land during the 1920s
b. Low prices for food meant they could not raise enough to pay back their loans
i. Some farmers destroyed their crops in hopes of reducing supply and driving up prices
ii. Destruction of food shocked many who were going hungry
c. Banks would seize the land to cover the unpaid loans
i. Farmers would often support each other by refusing to bid when banks auctioned the seized lands (whole farms would be sold for pennies to the same people who had lost them)
ii. Some states (i.e. Iowa) declared moratoriums on foreclosures so farmers would have more time to pay back mortgages
d. The Depression occurred during a time of great drought in the Great Plains (central America, from North Dakota to western Texas)
i. Severe weather and farming combined to create conditions for soil erosion
ii. Winds blowing soil created “black blizzards”
iii. The soil of the plains was carried as far as New England, DC, New York, and even out into the Atlantic Ocean
iv. The worst-hit area became known as the Dust Bowl
v. About 60% of the Dust Bowl farmers lost their farms
e. Thousands of families quit farming and move to the cities
i. 440,000 leave Oklahoma in the 1930s
ii. 300,000 leave Kansas
iii. Many move to California (about 100,000 to San Francisco, San Diego, and Los Angeles)
B. Poverty Strains Society
1. Impact on Health
a. Depression takes a serious physical and psychological toll on America
b. Some starvation and a great deal of hunger
c. Children suffer most from poor diet and poor medical care
d. People grew food in gardens, begged, or dug through garbage
2. Stress on Families
a. Many families were forced to move in with relatives when they lost their homes
b. Men felt particularly ashamed at being unemployed, particularly if wives had work
c. Some men abandoned their families out of embarrassment
d. Women who worked were accused of taking jobs away from men
e. Married women were often refused jobs
i. American Federation of Labor endorsed the idea in 1931
ii. Henry Ford had refused to hire them even in the 1920s
f. Women were once again largely left with domestic service (cleaning, laundry, child-care, etc.), typing, and nursing – “women’s work”
3. Discrimination Increases
a. Hard times increased competition for jobs
b. White laborers became eager for low-paying jobs traditionally accepted only by minorities
c. Hispanics and Asians, even some born in the United States, were deported
d. Unemployment among African Americans hits 56% in 1932
i. Government relief programs discriminated against blacks
ii. Black churches (i.e. Harlem evangelist Father Divine) and the National Urban League organize private assistance (soup kitchens, etc.)
e. Treatment of blacks in the South grew worse
i. Lynchings increased
ii. Basic civil rights (education, voting, health care) were denied
f. The Scottsboro Case highlighted discrimination
i. March, 1931 – nine black youths are arrested for raping two white women on a train near Scottsboro, Alabama
ii. Eight of the nine are convicted and sentenced to die by an all-white jury without even being able to hire a defense attorney
iii. Convictions were eventually overturned but only after four of the youths spent several years in jail
iv. Case becomes useful for propaganda by northern groups, including the Communist Party
C. Stories of Survival
1. Stories of the Depression inspire art and literature
a. John Steinbeck’s novel, The Grapes of Wrath, is considered the masterpiece of the era
b. Photographer Dorothea Lange records images that have a great impact
2. Americans found creative ways to survive on a few dollars a week
3. The situation doesn’t really improve for many until WWII
4. Many of the Depression Generation (those who were children during the Depression) exhibit signs of a Depression Mentality long afterwards
a. Continue to pinch pennies even when they become wealthy
b. Put money in mattresses rather than banks
c. Refuse to purchase things on credit
III. Surviving the Great Depression
A. Americans Pull Together
1. People from all situations often helped each other to survive
a. Tenants would join together to protest rent increases or evictions
b. Vagrants (hobos) would communicate tips and advice to each other
c. Farmers helped each other keep their farms and equipment when banks tried to foreclose and sell them at auction (Penny Auctions)
2. Many young people leave home seeking better situations
a. In the 1930s some 250,000 teenagers were living on the road
b. Illegally riding trains was a popular method of travel
i. Faced danger of arrest or injury
ii. Most settled down when Depression ended
c. Some went looking for work, others for adventure
B. Seeking Political Solutions
1. Few Americans call for violent political change despite bad times
i. In Europe, the Depression caused riots and political upheaval
ii. Americans put more trust in the democratic process
2. Radical reform movements do gain in popularity
i. Communist Party recruits some 14,000 members
ii. Communist candidate for president in 1932 gets just over 100,000 votes
iii. Socialist candidate for president in 1932, Norman Thomas, gets just under 900,000 votes (2.2% of the total)
iv. Proposals for the redistribution of wealth and social welfare programs attract support
C. Depression Distractions
1. Humor
a. Jokes and cartoons helped people survive the bad times
b. President Hoover is the target of many jokes
i. Hoovervilles – Shanty Town
ii. Hoover Blankets – Newspapers
iii. Hoover Flags – Empty pockets turned inside out
iv. Babe Ruth, making more than the President ($80,000) quipped “I had a better year than he did.”
2. Monopoly
a. Board game created by Charles B. Darrow of Germantown, PA
b. Based on properties in Atlantic City, NJ
c. Allowed poor people to fantasize about money and real estate
d. Produced by Parker Brothers in 1935, became an instant hit
e. Approximately 500 million people have played the game
D. Signs of Change
1. When no one knew when times would get better, Americans looked for any sign that life was improving
2. Prohibition Repealed
a. In February, 1933, after 15 years, Congress repeals Prohibition by passing the Twenty-First Amendment (ratified later that year)