Chapter 18 History - The Stock Market Crash/The Great Depression
What were Okies?
"Okies" were people from Oklahoma and other states affected by the Dust Bowl that were moving west to California to escape the effects of the Dust Bowl. With the soil very infertile, dust storms burying farms, crop prices very low, and banks demanding payment on mortgages, many farmers lost their farms and had no choice but to move west. Some farmers just gave up on their farms and moved west. These people were seeking work in California on farms to try to make money to rebuild their lives, but many Californian farmers conned people into working for mere pennies, so many people could not attain this dream.
What is the public response to Hoover's response?
-There are hunger marches in which people march in front of the White House. -Farmers start destroying some of their own crops to decrease supply and therefor drive prices back up
What are the 7 reasons for the Stock Market Crash/The Great Depression?
1. Buying on margin 2. Speculation (bank runs) 3. Wealth is not evenly distributed (overproduction) 4. Installment buying leads to big debts (overproduction) 5. Decline in foreign trade 6. Prosperity of the 1920s didn't help farmers 7. Federal Reserve's mistakes
What are the two problems associated with bank runs?
1. When the stock market goes down, people (like brokers and investors) owe money to the banks and they can't pay it back because the stocks aren't making money. Therefor, the bank doesn't have as much money. 2. Businesses depend on long term investors, and short-term investors who buy and sell stock quickly hurt the company because they pull their money out before a company gets a chance to use it and sometimes these speculators take small earnings with them if the stock price has gone up since they invested.
What is a bank run?
A bank run occurs when a lot of people run to withdraw their money from a bank all at once. When the stock market crashed, everyone ran to the banks to get their money because they thought it was, of course, safest with them. But banks loan out money to companies and people in order to make money, so they don't have everyone's money physically in the bank at once. When everyone went and demanded their money, the banks didn't have it, so many banks collapsed and people lost all of their savings if they didn't get their money out in time.
The 1920s were an example of what kind of market?
A bull market
What percent of the workforce was unemployed in 1933?
A quarter of the workforce (25%) was unemployed at this time. This is just counting people that wanted a job, not elderly or children. People job-shared and did part-time jobs in order to continue making money. People also did whatever they could to continue making money, such as selling apples on the street.
Explain how installment buying leads to big debts (also linked to overproduction).
An installment plan allows purchasers to make small down payments on an item and then pay the rest back in small monthly installment plans. Companies manufactured products at a high rate because they were selling products quickly to the upper class (there was a buying frenzy in the 1920s), but they didn't slow down production as sales slowed, so they had to target new customers. They targeted the middle and poorer class by allowing people to buy on installment plans. But of course people can't just have one of the new toys that is being produced, they have to have the vacuum AND the washing machine AND the car, and if they are buying these things on installment plans (which have interest rates) then the amount they are paying each month goes up because they are paying off more items. Thus, people have more debt that they are paying off.
Why does the Reconstruction Finance Agency make loans to these causes?
Banks - because banks need money so that they can lend money to people and businesses (businesses can create jobs) Railroads - so they can hire people and get products to places where people want to buy them Agriculture - farmers are still struggling
Explain buying on margin.
Because of the change in the mentality about debt in the 1920s, people would buy on margin in the stock market. This meant that they would pay a broker a small amount of money (say $100) to buy a share of stock worth more than that amount (ex. $1000). Then, as the stock rose in value because the market was increasing, then the broker would be paid back via the rising stock value. The person would officially own the $1000 share of stock when the stock had made enough to pay back the broker for the loan he gave the person to purchase it (in this case the stock would have had to earn $900 to pay back the broker).
What was the mentality about debt before and during the 1920s?
Before the 1920s, people did not like debt. They saw it as a flaw of character if someone had debt (you just didn't go into debt; if you wanted to buy something, you saved up for it). During the 20s, however, there was a huge change in mentality about debt. Suddenly, as new advances in technology make new things available - like cars and washing machines - people want to buy these things right away. So the people who cannot afford to pay for these things all at once go into debt to purchase them right away. They do things like buy on margin (and buy things on installment plans) and take out loans.
Explain the problem that wealth was not evenly distributed (associated with overproduction).
Everyone got richer in the 1920s; the rich got a lot richer, and the poor got a little bit richer. As the rich got richer, they went out and bought all of the cool new appliances that were being produced and sold (like vacuum cleaners, cars, etc). Companies love that the rich people can come in and buy things instantly and quickly (they are selling a lot of products), but when the rich people had bought a lot of what they wanted and the sales were dropping, companies did not stop manufacturing things at a fast pace. This led to overproduction, so companies had to find ways to target the middle and low class people.
Explain how decline in foreign trade was a cause for the Stock Market Crash. (The Great Depression was world-wide, America was just the epicenter.)
Foreign markets could have purchased more American goods, and this could have saved American jobs because companies would have been making money (this would stimulate the economy). The problem is that usually one way to protect American manufacturers is to kill foreign competition, and this was Hoover's plan. He imposed higher tariffs on foreign imports, hoping that this would encourage people to buy American products rather than cheaper foreign products. However, this plan backfired because Americans didn't have any money to buy American products or foreign products and foreign markets responded to raised tariffs against their countries by imposing tariffs against American products. Now American goods weren't being sold in America or overseas.
Who was Herbert Hoover?
Hoover became president in 1928; previously, he had worked for three consecutive presidents (Wilson -Dem.; Harding -Rep.; Coolidge -Rep.)
Hoover resists helping, but he eventually creates what agency? What does this agency do?
Hoover creates the Reconstruction Finance Agency, which makes loans to banks, railroads, and agriculture.
Why doesn't Hoover want to give aid directly to people who are struggling?
Hoover doesn't want to give aid directly to poor, unemployed, and homeless people because he doesn't want the people to think that they don't have to work and the government will just bail them out. He wants people to go get jobs. However, the people respond by pointing out that they want jobs, they want to work, but there are no jobs to be had.
What does Hoover do to try to save and create jobs?
Hoover first tries to convince companies not to fire people, but they refuse because they don't have the money to keep people on staff. Hoover then tries to convince state governments to start public projects to create jobs, but the states refuse because they don't have the money
What was Hoover's response to the Great Depression?
Hoover said that the Great Depression was just a bump in the road to prosperity, and he said that there was nothing really wrong. He basically tells people to stop whining and it will pass. Hoover believes in laissez-faire, which means that the government won't interfere in the economy
Why didn't these farmers give their surplus crops to the people in need?
If they gave away their crops, they would eventually have no money themselves. It would also severely damage crop prices. After all, why would anyone go to a farmer and buy produce when another farmer was giving it away?
What does Hoover do in 1932? Why this year?
In 1932, Hoover signs the relief bill, which gives aid directly to people who need it. He signs this bill in 1932 because it is an election year. Hoover knows he will not be reelected as president, but he wants to help his Republican Party members get reelected and keep people from hating the Republican Party because theydid not help the people.
How are buying on margin (speculation) and buying on installment plans similar?
In both cases, people are going into debt to buy something (either stock or a product) and just assuming that they will be able to pay it back later. When the Stock Market Crash hits, they cannot pay their debts for these items.
What is a Bear Market?
In general, the market is declining
What is a Bull Market?
In general, the market is rising
Where did all the money go during the Great Depression???
It didn't "go" anywhere, it just wasn't there (yet). During the 1920s, everyone was taking out loans and going into debt to buy things. These things basically just mean "I'll pay you later." Basically, everyone was just living with future money. Everyone was banking on that money that they were spending being there later (they would keep their job and continue getting their paycheck, or the stock they purchased would continue to rise in value
Life was very hard for many people during this time. What are some ways people tried to "escape" from their lives?
Movies, radio, art, and literature became very popular because people wanted to escape from everyday life. Movies: Gone with the Wind, Snow White and the Seven Dwarfs, The Wizard of Oz. People went to the movies because they often had air conditioning and because the movies allowed them to escape from the stresses of life. Art: American Gothic by Grant Wood shows how stressful life as a farmer is. Radio: Soap companies would sponsor radio "soap operas," which were radio story shows that had long, complicated storylines Literature: lots of books were being written to help people "escape" from their lives, just like movies. The most famous book from this time was The Grapes of Wrath by John Steinbeck
What were Hoovervilles?
People would lose their jobs, not be able to pay their mortgage, and then lose their house. These homeless people and families would move into Hoovervilles, which were communities of lots of temporary houses homeless people made out of whatever material they could find. These were shantytowns
What are public works projects?
Projects paid for by the state or federal government to build roads, bridges, schools, libraries, parks, etc. (Anything that benefits the public) These projects create jobs
What was Hoover's policy about the government interfering in the economy?
The 20s were a time of great economic prosperity. Everyone is making money (the rich are getting much richer, the poor are getting a little bit richer) and Hoover doesn't want the government to interfere and stand in the way of everyone making money, so this is a period of laissez-faire for businesses
What was the Bonus Army?
The Bonus Army was a large group of about 20,000 veterans who traveled across the country to D.C. and demanded their WWI bonuses. This movement started in California and more and more veterans joined as they moved east. The bonuses they wanted were a nice "gesture" from the U.S. Government after WWI when the soldiers returned home as heroes. The government promised today each veteran about $1500 in 1945, but when times got tough some of the veterans wanted their money early. The large group of veterans camped out in D.C. and asked for their money, but Hoover refused. The Bonus Army was given many warnings to leave, and their camps were becoming a health hazard. Hoover eventually ordered the U.S. Army to evict the Bonus Army, and the army attacked the Bonus Army camps, leaving two people dead: a sleeping veteran and a baby. The Bonus Army was disbanded, but it was a PR nightmare for Hoover. They never actually got their bonuses.
What was the Dust Bowl? When did it happen? Why did it happen?
The Dust Bowl (1932-1937) was a man-made and natural disaster that occurred when farmers over-planted their fields and overworked the once-rich soil. A drought hit the Midwest, and the already dry soil turned to dust. Wind would pick up the dust and create dust storms that could bury homes and entire communities in mounds of dust. These storms could be deadly if one breathed in too much dust.
What were the Federal Reserve's mistakes?
The Federal Reserve made three main mistakes in this time period: 1. During the 1920s, they kept the interest rates low. The interest rates were low enough that people were more inclined to take out larger loans in order to buy on margin, engage in speculation, and buy products. 2. When the stock market crashed and the Depression started, the Federal Reserve did nothing. They should have done something in response! 3. When the Federal Reserve finally did something in response to the Great Depression, they raised the federal interest rates. This was a problem because the money supply dried up and no one could take out loans. Instead they could have lowered the interest rates.
Explain why the prosperity of the 1920s didn't help farmers
The Great Depression kind of started in the 1920s for farmers. During WWI, the American government urged farmers to grow crops like crazy because they were trying to feed the American public, the American army, and part of the Allied public and Allied armies. Farmers had to spend some money in order to make a lot of money, they did things like buy more land, buy farming equipment, and buy new farming appliances like tractors. Many took out loans to do these things because they thought that they were going to continue making money like crazy as they did during WWI. When the war ended, the demand for crops slowed, but the supply was still high because farmers were producing as much as they could. Crop prices plummeted because supply was high and demand was low. Farmers could not pay back their debts because they were not making money. To try to decrease supply and drive up price, farmers would leave their new large plots of land empty. This is when terrible droughts hit the Midwest and the unplanted areas turned to dust (creating the Dust Bowl)
What are the federal interest rates? How do they tie into the Great Depression?
The government has a lot of money, and they loan to banks, who then loan that money out to people at a higher interest rate. The federal interest rates that the Reserve set directly influence the rates that the banks charge, because if the Reserve's rates are higher, then the bank rate will be higher because the banks still need to make money. The Federal Reserve kept interest rates low throughout the 1920s, so people were more inclined to take out large loans because money was "cheap" and the interest rates were low
What is a margin call?
The stock broker goes to the investors that they have bought stock for and demands the money they are owed. The stock brokers did this when the market started dropping before the crash and especially after the crash, but few people actually had the money to pay the brokers. In turn, the brokers could not pay back the banks (from whom they had made loans to buy stocks for people)
Was the Stock Market Crash the reason for the Great Depression? If not, what was it?
The stock market crash did not cause the Great Depression. Everything was lined up for the Depression in the 20s, the crash just acted as a trigger for the Depression.
What does the Federal Reserve do?
They are responsible for overseeing the economy of America; they are responsible for our money; and they are responsible for setting the federal interest rates
What happened on October 28, 1929?
This is known as Black Tuesday, and it was the day the "bottom fell out" of the stock market. The stock market crashed and everyone was selling stocks like crazy, which just made it drop farther. The week before, a large group of people had sold a lot of stock, and this made people nervous because they thought that those people must know something is about to happen (in reality they had just simply sold some stock). People started selling stock the week before October 28, and the snowball of people selling stock led to the Stock Market Crash on October 28.
What was the issue with buying on margin?
This type of stock purchasing banked on the fact that the market was going to keep rising and the success of it depended on the stock rising enough in value for the person to be able to pay back the stock broker. However, when the market crashed in 1928, people could not pay back the stock brokers because their stocks were no longer making money
Explain speculation.
When people bought and sold stocks based on what they thought was going to happen; they assumed in the 1920s that the market was going to continue to climb. Stock market investors would make purchases of stock without really considering a company's earnings. Speculation can also refer to people who buy stock quickly, wait for a very small gain, and then sell it instantly to make a small amount of money off of it. This hurts companies because they don't get a chance to use the person's money, but the person took their money back out with the little interest they had made.
What happens with buying on installment plans when the stock market crashes?
When the stock market crashes, people have to stop buying new appliances because they don't have the money. Companies did not see the impending drop in sales and still produced products at a high rate. The high supply of products and the low demand hurt companies, and they had to start firing people because they were not making enough money to keep staff. As people lost their jobs, they really couldn't afford to buy things, and so companies had to fire more people and it becomes a cycle.
