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CHAPTER 33: POLITICS OF
BOOM AND BUST
Causes of the Great Depression
Supply and Demand
What were the Main Causes of
the Great Depression
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Agricultural and Industrial Overproduction
Tariffs
European Bankruptcy
Coolidge Prosperity (Hoover Optimism)
SPECULATION
The CRASH
A Return to REALITY
Mother Nature
Natural Business Cycle
Agricultural Overproduction
• Increased Supply + Decreased
Demand = Lower Prices
Farmers faced Depression
the entirety of the 1920s.
• Increased Demand + Decreased
Supply = Higher Prices
• We are in a time period when
Supply is constantly
growing/increasing…. But what
about demand?
Too much food grown.
What happens when there
is more supply and there is
demand?
Forclosure Auction
Industrial Overproduction
• Industries also produced enormous amounts of goods
(specifically cars, vacuums, radios)
• How long does a car last? Vacuum? Radio?
• What happens when everyone has bought one? Where to turn
now?
• So now we see SUPPLY has increased, but demand is quickly
decreasing…HMMMM… What does that mean again?
• What do corporations do when prices fall to continue making a
profit?
Tariffs
Fordney-McCumber Tariff
Hawley Smoot Tariff
How do these contribute
to the Great Depression?
Remember the law of
supply and demand, plus
ag and industrial
overproduction!
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European Bankruptcy
Mother Nature
After trying to pay back their debts, we see
Mother nature always enjoys
many countries in Europe begin to default
(not pay) their debts.
European banks fail
Britain raises interests rates, hoping to keep
money in the country
Helps cause the “crash”
destroying American dreams!
Mississippi River Flood – 1927
2 Florida Hurricanes – 1928
Dustbowl Drought – 1930-
1936 (Depression had hit, but
this worsened it and
extended it)
Natural Business Cycle
DEPRESSION!
Prosperity, Speculation, and a
Return to Reality
• The major causes along with overproduction… a False
Sense of Prosperity
• Some prosperity in the 20s was real
– Production was up 65%
– Wages were up
– Profits were up
• People were optimistic, happy, and wanting to become a
part of it
• Coolidge’s calm (along with Mellon’s financial policies)
produced an aura of prosperity that infected Americans
SPECULATION
• This period of prosperity will cause a
widespread epidemic of Speculation.
• Speculation – Get Rich Quick Scheme. The
idea of buying something for cheap and then
selling it high so that you can make a lot of
money really quickly.
Speculation Cont.
• Real Estate:
– Florida real estate boom of 1925-1927
• During the decade of the 1920s Florida will see a population increase
of 50% (Miami sees one of 400%)
• Boasting a great climate and proximity to eastern cities, Florida
becomes the hotspot for rich adventurers, pleasure-seekers,
sportsman, etc. (How many of those are in this country)
• Real estate speculators rush to Florida to buy up every piece of land.
They then sell it on Margin (low down payment of 10% with monthly
payments to follow)
• Speculation ends suddenly in 1927 and 28 when people begin
defaulting on mortgages, there are no more rich people to buy the
land, and 2 hurricanes destroy a lot of property
– California sees a similar speculative boom (but CA is more stable
and lasts much longer…. Even today CA is considered a paradise)
• We see speculation in 2 major areas:
• So where do speculators turn if Real Estate is not
profitable?
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Speculation in the Stock Market
Stocks Cont.
• Even when prices were at their highest people continue to buy buy
• By 1927 Market prices were incredibly high
• Industry experts predicted a steady decline in stock
values over the next few years (natural business cycle of
contraction or recession)
• Federal Reserve Board lowers interest rates to stave of
speculation but…
• American public becomes enamored with the stock
market… Speculators begin buying stocks on margin
(10% down… borrowing the rest from brokers… brokers
borrowed from banks)… The stock prices begin to rise
again and again….
• Everyone was involved: lower, middle, and upper classes
all were buying stocks in order to get rich quick.
buy!
• Stock prices become incredibly OVER-VALUED! (price of stock was
more than the profitability of the company)
• As profits and prices began to decrease in the consumer market
(again supply was far outstretching demand) and as foreign investors
began pulling their money out of America we see a mass orgy of
selling…. People attempt to get rid of their stocks but they are losing
money because the value of the stocks it going down (law of supply
and demand… A large of supply of stock with now demand means
that stock has lower value)
• THE CRASH of 1929… In one day over 16 million shares are sold
(previous record was 5 million)
Depression!
• Companies and individuals were broke… Margin traders
lost everything and couldn’t repay brokers… Brokers lost
everything… They could not pay their debts… Which
means banks were not receiving their money back that they
had loaned. (banks make money by loaning out deposits
and then receiving interest on that loan… Banks rarely have
a lot of cash on hand)
• This mass orgy will produce a PANIC which will lead people
to rush to the banks to save their money… But the banks
are broke… Banks begin to fail (over 5000 in the first few
years)… The economic system crashes…
Hoover and the Depression
Hoover as President
• Herbert Hoover wins the Presidential election of
Hoover’s Agricultural
1928
• He is a brilliant engineer
• Campaign promise : “A Chicken in Every Pot”
(continued prosperity!... Increases optimism that
the boom will continue)
• When the market crashes he ties himself to the
idea of “rugged individualism” and laissez-faire
economics.. But as time passes it becomes
painfully clear that action must be taken…
Marketing Act, passed in
June of 1929,
was designed to help the
farmers help themselves,
and it set up a
Federal Farm Board to help
the farmers.
In 1930, the Farm Board
created the Grain Stabilization
Corporation
and the Cotton Stabilization
Corporation to bolster sagging
prices by
buying surpluses.
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Hoover as President
The Tariff
The Hawley-Smoot
Tariff of 1930 raised the
tariff to an
unbelievable 60%!
Foreigners hated this
tariff that reversed a
promising worldwide
trend toward reasonable
tariffs and widened the
yawning trade gaps.
Why the Great Depression
The Great Depression might have
been caused by an
overabundance of
farm products and factory
products. The nation’s capacity to
produce goods had clearly outrun
its capacity to consume or pay for
them.
Also, an over-expansion of credit
created unsound faith in money,
which is never good for business.
Britain and France’s situations,
which had never fully recovered
from World War I, worsened.
In 1930, a terrible drought
scorched the Mississippi Valley
and thousands of farms were sold
to pay for debts.
Turning on Hoover
Change Over Time
By 1930, the depression was
Hoover unfairly received the brunt of
the blame for the Great
Depression, but he also did not pass
measures that could have made the
depression less severe than it could
have been.
Critics noted that he could feed
millions in Belgium (after World
War I) but not millions at home in
America.
a national crisis, and hardworking
workers had nowhere to
work, thus, people turned
bitter and also turned
on Hoover.
Villages of shanties and
ragged shacks were called
Hoovervilles and
were inhabited by the
people who had lost their
jobs. They popped up
everywhere.
Hoover Battles the Great Depression
Finally, Hoover voted to
withdraw $2.25 billion to
start projects to alleviate
the suffering of the
depression.
The Hoover Dam of the
Colorado River was one such
project.
The Muscle Shoals Bill,
which was designed to dam
the Tennessee
River and was ultimately
embraced by the Tennessee
Valley Authority,
was vetoed by Hoover.
He did not believe in
government tampering with
the economic
machine and thus moving
away from laissez faire, and
he felt that
depressions like this were
simply parts of the natural
economic
process, known as the
business cycle.
However, by the end of his
term, he had started to take
steps for the government to
help the people.
Hoover Battles the Great Depression
Early in 1932, Congress, responding to
Hoover’s appeal,
established the Reconstruction
Finance Corporation (RFC), which
became
a government lending bank. This was
a large step for Hoover away from
laissez faire policies and toward
policies the Democrats (FDR) would
later employ.
However, giant corporations were the
ones that benefited most from
this, and the RFC was another one of the
targets of Hoover’s
critics.
Why doesn’t trickle down
economics work?
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Hoover Battles the Great Depression
In 1932, Congress passed the NorrisLa Guardia Anti-Injection Act,
which outlawed anti-union
contracts and forbade the federal
courts to
issue injunctions to restrain strikes,
boycotts, and peaceful picketing
(this was good for unions).
Remember, that in past depressions,
the American public was often
forced to “sweat it out,” not wait for
government help. The
trend was changing at this point,
forced to do so by the Depression.
Routing the Bonus Army in
Washington
Many veterans, whom had
not been paid their
compensation for WWI,
marched to Washington,
D.C. to demand their entire
bonus.
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Hoover falsely charged that the
force was led by riffraff and reds
(communists), and the American
opinion turned even more
against him.
The “Bonus Expeditionary
Force” erected unsanitary
camps and shacks in vacant
lots, creating health hazards
and annoyance.
Riots followed after troops
came in to intervene (after
Congress tried to pass a bonus
bill but failed), and many
people died.
Hoover
How responsible was Hoover for the Great
Depression?
How should we view his presidency today?
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