Download The Economy of the 1920`s “The Business of America… is Business”

The Economy of the 1920’s
“The Business of America… is Business”
- Calvin Coolidge, 1923
1. After World War I
• Industries switched from
making war goods to consumer
goods
• Consumers were interested in
buying “luxury” items
• Items considered not
necessary but making
life more comfortable
• Examples: radios, cars,
telephones, electric
refrigerators
• Many of these items
1920s
required credit in order Candlestick
Phone
to purchase
1926 – Chrysler Tourer
Family listening to radio
2. Post-war Economic Boom
• Average income increased after WWII = more $ to spend
• More $ meant more people wanted luxury items
• Businesses made more $ = used profit to expand their
production and employment
• More employment = more workers making $
• More income = more $ to spend = more goods
purchased
• (Formula) High Production + High Spending = a
Growing Economy
• Rapidly growing economy = Bull
Market
• Falling economy = Bear Market
3. Buy Now – Pay Later!!!
• Installment Buying – pay for an item on a monthly fee
• Get product now, pay a small part of it each month until
it is completely paid for
• Don’t need the entire price upfront
• Allows more customers to buy more expensive items
• I.B. = creates a demand for more products
• But also put people in debt (cars, houses, etc.)
• Still have to pay the entire price (plus interest) over time
• (This is how credit cards work – can be very dangerous)
• If you stop making payments on the item, the bank or
company can take it away (lose your car or house)
4 .Get Rich Quick in the Stock Market
• People had long invested in the stock market
(Philadelphia – 1790)
• Stock – a share of ownership in a company’s profits
• When people buy stock – businesses use that money to
expand the company (hire more people, make more goods)
• As the business grows and sells more products – the
value of the stock can increase
• Can also increase if more people buy more stock
• People literally make money over night
• But only get the money once you sell the stock
• If the value of the stock goes down – people lose $
• The goal is to buy at a low price and sell at a high price
5 . On-margin
• Businesses wanted to find a way to sell more stock in
at a faster rate (raise more $ to expand)
• Stocks could be purchased “on-margin”
• On-margin – buyer pays a small % of total stock cost,
loans the rest of the cost from the bank/stockbroker
• (Example) – Buyer pays 10%, loans 90%
• Loan – money borrowed that must be paid back
• On-margin allowed stock buyers to buy more shares
with the same amount of $
• Hold the stock until its value increases – then sell
• Repay the loan (bank/stockbroker) – keep what’s left
• On-margin only works if value goes up
• Value falls – lose money and still have to pay back the
loan
Presidents of the 1920s
• Mostly left the economy alone
• Laissez- Faire = gov’t keeps hands off
• Warren G. Harding (1921-1923) “Return to
normalcy”
• Calvin Coolidge (1923-1929) “The
business of America is business”
• Herbert Hoover (1929-1933) “The end of
poverty”
6. Trouble on the Horizon
• For most people – the economy was growing perfectly
• Bu all was not well the economy (2 reasons)
1. Farm prices were falling (loans taken out during WWI)
• Farmers were not making as much money on their
goods – many went bankrupt
• Bankrupt – lacking the money to run your business
2. Banks were loaning depositor's $ to stock buyers/brokers
• If the stock market were to fall……
• People may not be able to repay their loans to the bank
• Banks would not have people’s money when they came
to get it
• Millions of savings would be lost over night