Download Decreased Manufacturing With the stock market crash and the fears

Decreased Manufacturing
With the stock market crash and the fears of further economic woes, individuals from all classes
stopped purchasing items. This then led to a reduction in the number of items produced and
thus a reduction in the workforce.
As people lost their jobs, they were unable to keep up with paying for items they had bought
through installment plans (credit) and their items were repossessed. More and more inventory
began to accumulate in the factories and businesses. The unemployment rate rose above 25%,
which meant, of course, even less spending to help alleviate the economic situation.
With massive draws on funds during the Great Depression, banks had no money to lend to
businesses, and this lack of available credit led to a further worsening of economic conditions.
Unemployment
Unemployment levels in the United States during the Great Depression reached as high as 25%.
There were essentially two main causes behind this massive unemployment rate. After the Wall
Street Crash in October 1929, consumer buying confidence plummeted and factories producing
consumer goods had no choice but to cut their production and lay off workers. Ironically
because of this, consumer item prices actually dropped, making the actual value of wages
higher.
In the early 1920s, interest rates were lowered and this resulted in a housing boom.
Construction employment was very high during the 1920s but by the 1930s interest rates rose
again. Because of the higher interest rates and general job insecurity, house sales declined and
many builders were laid off.
Self-employed farmers were also vulnerable during this time. The Great Plains region
experienced drought and falling commodity prices throughout the country caused many farmers
to lose their farms to foreclosure. Many farmers in the drought-affected Dust Bowl simply
abandoned their property and headed west in search of paid work. Farming families were split
up as one parent traveled to other states in search of work. A massive subculture of hobos rose.
These unemployed people rode on railroad boxcars in search of employment. Across the
country shantytowns, or “Hoovervilles”, sprung up to house unemployed in scrap shelters,
packing crates and even disused automobiles. Soup kitchens were set up in these shantytowns
and the unemployed did anything to keep off starvation like selling apples on sidewalks.
STOCK MARKET CRASH
New York Stock Exchange experienced the worst financial panic the country had ever seen.
Nothing quite rivals the terror and devastation of Black Tuesday: October 29, 1929.
Before the Crash: Americans had a lot to be proud of back then: World War I was thoroughly
behind them, radio had been invented, and automobiles were growing cheaper and more
popular. Sure, the disparity between the rich and the poor had widened within the past decade,
but Americans could now buy goods on installment plans — a relatively new concept — and
families could afford more than ever before. Stocks were on a tear: between 1924 and 1929, the
Dow Jones Industrial Average quadrupled. At that time, it was the longest bull market ever
recorded; some thought it would last forever. Unsurprisingly, this exuberance lured more
investors to the market, investing on margin with borrowed money. By 1929, 2 out of every 5
dollars a bank loaned were used to purchase stocks.
In the last hour of trading on Thursday, Oct. 23, 1929, stock prices suddenly plummeted. When
the closing bell rang at 3 p.m. people were shaken. No one was sure what had just happened,
but that evening provided enough time for fear and panic to set in. When the market opened
again the next day, prices plunged with renewed violence. And then came Black Monday. As
soon as the opening bell rang on Oct. 28, prices began to drop. Huge blocks of shares changed
hands, as previously impregnable companies like U.S. Steel and General Electric began to
tumble. By the end of the day, the Dow had dropped 13%.
As the story goes, the opening bell was never heard on Black Tuesday because the shouts of
"Sell! Sell! Sell!" drowned it out. In the first thirty minutes, 3 million shares changed hands and
with them, another $2 million disappeared into thin air. Phone lines clogged. Trades happened
so quickly that although people knew they were losing money, they didn't know how much.
Rumors of investors jumping out of buildings spread through Wall Street; although they weren't
true, they drove the prices down further. Brokers called in margins; if stockholders couldn't pay
up, their stocks were sold, wiping out many an investor's life savings in an instant. One trader
fainted from exhaustion, was revived and put back to work. Others got into fistfights. When the
market closed at 3 p.m., more than 16.4 million shares had changed hands, using 15,000 miles
of ticker tape paper. The Dow had dropped another 12%.
In total, $25 billion — some $319 billion in
today's dollars — was lost in the 1929 crash.
Stocks continued to fall over subsequent
weeks, finally bottoming out on November 13,
1929. The market recovered for a few months
and then slide again, gliding swiftly and
steadily with the rest of the country into the
Great Depression. Companies incurred huge
layoffs, unemployment skyrocketed, wages
plummeted and the economy went into a
tailspin.
Banking Crisis
One of the most significant aspects of the Great Depression in the United States was the erosion
of confidence in the banking system. Weaknesses were apparent by 1930 and a growing wave of
failures followed. As banks closed their doors, a chain reaction occurred that spread misery
throughout the country.
One immediate result of bank closures was the contraction of the money supply. With less
money in circulation, the purchasing power of consumers was sharply reduced. Manufacturers
and retail establishments attempted to entice consumers by dropping prices on their goods — a
move that was largely in vain. Unable to move their merchandise, factories and stores then
resorted to scaling back production and cutting the work force.
By the end of 1932, more than 13 million American workers were unemployed. Anxious citizens
withdrew their deposits from banks and hoarded cash and gold. By early the next year, more
than 9,000 banks had failed. In early February, 1933, Louisiana needed a one-day bank holiday
to allow the Hibernia Bank, which was seeing a run on its cash, enough time to bring in more
currency. By the following Monday, the Hibernia Bank had received the necessary funds and
remained open, and for that bank at least, the banking crisis was temporarily averted.
The crisis, however, didn't stop. On March 14, the state of Michigan, home of the nearly
prostrate auto industry, announced an eight-day holiday and in the process touched off panics
in neighboring states.
By Inauguration Day in March, nearly all of the nation’s banks were either closed or had at one
point been closed, and of those remaining open, most were operating under special state rules
designed to protect them.
Outgoing Herbert Hoover blamed President-elect Franklin Roosevelt for the crisis and the
deterioration of public confidence in the banks. Hoover had asked on several occasions for
public declarations from Roosevelt that he would maintain balanced budgets and do all within
his power to fight inflation — promises that would have meant more to the business and
financial communities than to the millions of unemployed. Roosevelt refused to allow his future
commitments to be pinned down, which left Hoover angry and anxious to be out of office. The
bank crisis of 1933 was front and center when Franklin Roosevelt took office.
On March 6, 1933, in order to keep the banking system in America from complete collapse, the
President used the powers given him by the Trading with the Enemy Act of 1917 and suspended
all transactions in the Federal Reserve as well as other banks and financial institutions. The bank
holiday was the opening step in the New Deal.
HOOVERVILLES
A Hooverville was the popular name for a shanty town, examples of which were found in many United
States communities during the Great Depression of the 1930s.
The word "Hooverville" derives from the name of the President of the United States at the beginning of
the Depression, Herbert Hoover. They used Hoover's name because they were frustrated and
disappointed with his involvement in the relief effort for the Depression.
These settlements were often formed in horrible neighborhoods or desolate areas and consisted of
dozens or hundreds of shacks and tents that were temporary residences of those left unemployed and
homeless by the Depression. People slept in anything from open piano crates to the ground. Authorities
did not officially recognize these Hoovervilles and occasionally removed the occupants for technically
trespassing on private lands, but they were frequently tolerated out of necessity. Most people resorted to building their residences out of box wood, cardboard, and any scraps of metal
they could find. Some individuals even lived in sewer mains. Most of these unemployed residents of the
Hoovervilles begged for food from those who had housing during this era. Several other terms came into
use during this era, such as "Hoover blanket" (old newspaper used as blanketing) and "Hoover flag" (an
empty pocket turned inside out). "Hoover leather" was cardboard used to line a shoe with the sole worn
through. A "Hoover wagon" was a car with horses tied to it because the owner could not afford gasoline.
Hoovervilles were known to be a home for people who couldn't pay their mortgages.
Year
Number of Hoovervilles in America
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
403
1345
2674
2959
4123
4374
4473
5024
5140
5230
5331
Consumerism of the 1920s and its Decline
America emerged from WW1 as the world's leading economy, meaning that Americans were
considered to be the richest people in the world. This new wealth prompted a number of new
technological advancements to be made, including cars, radios and refrigerators, basically whitegoods that made life easier for people. Americans were driven by the desire to have all of the goods
that they wanted. During the 1920s everybody seemed to be buying everything, and businesses set
out to meet the demands of consumers, producing new products in record-breaking quantities.
Americans also started buying stocks in greater numbers, providing capital to already booming
companies. All the signs pointed upward, and starry-eyed men and women began to believe that it
was going to be a one-way trip, possibly forever.
Additionally the 1920s was the decade that mass-production was invented meaning that goods were
now produced cheaper and on a larger scale than ever.
Advertisement also played a major role in America’s consumerism; sophisticated new techniques
were developed to persuade people to buy newly available goods.
The actual Depression was caused by a combination of factors of international scope and great
complexity. In the United States, for example, the consumerism of the 1920s and the increase in
credit buying artificially accelerated the demand for consumer goods beyond what the real market
factors would have told. With the stock market crash, as purchasing power shrank and sales of
consumer goods slowed, manufacturers were forced to pull back, and more people lost their jobs. As
more became unemployed, the demand for consumer goods shrank even further and the gap
widened.
Buying on Margin
In the 1920s more people invested in the stock market than ever before. Stock prices rose so
fast that at the end of the decade, some people became rich overnight by buying and selling
stocks. People could buy stocks on margin which was like installment buying. People could buy
stocks for only a 10% down payment! The buyer would hold the stock until the price rose and
then sell it for a profit. As long as the stock prices kept going up, the system worked. However,
during 1928 and 1929, the prices of many stocks went up faster than the value of the companies
the stocks represented. Some experts warned that the bull market would end.
Buying on Credit
Buying on credit was a huge problem in the 1920s. Since the 20s was a period of great economic
boom, not many people took the future into consideration. Many people bought refrigerators,
cars, etc. with money that they did not have. This system was called installment buying. With
this system, people could make a monthly, weekly, or yearly payment on an item that they
wanted or needed. This happened until Black Tuesday, when the stock market crashed. The two
systems, installment buying and buying on credit, left millions of people in debt . When many
lost their jobs, they could not pay back the debts they had incurred.
Margin and credit caused the stock market and industry to grow at an uncontrolled pace.