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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