Economic Troubles on the Economic Troubles on the HorizonHorizon

Things Aren’t as Good as They

Appear to Be!

Signs of TroubleSigns of TroubleMajor Industries in Trouble: -- RR vs. -- Coal Mining vs. -- Lumber Co.’s

Farmers in Trouble: -- Post WWI: crop prices -- grow more crops = prices more! -- Can’t pay debt to banks -- Banks seize farms and equipment

Consumers:

-- Buying less b/c of rising prices, stagnant wages

-- overbuying on credit (installment plan) = DEBT!

Uneven Distribution of wealth:

-- widening income gap

Signs of TroubleSigns of Trouble

Uneven Income Distribution, 1929

- Over $10,000 = 0.1% of population- 80% of families have no savings

TODAY: The poorest 90 percent of Americans make an average of $31,244 a year, while the top 1 percent make over $1.1 million:

                                                                    

According to this chart, most income groups have barely grown richer since 1979. But the top 1 percent has seen its income nearly quadruple:

                                                                    

And this chart suggests most Americans have little idea of just how unequal income distribution is; they'd like things to be divvied more equitably:

                                                                           

Herbert Hoover Elected Pres., 1928Herbert Hoover Elected Pres., 1928 • Laissez-Faire Republican President

• Why elected?- Continue the prosperous 1920s!

“We in America are nearer to the final triumph over poverty than ever

before.”

Party On!

Stock Market = Riches?Stock Market = Riches?* By 1929, 4 million Americans own stock (3% of pop.)

* Speculation: buying risky stocks & bonds to make a quick profit

* Buying on margin: Paying a small % of a stock’s price as a down payment and borrowing $ for the rest. An “installment plan” for stocks.

The Stock Market Crashes: The Stock Market Crashes: Oct. 29, 1929, “Black Tuesday”Oct. 29, 1929, “Black Tuesday”

• Stock market plunges on Oct. 24th

• Oct 29th: 16.4 million shares “dumped”

• People who had bought on margin now

had a huge debt

● Others lose their life savings (no ins.)

● Total investments lost = $30 billion ( = to cost of WWI)!

Financial CollapseFinancial Collapse

• Banks and other businesses go bankrupt

- By 1933 11,000 of 25,000 banks had collapsed

● 1929- 1932: 90,000 businesses go bankrupt- Gross Nat’l Product (U.S.’ total output of goods & services) is almost cut in ½

● Unemployment rises drastically-1929 = 3% unemployment rate (1.6 mill. pple)

-1933 = 25% unemployment rate (13 mill. pple)

Gov’t Reaction: Hawley-Smoot Tariff ActGov’t Reaction: Hawley-Smoot Tariff Act• highest tariff in U.S. history

• designed to protect American farmers and manufacturers– plan actually backfired

• Worldwide trade drops 40%

Causes to The Great Depression

• Tariffs lower world trade

• A crisis in the farm sector & other industries.

• The availability of easy credit = debt.• An unequal distribution of income.

Please Answer the Following Questions Below Your Notes

• 1. What were the signs of financial trouble during the 1920s?

• 2. Who was president during the crash of the Stock Market and why had he been elected?

• 3. How did speculation and buying on the margin contribute the Crash of ’29?

• 4. What were the effects of the Crash?

• 5. Explain the causes of the Great Depression in your own words.

Today’s Crisis

• Please watch the video and be ready to discuss the questions & situation after…

• Pay close attention please

Questions: Please copy ?s and answer as you watch the video

• 1. Why do investors stop buying treasury bills from the Federal Reserve?

• 2. How does lowering the federal interest rate effect credit?

• 3. Explain Collateralized Debt Obligations (CDOs)

• 4. Explain Credit Default Swaps

• 5. Explain Sub-Prime Mortgages

• 6. Explain Frozen Credit Markets

Homeowners

Mortgages (loans) on Houses

“Main St.”

Investormoney

Institutions (mutual funds, pension funds, insurance

co.’s)

Financial systems

Banks, brokers

“Wall St.”