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670 C

HAPTER 22

Terms & Names

MAIN IDEA

One American's Story

The Nation’s Sick

Economy

•price support

•credit

•Alfred E. Smith

•Dow Jones

Industrial

Average

•speculation

•buying on margin

•Black Tuesday

•Great Depression

•Hawley-Smoot

Tariff Act

As the prosperity of the

1920s ended, severe

economic problems gripped

the nation.

The Great Depression has had

lasting effects on how

Americans view themselves

and their government.

WHY IT MATTERS NOW

Gordon Parks, now a well-known photographer, author, and ﬁlm-

maker, was a 16-year-old high school student in the fall of 1929. He

supported himself as a busboy at the exclusive Minnesota Club,

where prosperous club members spoke conﬁdently about the econo-

my. Parks, too, looked forward to a bright future. Then came the

stock market crash of October 1929. In his autobiography, Parks

recalled his feelings at the time.

A PERSONAL VOICE GORDON PARKS

“ I couldn’t imagine such ﬁnancial disaster touching my small world;

it surely concerned only the rich. But by the ﬁrst week of November

. . . I was without a job. All that next week I searched for any kind of

work that would prevent my leaving school. Again it was, ‘We’re ﬁr-

ing, not hiring.’. . . I went to school and cleaned out my locker, know-

ing it was impossible to stay on. A piercing chill was in the air as I

walked back to the rooming house.

”

—A Choice of Weapons

The crash of 1929, and the depression that followed, dealt a crushing blow to

the hopes and dreams of millions of Americans. The high-ﬂying prosperity of the

1920s was over. Hard times had begun.

Economic Troubles on the Horizon

As the 1920s advanced, serious problems threatened economic prosperity.

Though some Americans became wealthy, many more could not earn a

decent living. Important industries struggled, and farmers grew more crops and

raised more livestock than they could sell at a proﬁt. Both consumers and

farmers were steadily going deeper into debt. As the decade drew to a close, these

slippages in the economy signaled the end of an era.

▼

Gordon Parks,

shown here in 1968

discussing the

movie version of his

autobiographical

novel, The Learning

Tree.

p0670-677aspe-0622s1 10/17/02 9:04 AM Page 670

Page 1 of 8

INDUSTRIES IN TROUBLE

The superﬁcial prosperity of the late 1920s shroud-

ed weaknesses that would signal the onset of the Great Depression. Key basic

industries, such as railroads, textiles, and steel had barely made a proﬁt. Railroads

lost business to new forms of transportation (trucks, buses, and private automo-

biles, for instance).

Mining and lumbering, which had expanded during wartime, were no longer

in high demand. Coal mining was especially hard-hit, in part due to stiff compe-

tition from new forms of energy, including hydroelectric power, fuel oil, and nat-

ural gas. By the early 1930s, these sources supplied more than half the energy that

had once come from coal. Even the boom industries of the 1920s—automobiles,

construction, and consumer goods—weakened. One important economic indica-

tor that declined during this time was housing starts—the number of new

dwellings being built. When housing starts fall, so do jobs in many related indus-

tries, such as furniture manufacturing and lumbering.

FARMERS NEED A LIFT

Perhaps agriculture suffered the most. During World

War I, prices rose and international demand for crops such as wheat and corn

soared. Farmers had planted more and taken out loans for land and equipment.

However, demand fell after the war, and crop prices declined by 40 percent

or more.

Farmers boosted production in the hopes of selling more crops, but this only

depressed prices further. Between 1919 and 1921 annual farm income declined

from $10 billion to just over $4 billion. Farmers who had gone into debt had dif-

ﬁculty in paying off their loans. Many lost their farms when banks foreclosed and

seized the property as payment for the debt. As farmers began to default on their

loans, many rural banks began to fail. Auctions were held to recoup some of the

banks’ losses.

Congress tried to help out farmers with a piece of legislation called the

McNary-Haugen bill. This called for federal price-supports for key products

such as wheat, corn, cotton, and tobacco. The government would buy surplus

crops at guaranteed prices and sell them on the world market.

President Coolidge vetoed the bill twice. He commented, “Farmers have

never made money. I don’t believe we can do much about it.”

CONSUMERS HAVE LESS MONEY TO SPEND

As farmers’ incomes fell, they

bought fewer goods and services, but the problem was larger. By the late 1920s,

Farm equipment

is auctioned off

in Hastings,

Nebraska.

▼

A. Answer The

older industries

such as textiles,

steel, and rail-

roads, which

were basic to

the fundamental

well-being of the

economy, were

barely proﬁtable.

MAIN IDEA

Identifying

Problems

What industrial

weakness signaled

a declining

economy in the

1920s?

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Americans were buying less—mainly because of rising

prices, stagnant wages, unbalanced distribution of income,

and overbuying on credit in the preceding years. Production

had also expanded much faster than wages, resulting in an

ever-widening gap between the rich and the poor.

LIVING ON CREDIT

Although many Americans appeared to

be prosperous during the 1920s, in fact they were living

beyond their means. They often bought goods on credit—

an arrangement in which consumers agreed to buy now

and pay later for purchases. This was often in the form of

an installment plan (usually in monthly payments) that

included interest charges.

By making credit easily available, businesses encour-

aged Americans to pile up a large consumer debt. Many

people then had trouble paying off their growing debts.

Faced with debt, consumers cut back on spending.

UNEVEN DISTRIBUTION OF INCOME

During the 1920s,

the rich got richer, and the poor got poorer. Between 1920

and 1929, the income of the wealthiest 1 percent of the

population rose by 75 percent, compared with a 9 percent

increase for Americans as a whole.

More than 70 percent of the nation’s families earned less

than $2,500 per year, then considered the minimum

amount needed for a decent standard of living. Even fami-

lies earning twice that much could not afford many of the

household products that manufacturers produced.

Economists estimate that the average man or woman

bought a new outﬁt of clothes only once a year. Scarcely half

the homes in many cities had electric lights or a furnace for

heat. Only one city home in ten had an electric refrigerator.

This unequal distribution of income meant that most Americans could not

participate fully in the economic advances of the 1920s. Many people did not

have the money to purchase the ﬂood of goods that factories produced. The pros-

perity of the era rested on a fragile foundation.

Hoover Takes the Nation

Although economic disaster was around the corner, the election of 1928

took place in a mood of apparent national prosperity. This election pitted

Republican candidate Herbert Hoover against Democrat Alfred E. Smith.

THE ELECTION OF 1928

Hoover, the secretary of commerce under

Harding and Coolidge, was a mining engineer from Iowa who had never

run for public ofﬁce. Smith was a career politician who had served four

terms as governor of New York. He was personable and enjoyed being in

the limelight, unlike the quiet and reserved Hoover. Still, Hoover had one

major advantage: he could point to years of prosperity under Republican

administrations since 1920. Many Americans believed him when he

declared, “We in America are nearer to the ﬁnal triumph over poverty

than ever before.”

It was an overwhelming victory for Hoover. The message was clear:

most Americans were happy with Republican leadership.

DREAMS OF RICHES IN THE STOCK MARKET

By 1929, some econ-

omists had warned of weaknesses in the economy, but most Americans

672 C

HAPTER 22

“ We in America

are nearer to the

ﬁnal triumph

over poverty than

ever before.”

HERBERT HOOVER

UNEVEN INCOME

DISTRIBUTION, 1929

The 1920s were an era that

favored big business. Life was

good for the rich. They made up

just 0.1 percent of the population

and had yearly incomes of more

than $100,000. Conversely,

much of the population had to

scrape to get by. Many earned so

little that everyone in the family,

including children, had to work.

Nearly 80 percent of all families

had no savings.

Source: Historical Statistics of the United States,

Colonial Times to 1970

$10,000

and over

$2,000 – $4,999

29%

$5,000 – $9,999

$1,999 and under

65%

B. Answer

Beneath the sur-

face prosperity

of the 1920s, the

economy was in

trouble.

MAIN IDEA

Forming

Generalizations

What did the

experience of

farmers and

consumers at this

time suggest

about the health

of the economy?

p0670-677aspe-0622s1 10/17/02 9:04 AM Page 672

Page 3 of 8

maintained the utmost conﬁdence in the nation’s economic health. In increasing

numbers, those who could afford to invested in the stock market. The stock mar-

ket had become the most visible symbol of a prosperous American economy.

Then, as now, the Dow Jones Industrial Average was the most widely used

barometer of the stock market’s health. The Dow is a measure based on the stock

prices of 30 representative large ﬁrms trading on the New York Stock Exchange.

Through most of the 1920s, stock prices rose steadily. The Dow had reached

a high of 381 points, nearly 300 points higher than it had been ﬁve years earlier.

Eager to take advantage of this “bull market”—a period of rising stock prices—

Americans rushed to buy stocks and bonds. One observer wrote, “It seemed as if

all economic law had been suspended and a new era opened up in which success

and prosperity could be had without knowledge or industry.” By 1929, about 4

million Americans—or 3 percent of the nation’s population—owned stocks. Many

of these investors were already wealthy, but others were average Americans who

hoped to strike it rich.

However, the seeds of trouble were taking root. People were engaging in

speculation—that is, they bought stocks and bonds on the chance of a quick

proﬁt, while ignoring the risks. Many began buying on margin—paying a

small percentage of a stock’s price as a down payment and borrowing the rest.

With easy money available to investors, the unrestrained buying and selling

fueled the market’s upward spiral. The government did little to discourage such

buying or to regulate the market. In reality, these rising prices did not reﬂect com-

panies’ worth. Worse, if the value of stocks declined, people who had bought on

margin had no way to pay off the loans.

The Stock Market Crashes

In early September 1929, stock prices peaked and then fell. Conﬁdence in the

market started to waver, and some investors quickly sold their stocks and pulled

out. On October 24, the market took a plunge. Panicked investors unloaded their

shares. But the worst was yet to come.

The Great Depression Begins 673

Vocabulary

stock: a share of

ownership in a

company

Analyzing

DAY OF WRATH

After the apparent prosperity of the 1920s, virtually few were

prepared for the devastating effects of the stock market crash.

This cartoon by James N. Rosenberg, which shows Wall Street

crumbling on October 29, 1929, is titled Dies Irae, Latin for

“day of wrath.”

SKILLBUILDER

Analyzing Political Cartoons

What does the cartoonist suggest will happen to individuals

because of the crash?

How does the cartoonist convey the sense of fear and

shock?

What do the looks on people’s faces indicate about the

impact of the crash?

SEE SKILLBUILDER HANDBOOK, PAGE R24.

C. Answer They

caused over

investment as

people ignored

the risks and

bought more

than they could

pay for.

MAIN IDEA

Analyzing

Events

How did

speculation and

margin buying

cause stock prices

to rise?

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BLACK TUESDAY

On October 29—now known as Black Tuesday—the bot-

tom fell out of the market and the nation’s conﬁdence. Shareholders frantically

tried to sell before prices plunged even lower. The number of shares dumped that

day was a record 16.4 million. Additional millions of shares could not ﬁnd buy-

ers. People who had bought stocks on credit were stuck with huge debts as the

prices plummeted, while others lost most of their savings.

674 C

HAPTER 22

A Pen and Paper Operation

In the 1920s, orders to buy or sell a stock arrived at brokers’

telephone booths located around the edge of the trading ﬂoor.

They were then carried by hand or sent by pneumatic tube to

the trading post where that stock would be traded.

NYSE employees called

reporters had to record

every transaction. For

each new sale, they

wrote out a slip of paper

containing the stock’s

abbreviation, the number

of shares, and the price,

and then transmitted it to

the ticker room. Market

information was typed

into a keyboard that

converted the keystrokes

into electrical impulses

that drove the clattering

print wheels in ticker

machines along the net-

work. People would read

the current display at the

trading posts.

Technological Changes

While still centered around human interaction, the exchange has

incorporated a number of computer technologies to keep up

with the times. For example, members now receive stock bids

and offers through an electronic delivery system known as

SuperDot, which enables them to make a trade in less than 12

seconds. Electronic communications networks now allow individ-

uals to buy and sell stocks themselves over the Internet at a

fraction of what it would cost to use a specialist. Such innova-

tion has prompted some to insist that

all future trading will be done via com-

puters, thus eliminating the need for

physical exchanges such as the NYSE.

SKILLBUILDER

Hypothesizing What scenarios

can you imagine that might prompt

someone to submit a market

order on a certain stock?

Comparing How has technology

on the trading ﬂoor changed since

the 1920s?

The trading ﬂoor in 2000.

▼

The trading ﬂoor in 1914.

NEW YORK STOCK

EXCHANGE

In the twenty-ﬁrst century, the

New York Stock Exchange (NYSE)

remains at its core what it has

been since it opened its doors in

1792: the nation’s premier mar-

ketplace for the buying and selling

of stocks. There, stockbrokers

known as “members” take orders

from their customers to buy and

sell shares of stock in any one of

more than 3,000 companies.

To execute their customers’

orders, the members offer and

receive bids in what resembles a

loud and fast-paced auction. In

general, customers submit two

types of orders. A limit order tells

the broker to buy or sell only if

the stock reaches a certain price.

A market order tells the broker to

execute a transaction immediate-

ly, no matter what the price.

Despite remaining close to its

roots, the NYSE is today undergo-

ing perhaps the most signiﬁcant

changes in its long history, in

large part due to the growth of

computers and the Internet.

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By mid-November, investors had lost about $30 billion, an amount equal to how

much America spent in World War I. The stock market bubble had ﬁnally burst. One

eyewitness to these events, Frederick Lewis Allen, described the resulting situation.

A PERSONAL VOICE FREDERICK LEWIS ALLEN

“ The Big Bull Market was dead. Billions of dollars’ worth of proﬁts—and paper

proﬁts—had disappeared. The grocer, the window cleaner, and the seamstress had

lost their capital [savings]. In every town there were families which had suddenly

dropped from showy afﬂuence into debt. . . . With the Big Bull Market gone and

prosperity going, Americans were soon to ﬁnd themselves living in an altered

world which called for new adjustments, new ideas, new habits of thought, and a

new order of values.

”

—Only Yesterday

Financial Collapse

The stock market crash signaled the beginning of the Great Depression—the

period from 1929 to 1940 in which the economy plummeted and unemployment

skyrocketed. The crash alone did not cause the Great Depression, but it hastened

the collapse of the economy and made the depression more severe.

BANK AND BUSINESS FAILURES

After the crash, many

people panicked and withdrew their money from banks. But

some couldn’t get their money because the banks had invest-

ed it in the stock market. In 1929, 600 banks closed. By 1933,

11,000 of the nation’s 25,000 banks had failed. Because the

government did not protect or insure bank accounts, millions

of people lost their savings accounts.

The Great Depression hit other businesses, too. Between

1929 and 1932, the gross national product—the nation’s

total output of goods and services—was cut nearly in half,

from $104 billion to $59 billion. Approximately 90,000

businesses went bankrupt. Among these failed enterprises

were once-prosperous automobile and railroad companies.

As the economy plunged into a tailspin, millions of

workers lost their jobs. Unemployment leaped from 3 per-

cent (1.6 million workers) in 1929 to 25 percent (13 mil-

lion workers) in 1933. One out of every four workers was

out of a job. Those who kept their jobs faced pay cuts and

reduced hours.

Not everyone fared so badly, of course. Before the

crash, some speculators had sold off their stocks and

made money. Joseph P. Kennedy, the father of future pres-

ident John F. Kennedy, was one who did. Most, however, were not

so lucky or shrewd.

WORLDWIDE SHOCK WAVES

The United States was not the only country

gripped by the Great Depression. Much of Europe, for example, had suffered

throughout the 1920s. European countries trying to recover from the ravages of

World War I faced high war debts. In addition, Germany had to pay war repara-

tions—payments to compensate the Allies for the damages Germany had caused.

The Great Depression compounded these problems by limiting America’s ability

to import European goods. This made it difﬁcult to sell American farm products

and manufactured goods abroad.

The Great Depression Begins 675

D. Answer

Many were out

of a job. Others

experienced pay

cuts and

reduced hours.

MAIN IDEA

Analyzing

Effects

What

happened to

ordinary workers

during the Great

Depression?

Skillbuilder

Answers

1. Possible

Answer:

During a

crash.

2. Early NYSE

technology

consisted of a

tickertape

machine and

pneumatic

tubes. Now

deals are

handled elec-

tronically by

computers.

This British

election poster

shows that the

Great Depression

was a global

event.

▼

p0670-677aspe-0622s1 10/17/02 9:04 AM Page 675

Page 6 of 8

676 C

HAPTER 22

Income and Spending

Source: Historical Statistics of the United States

$800

$600

$400

$200

1929 ’30 ’31 ’32 ’33

Average Yearly

Income

per Person

Average Consumer

Spending

per Person

Unemployment

People (in millions)

1928 ’29 ’30 ’31 ’32 ’33

Bank Failures

Banks (in thousands)

1928 ’29 ’30 ’31 ’32 ’33

Business Failures

Businesses (in thousands)

1928 ’29 ’30 ’31 ’32 ’33

SKILLBUILDER

Interpreting Graphs

In what year did the biggest jump in

bank failures occur?

What measure on the graphs seems

to indicate an improvement in the U.S.

economy during the Depression? What

might explain this?

Economic indicators are measures that

signal trends in a nation’s economy.

During the Great Depression several

trends were apparent. Those indicated

at the right are linked—the conditions of

one can affect another. For instance,

when banks fail , some businesses

may have to close down , which can

cause unemployment to rise . Thus,

people have less money and spending

declines .

1 2

3 4

Depression Indicators

Skillbuilder Answers

1. 1933

2. Business failures dropped in 1933. There

were fewer businesses remaining.

Distraught men try to withdraw their savings from a failing bank.

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Page 7 of 8

The Great Depression Begins 677

In 1930, Congress passed the Hawley-Smoot Tariff

Act, which established the highest protective tariff in

United States history. It was designed to protect American

farmers and manufacturers from foreign competition. Yet it

had the opposite effect. By reducing the ﬂow of goods into

the United States, the tariff prevented other countries from

earning American currency to buy American goods. The tar-

iff made unemployment worse in industries that could no

longer export goods to Europe. Many countries retaliated

by raising their own tariffs. Within a few years, world trade

had fallen more than 40 percent.

CAUSES OF THE GREAT DEPRESSION

Although histori-

ans and economists differ on the main causes of the Great

Depression, most cite a common set of factors, among them:

• tariffs and war debt policies that cut down the foreign

market for American goods

•a crisis in the farm sector

• the availability of easy credit

•an unequal distribution of income

These factors led to falling demand for consumer

goods, even as newly mechanized factories produced more

products. The federal government contributed to the crisis

by keeping interest rates low, thereby allowing companies

and individuals to borrow easily and build up large debts.

Some of this borrowed money was used to buy the stocks

that later led to the crash.

At first people found it hard to believe that economic

disaster had struck. In November 1929, President Hoover

encouraged Americans to remain confident about the

economy. Yet, the most severe depression in American his-

tory was well on its way.

MAIN IDEA

2. TAKING NOTES

In a diagram like this, record the

causes of the 1929 stock market

crash.

Which do you see as the biggest

cause? Why?

CRITICAL THINKING

3. MAKING INFERENCES

How did the economic trends of the

1920s help cause the Great

Depression? Think About:

• what happened in industr y

• what happened in agriculture

• what happened with consumers

4. DRAWING CONCLUSIONS

Judging from the events of the late

1920s and early 1930s, how

important do you think public

conﬁdence is to the health of the

economy? Explain. Think About:

• what happened when overconﬁ-

dence in the stock market led

people to speculate and buy

on margin

• how conﬁdence affects

consumer borrowing

cause

cause cause

cause

Stock Market Crash

GLOBAL EFFECTS OF THE

DEPRESSION

As the American economy col-

lapsed, so too did Europe’s. The

world’s nations had become

interdependent; international

trade was important to most

countries. However, when the

U.S. economy failed, American

investors withdrew their money

from European markets.

To keep U.S. dollars in America,

the government raised tariffs on

goods imported from other coun-

tries. World trade dropped.

Unemployment rates around the

world soared. Germany and

Austria were particularly hard hit.

In 1931 Austria’s largest bank

failed. In Asia, both farmers and

urban workers suffered as the

value of exports fell by half

between 1929 and 1931. The

crash was felt in Latin America

as well. As U.S. and European

demand for Latin American prod-

ucts like sugar, beef, and copper

dropped, prices collapsed.

E. Answer

World trade

dropped, causing

unemployment to

rise globally.

MAIN IDEA

Summarizing

How did the

Great Depression

affect the world

economy?

1. TERMS & NAMES For each term or name, write a sentence explaining its signiﬁcance.

•price support

•credit

•Alfred E. Smith

•Dow Jones Industrial

Average

•speculation

•buying on margin

•Black Tuesday

•Great Depression

•Hawley-Smoot Tariff Act

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