Chapter 5 - Controversy: The coming of slump, and the Depression, 1929-1933

Question 1

Why was there an overheated economy?

Answer 1

Production outstripped demand.
Technology had produced a flood of goods - the market demands couldn’t keep up.
E.g. 1929 stock market fall - healthy share market correction.
Had risen well beyond sensible values.
Short 1921 slump - production drop, shares/wages fell.
Governments made massive cuts.
1922 growth was resumed.

Question 2

Why were great part of the US ‘economically rotten’?

- what made it worse in 1930?

Answer 2

Small scale tenant farmers - economic oblivion.
Too many small banks.
Depressed rural economy - particularly vulnerable.
1930 - US tariff protection intensified - hit international trade.

Question 3

What is a ‘monetarist’ point of view?

Answer 3

Shortage of money and credit - ‘dear money’ policy.
1929 Federal Reserve raised interests to stem the speculation in shares.
Banks/brokers couldn’t lend money easily.
Overdid it, leading to bank collapse.
Banks couldn’t lend/borrow cheaply.
RAISING INTEREST RATES

Question 4

What is a ‘Keynesian’ point of view?

Answer 4

Lack of sufficient demand.
Government failure to increase demand by spending more.
Key weakness - agriculture.
E.g. USA/Germany - largest agricultural sectors.
Worse off than GB (3rd largest agricultural sector) - USA had large but depressed agricultural sector.
TOO MUCH STUFF

Question 5

What basic factors led to the depression of 1929-1933? 13

Answer 5

1. Insufficient demand - market saturation.
2. Depressed agriculture.
3. Declining old industries.
4. Wages weren’t rising fast enough to encourage greater consumption.
5. High tariffs - falling overseas demand.
6. Government failed to increase demand spending sufficiently.
7. Shortage of money and credit.
8. Banking system.
9. ‘Dear money’ 1929 policy.
10. ‘Get rich quick’ schemes.
11. The Big Bull Market.
12. Confidence loss.
13. Cycle of international debt.

Question 6

What is meant by market saturation?

Answer 6

Production simply outstripped demand.
Technological revolution/mass production techniques were so good - couldn’t be absorbed quick enough.
Rest of the world were hit by tariffs/war debts.

Question 7

Did agriculture fare well in the economic boom?

Answer 7

1929 - average income $270 - national average $750.
Benefited from FWW.
Investment in new equipment resulted in high levels of debt.
Debt level 1910 - $3.2 billion.
Debt level 1920 - $8.4 billion, with annual interest payments of £574 million.
The value of farmland fell by 30% - 1920-1929.

Question 8

What became a problem as a result of the FWW?

Answer 8

Overproduction.
Small farmers suffered intense pressure - they couldn’t compete with those with superior technology.
Price levels fell.
E.g. wheat; $2.19 in 1919, but 90c in 1922.

Question 9

How did natural disasters start a chain reaction regarding agriculture?
+ EXAMPLE.

Answer 9

Drought.
Net income fell from $6.1 billion in 1929 to $2 billion in 1932.
E.g. Oklahoma had wheat yield of $1 million.
1933 - only $7,000.
Income fell and farmers fell behind on mortgage repayments - debt increased.
E.g. Mississippi 1927 flood - state income fell from $239 to $117 in 1933.
1/3 of the banks failed.
3,500 foreclosures out of 5,280 farms.

Question 10

How did the agricultural ‘underclass’ suffer?

Answer 10

Farm labourers lost their jobs.
Sharecroppers faced poverty.
Many AAs moved from the South to northern cities.

Question 11

What were the depressed ‘black-spot’ industries in the 1920s and why?

Answer 11

Overproduction and lack of demand.
Coalmining and textiles.
New fuel e.g. oil and the end of the railway boom.
Mine owners then cut wages.
1931 - 2.2 million man days were lost in strikes.
New fibres e.g. rayon, hit traditional cotton producers.
1923-1933 - 190,00 to 100,000 textile workers.

Question 12

Why was there a decline in consumer spending in the late 1920s?

Answer 12

Particularly in cars and radios.
1927 - the majority of those who could afford to buy goods had already done so.
Automobile and electrical manufacturing industries worst off.
Combined sales fell by 2/3 in 1929-1932.

Question 13

Was the distribution of wealth fair in the 1920s?

Answer 13

60% families - $2,000 income - 16 million families.
Uneven wealth distribution.
North-east - $921 income.
SE farmers - $129 income.
1929 - richest 1% got 19%.
Top 5% - 33.5% disposable income.

Question 14

How was growing unemployment a problem in new industries?

Answer 14

Economic malaise in urban areas.
1931 - 16% unemployed.
1933 - 25% unemployed.
Those in work - 32% declining income.
1924 - 73% had been unemployed at some stage.
43% - unemployed for over a month.

Question 15

How was growing unemployment an issue for the automobile industry?

Answer 15

Detroit - workers fell by 20%.

137,000 workers in spring 1929 - 37,000 in 1931.

Question 16

How was growing unemployment an issue for the electrical industry?

Answer 16

Consumers had no money for replacements.
No market for new buyers.
General Electric’s income fell from $60.5 million in 1930, to $14.17 million in 1932.
Workforce fell from 88,000 to 41,000.

Question 17

How was growing unemployment an issue for the construction industry?

Answer 17

Contracts awarded fell from $6.6 billion in 1929 to $1.3 billion in 1932.
Job losses - timber/architectural industries.
1931 - 75% iron/steel workers were on short time.
Many forced to shanty towns - ‘Hoovervilles’.

Question 18

When did the economic depression START to occur?

+ stock market collapse EXPLANATION.

Answer 18

Autumn 1927.
Religious belief in the market.
1% pop. invested - ‘on the margin’.
Unregulated speculation - high debts - originally thought to be paid off easily.
BUT rising stock prices outran the real economic growth.
Confidence loss - panic selling - minimise loss.
SHARP FALL IN STOCK PRICES.
September-November 1929 - industrial stock fell by 50%.
Large banks called in money - market collapsed.

Question 19

When did the first warning signs of the stock market collapse occur?

Answer 19

First 2 weeks in October - drop of 20%.
23rd October - complete avalanche.
E.g. US steel 205.5 to 193.5 points - same day.
Freak weather conditions - lack of communication communicate - phone lines down.
Crowds Exchange Building.
Chief of Police drafted in 600 men.

Question 20

How did US banking firms try and remedy ‘Black Thursday’?

Answer 20

Crisis meeting at 23 Wall Street - headquarters of JP Morgan.
Richard Whitney of JP Morgan purchased 10,000 shares in US Steel and then repeated the process by buying other stocks.
The 6 bankers spent $30 million - TEMPORARY FIX.
NY Times Index then only down 12 points.

Question 21

When did the second crisis of the stock market collapse occur?

Answer 21

28th October 1929.
9 million shares changed hands.
NY Times Index - 49 price point drop.
14% drop in Market.
'Black Tuesday' 29th - $30 billion lost.
Further 43 NY Times Index point drop.

Question 22

Why was the banking system so bad within the US?

Answer 22

Majority were small/independent - 30,000.
20% US banks collapsed.
Lack of regulation - laissez faire.
No federal deposit insurance system to provide security.
Poor management - granted unsecured loans.
Low interest rates - easy credit.

Question 23

How was the Federal Reserve Board considered ‘weak’?

Answer 23

12 reserve banks headed by Fed.
Laissez faire.
Board was based in NY, not Washington, where the Federal Reserve Board met - inefficient.
The Federal Reserve Board - ‘dear money’ 1929 - interest rates too high.

Question 24

What was the effect of ‘Gold Standard’?

Answer 24

Low interest rates had a knock-on effect on the US economy by making money cheap and therefore partly fueling the boom.
1931 - GB left the gold standard.

Question 25

What happened when the great crash in share values was actually ‘felt’?

Answer 25

Fed kept money tight - it made it difficult to borrow by maintaining high interest rates.
Banks were forced to call in loans and sell assets to maintain liquidity.

Question 26

What happened in November 1930 regarding the great crash in share values?

Answer 26

Bank of Kentucky failed - triggered other failures.
11th December - Bank of the US in NY City collapsed.
It had 400,000 depositors and $286 million on deposit.
HUGE disaster.
HOWEVER again, many thought the worst was over.

Question 27

What did Hoover believe to be the real heart of the economic crisis?

Answer 27

The First World War.
Prior to 1914, the pound sterling fixed to gold, functioned as a world currency to which other countries could relate.
The weakening of GB in the war removed a key prop.

Question 28

How had the tariffs weakened Europe?

Answer 28

Market already weakened due to the FWW.
US putting tariff barriers even higher in 1930.
Other countries followed this - even GB.
Resulted in a devastating contraction of world trade.
World trade 1929 - $36 billion.
World trade 1932 - $12 billion.

Question 29

What did GB do regarding the gold standard?

Answer 29

Biggest Australian bank, Kreditansalt, collapsed.
Triggered failures across central Europe and Germany.
September 1931 - GB abandoned the gold standard for sterling - devalued the pound.

Question 30

How did the US react to GB abandoning the gold standard?

Answer 30

FED raised interest rates to stop an outflow of gold from the US - bad effect.
Money was now more expensive to borrow.
More bank failures - 530 failures in October alone.
Almost 2,300 banks had collapsed.
Depositors lost savings/companies couldn’t borrow.
Money was draining from the system.
Hoover’s 1931 raising of taxes - monetary squeeze.

Question 31

What can be said in Hoover’s defence?

Answer 31

1. Unaware of problem scale - believed 1929 to be a repeat of the smaller 1921 recession.
2. Small scale of the White House staff and Fed Govern.
3. Left criticism - Hoover should’ve launched more federal initiatives to bring down the rising unemployment.
   Fed expenditure in 1929 was only 3% GNP compared to 20% by the 1990s.
4. No effective control over Congress.

Question 32

What did the 1929 Agricultural Marketing Act do?

Answer 32

Allocated 0.5 billion dollars for farmer owning cooperatives.
Proved inadequate.
Grain imports from Argentina/Canada drove prices down and further undermined the agricultural community.

Question 33

What was Hoover’s biggest mistake?

Answer 33

The Hawley-Smoot Tariff Act of 1930.
‘Choking off international trade’.
Hoover wanted some protection for agriculture, but ended up with a much more protectionist measure that intended.

Question 34

What was the Hawley-Smoot Tariff Act of 1930?

Answer 34

This raised duties on a 20,000+ farming products and manufacturing goods to an average level of 42%.
Produced retaliation from other countries.
Free-trade GB adopted tariffs in 1931.
Contributed to the downward spiral in world trade.

Question 35

How did Hoover TRY to mobilise the US behind a programme of economic expansion?

Answer 35

Called a conference at the White House and addressed key groups, asking: - VOLUNTARISM’.
Leading businessmen - to sustain wages/employment levels.
Union leaders - industrial harmony/encourage their members to spend money.
Mayors/governors - develop spending programmes on roads, schools etc.

Question 36

Was Hoover successful regarding his meeting on economic expansion?

Answer 36

Spring 1931 - wage cuts/job losses in key industries rose.
E.g. US Steel had a 10% wage cut.
Within 10 days, 1.7 million workers had less money in their pockets.

Question 37

How did Hoover try and tackle the banking crisis in 1931?

Answer 37

National Credit Corporation in October 1931.
$500 million fund.
Attempted to persuade the largest banks to provide lending agencies that would be able to give closing banks, money that could be used for loans.

Question 38

Did the 1931 National Credit Corporation work?

Answer 38

Ultra-conservative bankers - only spent 10 million of the funding.
The banks weren’t saved - several collapsed.
1931 - bank failures were running at record levels.

Question 39

What did Hoover think regarding benefits?

Answer 39

Opposed direct federal aid to individuals - extreme droughts put this to the test.

Question 40

What was the Reconstruction Finance Corporation of 1932?

Answer 40

Recognition that voluntarism hadn’t worked.
Two billion dollars was made available to rescue banks, trusts, credit unions and other financial institutions.
HOWEVER - most aid went to the larger banks/companies.

Question 41

How did Hoover balance the federal budget?

Answer 41

Economic belief that a balanced budget was CRUCIAL.
Increased fed expenditure = tax rise.
Didn’t accept deficit spending.
Private borrowing remained stagnant and a further tax rise didn’t help - didn’t budge Hoover.
June 1932 - largest peace-time tax rise in US history.
The Revenue Act of 1932 - top incomes increased from 25% to 63%.

Question 42

How is Hoover criticised (in general) on a left-wing perspective?

Answer 42

Left-wing perspective - too little, too late.
Laissez faire attitudes and volunteerism.
Exhorting individuals/companies to take action.

Question 43

How is Hoover criticised (in general) on a right-wing perspective?

Answer 43

He did TOO MUCH.
Initiatives harmed big businesses.
Tax increases tightened the monetary squeeze.
Inability to control the Federal Reserve System.
Force increased liquidity by reducing interest rates.

Question 44

What was Hoover’s biggest politically disastrous mistake?

Answer 44

July 1932 - 15,000 FWW ‘bonus’ veterans - Washington.
Temporary camp set up.
Hoover ordered General Douglas MacArthur to clear camp.
MacArthur misunderstood - brutal violence erupted at the Anacostia flats.

Question 45

What was life like for AAs/NAs regarding prosperity?

Answer 45

NA - infertile reservations.
AAs - South, poorest areas - share croppers.
North AAs - discrimination, ‘ghettos’ e.g. Harlem.
1914 - 50,000.
1930 - 165,000.
KKK fear.

Question 46

What was life like for women regarding prosperity?

Answer 46

Little improved career opportunities.
150 female dentists, 100 accountants.
Menial jobs - 700,000 domestic servants.
1928 - only 2/435 House of Representatives delegates were female.
Marriage and housework.

Question 47

What were some ‘get rich quick’ schemes?

Answer 47

Charles Ponzi - promised 50% profit in 90 days.
On bail - sold Florida land.
Frenzy land purchases - Henry Flager (Standard Oil).
1920-1925 - Florida pop - 1.2 million.
Deposits only 10% land value.

Question 48

What were some ‘get rich quick’ scams?

Answer 48

‘Within easy sea access’ - miles away.
Manhattan Estates - ‘Nettie’ didn’t exist.
1926 hurricane - 400 dead, 50,000 homeless.
Mediterranean fruit fly epidemic.

Question 49

How was insider dealing a problem regarding The Big Bull Market?

Answer 49

Buying/share selling with insider knowledge e.g. when a company was going to take-over - information not yet available to the general public.

Question 50

What was the cycle of international debt?

Answer 50

Debt Funding Commission:
War debt repayment - 1947.
Interest rate - 4.25%.
Dawes Plan - lent $800 million to Germany after ToV - $33,000 million reparations to Allies.
Young Plan - reduced payment from 269 billion to 112 billion Gold Marks - repayment lease to 59 years.
Less money paid to Allies, therefore less USA payment.

Question 51

What characteristics of The Bull Market helped contribute to the depression? 6

Answer 51

1. Lowered interest rates: 1927 - 4% to 3.5%.
   Encouraged home borrowing.
   1928 - 5% up.
2. Market instability.
3. Confident economy - 1192 stock broking firms - 1928.
4. Persuasive brokers.
5. ‘On the margin’ - 50,000.
6. Media encouragement - $15 investment, 21 years, $80,000 richer - Ladies Home Journal.

Question 52

How did the loss of confidence help contribute to the depression?

Answer 52

Collapse of Clarence Hatry.
Bernard Baruch/Joseph Kennedy - selling stock.
Rumours of Fed. tightening credit facilities - more difficult to borrow.

Question 53

What was the human cost of the depression?

Answer 53

Suicide rates - 17.4 per 10,000 in 1932.
Marrage rate - 1.23 million in 1929, to 982,000 in 1932.
2 million hoboes - shanty towns.
Schools closed for 10 months.
25% eligible for relief actually received any.
76/1000 farms repossessed.
Only 11 states had a pension scheme - $222,000 for 1,000 people.
Many starved to death.