What economic factors and conditions made the American economy appear prosperous in the 1920’s?

1. What economic factors and conditions made the American economy appear prosperous in the 1920’s? • High gross national product (GNP) – total value of goods and services produced in a given period • Low unemployment – satisfied workers • Stock market values went steadily up - quadrupled between 1920-1929

2. What economic factor led to optimsim? • The growth of the GNP • This led to reckless spending by the American people – cars, vacuums, refrigerators, etc. – usually on credit

3. How did business benefit from welfare capitalism? • Welfare capitalism – various benefits companies provide (like health insurance) to improve worker satisfaction and loyalty • As a result, union membership dropped; worker loyalty and satisfaction grew

4. How does the stock market work? • People buy stocks, which gives them a share in the ownership of a corporation • If a corporation does well, values of stock typically go up, making stock holders a profit • But, if stock prices go down, shareholders lose money

5. How did Coolidge and Harding view the relationship between business and government? • Basically, that government should support, not interfere, with business practices • They believed in giving businesses the maximum freedom to profit and succeed • “laissez-faire” – to let alone

6. How did the rise of the stock market affect American investors? • As stock prices rose, more and more Americans began to invest in the stock market • Number of shares being traded in the U.S. went from 318 million in 1920 to more than 1 billion in 1929 • It seemed to good to be true – some believed that everyone could get rich investing in the stock market

7. What were the basic economic weaknesses in the American economy in the late 1920’s? • Very uneven distribution of wealth – 5% of the workers made 70% of the country’s income; conversely the other 95% made 30% of the country’s income • Easy credit – too easy • Too easy to buy stock on margin

8. In what way was the easy availability of credit both a blessing and a curse? • It was a blessing in that it allowed more Americans to buy more products, which brought on more economic growth • It was a curse when consumers could not pay off their debts, purchases slowed • Warehouses started to be filled with un-purchased goods

9. What was a margin call? • “buying on margin” – borrowing money to invest in the stock market; a borrower assumed he would pay back the loan with money made from stock prices going up • A margin call was a demand for payment of a margin loan if a stock’s value fell below a certain point

10. What events led to the stock market’s crash in October 1929? • Sale of consumer goods declined • Rumors of a crash spread • Fears grew • Investors began to sell off stock • This began a snowball effect where stock prices plunged because there were no buyers

11. How did the big sell-off of stocks begin? • Some investors were nervous and began to sell off stocks • Others soon joined in • With no buyers, stock prices plunged

12. What were the effects of the crash on the economy of the United States and the world? • Banks failed – many had invested stocks themselves, or given loans to stockbrokers to lend investors • Investors lost money • Consumers stopped buying • Nearly three million Americans lost their jobs • Such an impact on the American economy affected the world economy

13. What impact did the stock market crash have on individual investors? • Almost all suffered • Couldn’t pay off debts – lost all savings

14. Why were banks affected by the stock market crash? • Depositors panicked and withdrew money – bank runs • Many banks lost money from stocks and also from loans made to stockbrokers