Causes of the Great Depression

Stock Market Soars

• Bull Market- long period of rising stock prices• In the late 1920’s, a bull market had many

people investing in stocks.• With the market soaring, investors began

buying stocks on Margin.– Buying a stock by paying only a fraction of the

stock price and borrowing the rest.

Margin Example

• With $1,000, an investor could buy $10,000 worth of stock. The other $9,000 would come as a loan from a stockbroker. The broker held the stock as collateral.

• If the price rose you could make a profit. The investor who borrowed to buy $10,000 worth of stock only had to wait till it got to $11,000 to make money.

Problem with Margin

• Margin Call- demand by a broker that investors pay back loans made for stocks purchased on margin.

• Investors were very sensitive to any fall in stock prices because if prices fell, they had to sell quickly, or they might not be able to pay back loan.

Speculation

• Def- buying stocks expecting that the market would grow and sell them to make money quickly.

• Before the late 1920’s, the prices investors paid for stocks usually reflected the stock’s true value.

• In the late 1920’s, investors bid prices up without considering a company’s earnings and profits. (Speculation)

The Great Crash

• The bull market only lasted as long as investors continued to put new money into it.

• In 1929, the market ran out of new customers. • In September, investors sensed danger and

began to sell off their investments. • Prices began to slip and continue to fall.

• Read pg. 402

Stock Market Crash Questions

• Pg. 468-469 in textbook

Causes of the Great DepressionFederal Reserve kept interest rates low; companies borrowed money and expanded more than necessary.

Companies made more goods than could be sold.

Not everyone who wanted consumer goods could afford them.

Tariffs restricted foreign demand for American goods.

With too many goods unsold, production was cut back and employees were laid off.

Low interest rates encouraged borrowing money to speculate, endangering bank solvency.

Cyclical Effect of Causes