The Stock Market Crash15.1

Background1920s appeared to be a decade of

prosperity = “The Roaring 20s”Some believed economic problems

existed below the surface Most ignored these warnings

Credit Confidence in nation’s prosperity led

many to purchase goods on credit1929: Credit purchases =$7 billion

Government encouraged credit spending by keeping interest rates low

Problems With Easy CreditEasy access to credit enabled

people to buy things they couldn’t affordEconomic experts worried about debt

High consumer debt could cripple people in an economic downturn

Bull Market A market with an

upward trend in prices

Seemed no end to 1920s Bull Market

Bear Market A market with a

downward trend in prices

Stock Speculation = Playing the market by buying and

selling stocks to make a quick profit – becomes popular

This stimulated economic growth Rapid buying and selling inflated

stock prices Could be a problem if demand

decreased.

Margin Buying = The practice of purchasing stocks

with borrowed money Speculators often buying stock with

10% down – borrowing 90% Margin buying was great with a bull

market But…. Bear market would be investors deep

in debt.

The CrashOctober 24, 1929: Black Thursday

= The beginning of the crashRising interest rates made large

numbers of investors nervous - they began selling large # of

sharesLeads confidence to drop and prices pushed lower and lower

http://upload.wikimedia.org/wikipedia/commons/a/a5/1930-67B.gif

Black TuesdayOctober 29, 1929Stock prices sank to shocking

lows16 million shares of stock were

sold in one day= huge amount of debt

Stock Brokers & Debt Brokers began to contact investors

who had purchased theirs on margin(by borrowing)

They demanded cash to cover their loans

Investors were unable to pay = had to sell stocks at huge losses By mid- Nov – leading stocks values

were cut in half!!

Part 2

The Beginning of The Great Depression

The Great Depression Public officials & Business leaders

insisted the stock market crash was a temporary and minor setback

Coming events would prove them wrong

Causes of the Great Depression

1. Banking Crisis 2. Business Failures 3. Rising Unemployment 4. Global Depression 5. Income Gap / Consumer Debt 6. Business Cycle

1. The Banking Crisis Cause: Stock Market Crash –

Directly affected only a few Americans

Indirectly – affected millions Effect: Bank failures led to complete

loss of all money in that bank

Banking CrisisBanks make money by investing

their customer’s moneyResult: When the market crashed

banks suffered severe losses like all investors

Defaults On Loans Cause: Many investors had lost most

of their money in the crash Effect: Most could not repay their

bank loans Result: This left many banks with little

income = Many banks had to close

Fear of Additional Failures Cause: Depositors fear losing their

money if a bank closed Effect: Depositors panic and began

trying to withdraw their savings Result: Catastrophe for banks that

were already low on moneyLed to more bank failures

2. Business Failures Over 26,000 businesses went

bankrupt in 1930 alone GNP = total value of goods &

services produced per year. Gross National Product (GNP):

1929 - $103 Billion 1933 - $56 Billion

Decreased ConsumerSpending

Cause: Consumers became unwilling or unable to buy new products

Effect: Debt & fear of bank failures brought an end to purchasing on credit

Result: people not buying stuff

3. Rising Unemployment Cause: massive amounts of business

failures Effect: People lost their jobs as their

companies simply ceased to exist Result: 1932 –

Unemployment reached 23.6%Up 20% over 3 years

Underemployment – over 50%

4. Global Depression Economic troubles in Europe

contributed to the depression Global economy was struggling due to

massive war debts World trade declined in the 1920s &

1930s

Global Depression’s Impact on America Cause: Foreign customers unable to

purchase American goods – too expensive Effect: American industries were left with

large surpluses America placed high tariffs on foreign

goods to help business Smoot-Hawley Tariff:- highest in US

History Accelerated the global depression by

eliminating the American market for foreign industry

Income Gap / Consumer Debt Disposable income - $ left after buying

necessities 1923 – 1929: Cause: Disposable income of the wealthiest 1%

of Americans increased by 63% Disposable income for the poorest 93%

declined by 4% Effect: poor Americans lacked the $ to

boost the economy

6. The Business Cycle = The regular ups and downs of

business in the free enterprise economy

The United States Business Cycle, 1890-1940

Business Cycle Theory Prosperous Times: -Industry increases production & hires

more workers =Production develops surplus During Surpluses: - industry scales back production =Workers are laid off and lose purchasing

power

Recession / DepressionLasts until surpluses are

depletedOnce surpluses are depleted

industry increases and we start over