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Factors in the Stock Market Crash and the Causes of the Great Depression Lecture

Factors in the Stock Market Crash and the Causes of the Great Depression Lecture. 1920’s Prosperity.

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Factors in the Stock Market Crash and the Causes of the Great Depression Lecture

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  1. Factors in the Stock Market Crash and the Causes of the Great Depression Lecture

  2. 1920’s Prosperity • The years following WWI are known as the “Roaring Twenties”. During the 1920’s, many Americans believed that the United States was a place of unlimited growth, opportunity, and achievement. Americans were earning more money then ever. Between 1922 and 1929 the national income rose from $61 billion to $87 billion, a leap of nearly 43 %. Due to their increased earnings, many Americans had more money to spend on luxury goods such as radios, refrigerators, and automobiles. In addition, by 1929 the US Stock market was at an all time high. By the end of 1929 Americans had traded 1.1 billion shares of stock on the New York Stock Exchange. Many argued that the American economic prosperity would last forever

  3. The Great Depression Foreshowed • By late 1929 cracks were beginning to show in the US economy. Unemployment was on the rise, farmers were losing their land and stock prices were dropping. While many historians debate the exact cause of the Great Depression, they generally agree on five key factors:

  4. 1. Republican domestic and international policies • The administration of President Calvin Coolidge, from 1923 to 1929, and his Republican successor, Herbert Hoover, implemented many pro-business policies based on the doctrine of trickle-down economics and a conservative approach to international economics. Their belief was that if the government provided business and the wealthy individuals with significant tax cuts, they in turn would reinvest in the US economy. To make up for lost revenue the Government cut government expenditures and raised taxes on the middle and lower classes. Yet wealth did not trickle down, instead corporations devoted their profits to expand their factories, increase the production of goods and lining their own pockets. Furthermore, owners kept workers wages low, thus increasing the gap between the rich and the poor.

  5. 1. Republican domestic and international policies • After WWI most European nations were broke and could not pay pack the $11 billion loans they owed the US. In Response, the US began to reschedule the loan payments and began lending European nations even more money in an attempt to help them repay the original loan debt. In addition, Republican in Congress imposed high tariffs on imports to promote consumer spending on American made products. As a result, without substantial markets for their goods, European nations had no hope of repaying loans.

  6. 2. Unchecked Stock Speculation • Investor speculated which company’s stock would rise and then bought large quantities of stock, which they then resold at a higher price for a quick profit. Some rich investors would pool their money together and buy large amount of stock at a cheap price. Smaller investors would conclude that the company was profitable and would begin a buying frenzy. When the stock price peaked the investor pool operators would quickly sell off. Since the price of the stock was artificially inflated the value of the stock plummeted when the investor pool pulled out of the company stock. This practice drove stock value artificially higher and higher causing some economist to fear that the market would soon head for a big fall.

  7. 3. Weak and unregulated Banking • The banking industry had grown increasingly unstable over the course of the 1920’s because of the banks’ over-extension of credit to stock investors. During the period, Banks permitted investors to buy stock on large margins of credit, called buying on margin. Investor put 10 % cash down on stock purchases, and then the bank lent the rest of the money to buy the stock using the stock as collateral. So if a person wanted $20,000 in stock they had to invest $2,000 with the bank loaning $18,000. The Federal government did nothing to prevent the banks from loaning their depositors’ money on high risk ventures, to require keep a certain part of the deposits in reserve, or to insure the depositors money.

  8. 3. Weak and unregulated Banking • So when the Stock market collapses in 1929 investor who had bought on margin could not pay back the loans. Banks in turn could not replace their depositors’ money which they had used to fund the high risk loans. Therefore, not only did investor and banks lose money and close, but even families who had not played the stock market lost all their money. By 1932 almost 6,000 Banks had closed.

  9. 4. Overproductions of goods • Before 1929 American production of goods parallel the course of the stock market. Consumer demand for goods was high and new inventions allowed companies to produce more goods in less time. As a result companies continued to expand their factories, increase their production and flooded the market with endless supply of goods. But by 1929 companies had more plants than they needed and the market place was saturated with goods few Americans could afford. In addition, Farmers began to take advantage of the same technological advancements to increase agricultural production. To buy this new technology farmer borrowed heavily from banks believing he market for their goods would continue to grow.

  10. 4. Overproductions of goods • However, competition with farmers in other parts of the world, particularly a recovering Europe, caused the demand for US agricultural products to drop sharply. Farmers were often stuck with crops they could not sell or only sell at a very low price. As a result, many farmers defaulted on loan payments and lost their farms to bank foreclosure. To make matters worse the mid- and southwest were hit with droughts so severe that it cause the top soil to turn to powered and blow away, causing the area to be called the Dust Bowl. Between 1930 – 1934, due to drought and defaulted loans, 1 millionfamilies lost their farms.

  11. 5. Unequal Distribution of Wealth • By 1929 1% of the population possessed over 60% of the country’s wealth. From 1920 – 1929, the average American saw his net income increase by 9%. I comparison, the income of the rich Americans rose by 75%. In short the rich were getting richer and the poor were getting poorer. This distribution of wealth had a significant impact on the stability of the US economy.

  12. Stock Market Crashes – October 1929 • Economist warned that the bull market, a market in which prices are constantly rising, could not continue indefinitely made investors nervous. In 1929 many investor began selling their stocks while they could still get a high price for them. As a result stock prices fell, companies slowed down production because of this decline, which in turn led to additional price drops. By October 1929 stock prices were on a devastating downward spiral. On October 29, 1929, known as “Black Tuesday”, orders to sell at any price swamped the stock market in New York. In a matter of hours people lost fortunes it had taken a decade to make. By the end of the Black Tuesday, investors had lost $16 billion, the Great Depression had begun.

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