3 Objectives1. Recount why financial experts issue warnings about business practices during the 1920s.2. Describe why the stock market crashed in 1929.3. Understand how the banking crisis and subsequent business failures signaled the beginning of the Great Depression.4. Analyze the main causes of the Great Depression.
4 Economic Troubles on the Horizon 1920s were times of unlimited economic prosperity.Warnings were being discussed and not heard in the public.1. agricultural crisis.2. industries were having problems.March, 1929: President Herbert Hoover told the American public he had confidence in the economy.
5 Credit: By 1929 credit purchases were on the rise Credit: By 1929 credit purchases were on the rise. Credit purchases by 1929 had totaled 7 billion dollars.The government encouraged borrowing by keeping interest rates low in the 1920s. Purchasing consumer goods on credit when many couldn’t afford to ever pay for.If there were an economic downturn consumers would not recover. Consumers didn’t pay much attention to the economic warnings and continued to purchase radios, automobiles, and appliances on credit.
6 Playing the market1920s there was confidence in the stock market, prices rose and investors put millions of dollars into the market.Bull Market: upward trend in stock prices.Bear Market: downward trend in stock prices.Late 1920s stock speculation or “playing” the market by buying and selling for a profit. With speculation came economic growth. Many stocks were being purchased for more than they were worth. If investors confidence weakened prices would tumble.
7 Margin Buying: practice of purchasing stocks with borrowed money Margin Buying: practice of purchasing stocks with borrowed money. Speculators put up as little as 10 percent of the price of a stock and borrowed the rest. This worked as long as the bull market continued . If prices ever fell, investors would be in debt.Summer, 1929: market was still doing well and people continued to invest. By September, stock analyst Roger Babson had written the crash of the market is coming. Some investors started selling their stocks, other’s continued to invest and disregarding the warnings.
8 The Stock Market Crashes Black Thursday, October 24, 1929: investors were nervous about rising interest rates, started to sell shares. With this happening confidence wavered and prices fell.Black Tuesday, October 29, 1929: prices fell to a new low as investors got rid of 16 million shares of stock on the market.As prices fell brokers contacted customers who owed money and wanted cash to cover loans. Many couldn’t attain the funds and losses were huge. Investors were ruined.
9 The Depression Begins Factors That Caused the Stock Market Crash: 1. economic factors such as rising interest rates worry investors2. investors sell stocks3. stock prices plunge4. heavy sales continue5. The crash
10 Banking Crisis: 1929, a very small part of the population had invested in the market. But, many investors couldn’t pay on their loans and banks were loosing assets and eventually forced to close.Many depositors withdrew their money in panic and this led to more bank failures.Between : 5,000 banks failed1930: 400,000 depositors loss their in a New York City bank.
11 Business failures: Due to the banking crisis industries had lost money in the market. Consumers weren’t buying new products on credit. Which led many companies to reduce inventories, slow down on production schedules, and lay off employees.Gross national product: total value of all goods and services produced in a given year.1932: unemployment rose at 23.6 percent.1930: With the massive unemployment this was the beginning of the Great Depression. The Depression began in 1929 until the start of World War II.
12 What Caused the Great Depression? Global Depression:1. Many blamed the U.S. depression on the aftermath of WWI and the European economy.2. War debts that were built up by European countries.3. Consumers overseas were not buying American goods due to debt.4. America place high tariffs on imported goods. Congress passed Smoot-Hawley Tariff of 1930 one of the highest tariffs on goods. The tariff protected American industries from inexpensive imports. This just spurred the global depression by taking out the American market for foreign manufacturers and industries.
13 The income gap and consumer debt 5. Historians have argued that uneven distribution of wealth was another cause of the depression.In 1929 nearly 80 percent of the nation’s families had no savings at all. These families had no financial cushion when the depression hit. Businesses stopped extending credit when the depression started.Writer Upton Sinclair said, “The…depression is one of abundance, not of scarcity….The cause of the trouble is that a small class has the wealth, while the rest have the debts.” Many had argued if workers wages were higher and farmers received better prices on crops the depression may have not been as severe.
14 The business cycleBusiness cycle: regular ups and downs of business in a free-enterprise economy. The business cycle theory, industries increase production and hire more workers in good times-surpluses pile up-overproduction. Companies cut down on production and lay off workers. With no salary coming in consumers cannot purchase products. Underconsumption, leads to a recession or depression. Surplus goods are sold and industry again starts production and the recession/depression is done.The length and downturn of the Great Depression were out of the cycle of the business cycle.