2The Stock Market CrashWhat events led to the stock market’s Great Crash in 1929?Why did the Great Crash produce a ripple effect throughout the nation’s economy?What were the main causes of the Great Depression?
3The Market CrashesThe market crash in October of 1929 happened very quickly.In September, the Dow Jones Industrial Average, - an average of stock prices of major industries, had reached an all time high of 381.On October 23 and 24, the Dow Jones Average quickly plummeted, which caused a panic.On Black Tuesday, October 29, 1929, most people sold their stocks at a tremendous loss.This collapse of the stock market is called the Great Crash. Overall losses totaled $30 billion.The Great Crash was part of the nation’s business cycle, a span in which the economy grows, and then contracts.
4Some Basic EconomicsThe results of the Great Crash are all symptoms of an economy beginning to contract.Contraction is an economic decline marked by a falling output of goods and services, and increased unemployment.Contraction - Bad Expansion – GoodA long and severe contraction is known as a depression.
5Business Cycle $$“Boom”$$ Decreasing business activity; unemployment Contraction Expansion or Growth Expansion $$Increasing employment income & general prosperity$$Contraction Depression or Recession Today, the Federal Reserve attempts to make the business cycle look like this
6Effects of the Great Crash, 1929 InvestorsBusinesses and WorkersInvestors lose millions.Businesses lose profits.Consumer spending drops.Workers are laid off.Businesses cut investment and production Some fail.BanksBusinesses and workers cannot repay bank loans.Savings accounts are wiped out.Bank runs occur.Banks run out of money and fail.World PaymentsOverall U.S. production plummets.U.S. investors have little or no money to invest.U.S. investments in Germany decline.German war payments to Allies fall off.Europeans cannot afford American goods.Allies cannot pay debts to United States.
7The Effect of the Great Crash Initially, the crash only effected those who heavily invested in the stock market, soon it effected millions.Risky loans hurt banks – in the 1920s, banks loaned huge $ to high-risk businesses – when stocks fell, these businesses were unable to repay loans.Consumer Borrowing – Consumers had borrowed heavily to buy consumer goods, when banks called in their loans (wanted their money back) customers did not have cash to repay themBank Runs – afraid that banks would run out of money people rushed to withdraw their money. To pay back these deposits, banks had to recall loans from borrowers.
8The Effect of the Great Crash Bank Failures – the combination of unpaid loans and bank runs meant that many banks failed. 5,500 failed!Savings wiped out – bank failures wiped out what little savings people had.Cuts in production – Businesses could not borrow money – couldn’t produce more goods – few people had money to buyRise in Unemployment – as businesses cut production, they laid off workers, unemployment increasedFurther Production Cuts – as unemployment grew, incomes shrank, consumers spent less, businesses produced even fewer goods
9Impact on Farmers and Workers With cuts in production, factories began to close and workers lost jobsSoon small factories closed – local businesses and restaurants closed too (workers had no money to go to them)Already low farm prices fell lower (no one could afford them at the current price) farmers lost money and their homes
10Impact on the WorldMany of the world’s banking, manufacturing, and trade were interdependentWhen the U.S. economy fell, the global economic system began to contractAfter WW1 France & Britain needed to repay their war debtsCongress kept import taxes high making it hard for European nations to sell to the U.S.German banks failed, so the Allies could not repay the U.S.
11The Great DepressionThe economic contraction that began with the Great Crash triggered the most severe economic downturn in the nation’s history—the Great Depression.The Great Depression lasted from 1929 until the United States entered World War II in 1941.The stock market crash of 1929 did not cause the Great Depression. Rather, both the Great Crash and the Depression were the result of deep underlying problems with the country’s economy.Economists dispute what exactly caused it.
12Underlying Causes of the Depression An Unstable EconomyThe prosperous economy of the 1920s lacked a firm base.The nation’s wealth was unevenly distributed. Those who had the most tended to save or invest rather than buy goods.Industry produced more goods than most consumers wanted or could afford.The uneven prosperity of the 1920s made rapid recovery from a poor economy impossible. (not enough money in enough hands)Over-speculationSpeculators bought stocks with borrowed money and then pledged those stocks as collateral to buy even more stocks.The stock market boom was based on borrowed money! About 10 cents on the dollar!)When loans were called in borrowers could not come up with the balance.
13Underlying Causes of the Depression Government PoliciesDuring the 1920s, the Federal Reserve System cut interest rates to assist economic growth (you can borrow at lower rate, so money is cheaper)Then, in 1929, it limited the money supply to discourage lending.As a result, there was too little money in circulation to help the economy after the Great Crash.During the Depression, political leaders debated whether to stimulate the economy with higher government spending or to let the natural operation of the free market restore economic expansion & prosperity
14Underlying Causes of the Depression Too much DebtMany people were in debt and were vulnerable to poor economic conditions – too many loansMany businesses were heavily in debt counting on good times.Banks FailuresMany banks were structurally weakMany banks did not keep enough money in reserve so they could not deal with bank runs or bad loansFailed banks had no money to lendBreakdown of International Trade.Many European countries had large debts with U.S. banksHigh Tariffs (Smoot Hawley Act) reduced amount of European goods purchased – no new income for Europe – can’t pay back loansAlso demand for U.S. goods decreased