Goals for today Understand the major causes and effects of the stock market crash and the Great Depression
In the 1920s: High Hopes Journalist Lincoln Steffens: “Big business in America, is producing what the Socialists held up as their goal: food, shelter and clothing for all. You will see it during the Hoover administration.” Business was booming!
The 1920s Stock Market surges In 1925, the value of all stocks $27 billion By October of 1929, stock values were $87 billion Many people thought everyone would become rich Think back to yesterday’s simulation: If people thought the stock market would continue to go up forever, what would that lead them to do?
But underneath the wealth… There were warning signs that all was not well
1. Gap between rich and poor 2. Personal debt 3. Speculation 4. Farmers & workers struggle WARNING SIGNS
Warning Signs 1. GAP BETWEEN RICH AND POOR The Rich: Huge corporations – not small businesses – were succeeding In 1929, 0.1% of the population had 34% of the country’s total savings Secretary of the Treasury, Andrew Mellon, gave the largest tax cuts to the wealthiest Americans The Poor: 71% of individuals and families earned less than $2,500 a year 80% of families had no savings
Warning Signs 2. PERSONAL DEBT People believed that America was becoming more and more prosperous They started buying more, and going into debt
Warning Signs 3. SPECULATION Speculation: Making high-risk investments, hoping to get a huge return Buying on margin: Investors could purchase a stock for a fraction of the price (10-50%) and borrow the rest. If the stock went up, people could make lots of money.
Two questions… In yesterday’s simulation: How did speculation and buying on margin hurt investors? How might they also contribute to an unstable economy?
Warning Signs 4. FARMERS AND WORKERS STRUGGLE Farms struggled Farms couldn’t repay money to banks 6,000 rural banks failed during the 1920s Factory workers also struggled Worked many hours for little pay
In the Stock Market… In 1929, prices in the Stock Market reach an all- time high But a few worried investors started to sell This led many people to follow their example Think back to yesterday’s simulation… Why might stock owners want to sell when they saw others selling? What were they afraid of?
BLACK TUESDAY October 29, 1929 16.4 million shares traded on this day Market collapses
Effects of the Stock Market Crash 1. Risky loans hurt banks 2. Consumer borrowing bankrupted people 3. Bank runsbank failures >People all ran to the bank to withdraw their money >Banks collapsed, people lost everything
Ultimately… The Stock Market Crash leads to the Great Depression
Too much for sale, too little to spend Other Causes
Bank Failures Banks were hurt by crisis because the money they lent out was not being repaid. Banks closing at high rates, especial in rural areas People ran to banks to withdraw their money. When banks ran out of money, they had to close. People lost their savings.
Overproduction By 1920s, factories were using assembly-line methods and producing a lot of goods. Overproduction – more products are created than people can afford to buy Factories had to cut-back costs and lay people off
Underconsumption Underconsumption – people were not buying as much as the economy was producing. By 1929, people who could buy cars, radios, etc. already had them. Few rich did not buy enough, many poor did not spend enough
After the crash… Industrial production fell by 50% 12 million people were unemployed Businesses closed, people had no money, families starved or scraped by
Government makes things worse FED increases interest rates Effect- less money moving around in the economy Hawley-Smoot Tariff Act- Tax placed on imported goods (it was meant to protect US businesses) Effect- Reduction in trade hurts US economy even more!