The Crash of 1929

Vocabulary  Stock- a share in business ownership.  Speculation- a risky business venture involving buying or selling property in the hope of making a large, quick profit; making investments in the stock market.  Margin-to “buy on margin” means that the brokerage house lends money to someone to buy securities. If the stock goes up, all the profits (minus the interest charged on the loan) are the purchasers.  Stock- a share in business ownership.  Speculation- a risky business venture involving buying or selling property in the hope of making a large, quick profit; making investments in the stock market.  Margin-to “buy on margin” means that the brokerage house lends money to someone to buy securities. If the stock goes up, all the profits (minus the interest charged on the loan) are the purchasers.

The Stock Market  There was no regulation of the stock market. Some stocks sold that didn’t even exist; insider trading was OK; stocks were highly inflated in value  Bull Market: strong economy, a growth economy, & increased chance for profits.  Bear Market: value of stocks goes down & speculators begin to sell.  There was no regulation of the stock market. Some stocks sold that didn’t even exist; insider trading was OK; stocks were highly inflated in value  Bull Market: strong economy, a growth economy, & increased chance for profits.  Bear Market: value of stocks goes down & speculators begin to sell.

1920s Economy  Average income in 1929 was $750/year  A family of four needed $2000/year to have a minimum of health & decency  In 1925, Americans owed $1.3 billion on installment plans  By 1929, Americans owed $3 billion on installment plans  Average income in 1929 was $750/year  A family of four needed $2000/year to have a minimum of health & decency  In 1925, Americans owed $1.3 billion on installment plans  By 1929, Americans owed $3 billion on installment plans

American Financial Habits  Most Americans borrowed money to purchase durable goods (cars, appliances, etc.)  By the late 1920s, Americans stopped purchasing these items, because almost every household had them.  80% of Americans had NO savings  Most Americans borrowed money to purchase durable goods (cars, appliances, etc.)  By the late 1920s, Americans stopped purchasing these items, because almost every household had them.  80% of Americans had NO savings

False Security  October 19, 1929  “The nation is marching on a permanently high plateau.”  Yale Economist  October 19, 1929  “The nation is marching on a permanently high plateau.”  Yale Economist

Leading up to The Crash  October 21, 1929 the market decline began  October 24, 1929 a selling frenzy began  October 24, 1929 JP Morgan called investors together to buy stocks to boost them up  October 25, 1929 the selling of stocks stopped  October 21, 1929 the market decline began  October 24, 1929 a selling frenzy began  October 24, 1929 JP Morgan called investors together to buy stocks to boost them up  October 25, 1929 the selling of stocks stopped

“Black Tuesday”  On Monday, October 28, Morgan & his investors have second thoughts & begin to sell the stock they purchased the week before  Tuesday, October 29, the bottom drops out and the stock market crashed  This will be the single most devastating day in the market until  On Monday, October 28, Morgan & his investors have second thoughts & begin to sell the stock they purchased the week before  Tuesday, October 29, the bottom drops out and the stock market crashed  This will be the single most devastating day in the market until 2000.

Causes of the Crash  Speculators bought stocks on margin  Some brokers charged 20% interest  In the boom years investors made fortunes by selling their stocks at a profit  By the summer of 1929, brokers had lent out more than $6 million in margin loans  Speculators bought stocks on margin  Some brokers charged 20% interest  In the boom years investors made fortunes by selling their stocks at a profit  By the summer of 1929, brokers had lent out more than $6 million in margin loans

Causes Continued  Realizing that the market was saturated, a few investors began selling their stock  By the fall of 1929, stock prices began to decline  Brokers began calling in their margins  If an investor did not have the cash to pay the brokers, the brokers were forced to sell the stock  This enforced selling caused stock prices to go down even further  Other investors noticed the prices going down & began to sell theirs in a panic  Realizing that the market was saturated, a few investors began selling their stock  By the fall of 1929, stock prices began to decline  Brokers began calling in their margins  If an investor did not have the cash to pay the brokers, the brokers were forced to sell the stock  This enforced selling caused stock prices to go down even further  Other investors noticed the prices going down & began to sell theirs in a panic

How the Banks Became Involved  Many banks had lent money to the brokerage houses  Brokers lost the money when their customers could not respond to the margin calls & failed to repay the loans  The banks were not federally insured, so the money that prudent people had saved vanished  Many banks had lent money to the brokerage houses  Brokers lost the money when their customers could not respond to the margin calls & failed to repay the loans  The banks were not federally insured, so the money that prudent people had saved vanished

Results  Banks that had not loaned money to brokerage houses were not affected by the stock market  As people watched the market crash and banks fail, they became nervous  These people made “runs” on their banks  Meaning they withdrew all their funds, causing stable banks to fail  Banks that had not loaned money to brokerage houses were not affected by the stock market  As people watched the market crash and banks fail, they became nervous  These people made “runs” on their banks  Meaning they withdrew all their funds, causing stable banks to fail