The Stock Market Crash Chapter 14-1

The Nation’s Sick Economy The prosperity of the 1920s was superficial: Major industries are not making a profit; – Demand for industrial goods decreases after WWI; There is a crisis in farming – Demand for farm goods decreases after WWI; – Prices for farm goods fall (deflation); – Farmers are debt Consumers have less money to spend & buy less; Many people are living on credit (borrowed money); Gap between rich & poor widening.

What is Stock? Stock – A small piece of ownership in a corporation – Corporations sell stock in order to raise money to expand their business and/or develop new products; – The price of a company’s stock reflects the perceived value of the corporation What the public thinks the company is worth

What is the Stock Market? Stock Market (aka Stock Exchange) – a place where stocks are bought and sold; – The New York Stock Exchange is one of the oldest and best established stock markets in the country; – The Dow Jones Industrial Average is an average of the stock prices for 30 of the biggest companies traded on the NYSE; Many people look to the Dow as a barometer of the of the stock market’s health

Stocks in the Roaring 1920s During the 1920s stock prices rose steadily – The Dow Jones hit an all time high of 381 People rushed to buy stocks and bonds – Many engaged in speculation – buying stocks with the hope of making a quick profit; – People also began to buy on margin – paying a small percentage of a stock’s price and borrowing the rest (on credit). Bubble Market - Rising stock prices do not accurately reflect the actual value of the stock

The Stock Market Crashes In 1929 stock prices peak, then fall; The Bubble Bursts – Investors begin to loose confidence in the stock market; Black Tuesday – October 29, 1929, investors panic and everyone tries to sell their stock; There are no buyers; People who bought stock on margin are stuck with huge debt, others loose their entire investment; By November, investors have lost $30 Billion.

The Great Depression Begins The stock market crash signals the beginning of the Great Depression; – An economic depression is characterized by negative economic growth and high unemployment; GDP is cut in half, from $104B to $59B – 90,000 businesses go bankrupt Unemployment reaches 25% – The Great Depression lasts from 1929 – 1940

Depression Strikes Worldwide Most European countries have huge debts as a result of WWI High tariffs (taxes on imports) limit America’s ability to import goods from Europe – This prevents Europeans from earning American dollars and buying American goods – European countries institute their own protective tariffs on imported American goods – World trade plummets by 40% Unemployment is made worse

Panic Spreads to the Banks The crash leads people to panic and try to withdraw their money from banks; – Many banks have invested in the stock market and have lost a lot of money; – They have no money to return to their customers; – Thousands of banks close; 44% of the nation’s banks close – Many people loose their entire life savings;

Summary of Causes War debt and high tariffs limit the foreign market for American goods Demand for consumer goods decreases after the war; A crisis in farming leads to massive debt and falling prices for farm goods; Availability of easy credit; An unequal distribution of income