The Stock Market Crash

1. The Stock Market Crash 15.1

2. Background • 1920s appeared to be a decade of prosperity = “The Roaring 20s” • Some believed economic problems existed below the surface • Most ignored these warnings

3. Credit • Confidence in nation’s prosperity led many to purchase goods on credit • 1929: Credit purchases =$7 billion • Government encouraged credit spending by keeping interest rates low

4. Problems With Easy Credit • Easy access to credit enabled people to buy things they couldn’t afford • Economic experts worried about debt • High consumer debt could cripple people in an economic downturn

5. Bull Market • A market with an upward trend in prices • Seemed no end to 1920s Bull Market Bear Market • A market with a downward trend in prices

6. Stock Speculation • = Playing the market by buying and selling stocks to make a quick profit – becomes popular • This stimulated economic growth • Rapid buying and selling inflated stock prices • Could be a problem if demand decreased.

7. Margin Buying • = The practice of purchasing stocks with borrowed money • Speculators often buying stock with 10% down – borrowing 90% • Margin buying was great with a bull market But…. • Bear market would be investors deep in debt.

8. The Crash • October 24, 1929: Black Thursday = The beginning of the crash • Rising interest rates made large numbers of investors nervous • - they began selling large # of shares • Leads confidence to drop and prices pushed lower and lower

10. Black Tuesday • October 29, 1929 • Stock prices sank to shocking lows • 16 million shares of stock were sold in one day • = huge amount of debt

12. Stock Brokers & Debt • Brokers began to contact investors who had purchased theirs on margin(by borrowing) • They demanded cash to cover their loans • Investors were unable to pay • = had to sell stocks at huge losses • By mid- Nov – leading stocks values were cut in half!!

13. Part 2 The Beginning of The Great Depression

14. The Great Depression Public officials & Business leaders insisted the stock market crash was a temporary and minor setback Coming events would prove them wrong

15. Causes of the Great Depression • 1. Banking Crisis • 2. Business Failures • 3. Rising Unemployment • 4. Global Depression • 5. Income Gap / Consumer Debt • 6. Business Cycle

16. 1. The Banking Crisis Cause: Stock Market Crash – Directly affected only a few Americans Indirectly – affected millions Effect: Bank failures led to complete loss of all money in that bank

17. Banking Crisis Banks make money by investing their customer’s money Result: When the market crashed banks suffered severe losses like all investors

18. Defaults On Loans Cause: Many investors had lost most of their money in the crash Effect: Most could not repay their bank loans Result: This left many banks with little income = Many banks had to close

19. Fear of Additional Failures Cause: Depositors fear losing their money if a bank closed Effect: Depositors panic and began trying to withdraw their savings Result: Catastrophe for banks that were already low on money Led to more bank failures

20. 2. Business Failures Over 26,000 businesses went bankrupt in 1930 alone GNP = total value of goods & services produced per year. Gross National Product (GNP): 1929 - $103 Billion 1933 - $56 Billion

21. Decreased ConsumerSpending Cause: Consumers became unwilling or unable to buy new products Effect: Debt & fear of bank failures brought an end to purchasing on credit Result: people not buying stuff

22. 3. Rising Unemployment Cause: massive amounts of business failures Effect: People lost their jobs as their companies simply ceased to exist Result: 1932 – Unemployment reached 23.6% Up 20% over 3 years Underemployment – over 50%

23. 4. Global Depression Economic troubles in Europe contributed to the depression Global economy was struggling due to massive war debts World trade declined in the 1920s & 1930s

24. Global Depression’s Impact on America Cause: Foreign customers unable to purchase American goods – too expensive Effect: American industries were left with large surpluses America placed high tariffs on foreign goods to help business Smoot-Hawley Tariff:- highest in US History Accelerated the global depression by eliminating the American market for foreign industry

25. Income Gap / Consumer Debt Disposable income - $ left after buying necessities 1923 – 1929: Cause: Disposable income of the wealthiest 1% of Americans increased by 63% Disposable income for the poorest 93% declined by 4% Effect: poor Americans lacked the $ to boost the economy

26. 6. The Business Cycle = The regular ups and downs of business in the free enterprise economy

27. The United States Business Cycle, 1890-1940

28. Business Cycle Theory Prosperous Times: -Industry increases production & hires more workers =Production develops surplus During Surpluses: - industry scales back production =Workers are laid off and lose purchasing power

29. Recession / Depression Lasts until surpluses are depleted Once surpluses are depleted industry increases and we start over