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Factors in the Stock Market Crash and the Causes of the Great Depression Lecture


Factors in the Stock Market Crash and the Causes of the Great Depression Lecture 1920 s Prosperity The years following WWI are known as the Roaring Twenties . – PowerPoint PPT presentation

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Title: Factors in the Stock Market Crash and the Causes of the Great Depression Lecture

Factors in the Stock Market Crash and the Causes
of the Great Depression Lecture
1920s Prosperity
  • The years following WWI are known as the Roaring
    Twenties. During the 1920s, many Americans
    believed that the United States was a place of
    unlimited growth, opportunity, and achievement.
    Americans were earning more money then ever.
    Between 1922 and 1929 the national income rose
    from 61 billion to 87 billion, a leap of nearly
    43 . Due to their increased earnings, many
    Americans had more money to spend on luxury goods
    such as radios, refrigerators, and automobiles.
    In addition, by 1929 the US Stock market was at
    an all time high. By the end of 1929 Americans
    had traded 1.1 billion shares of stock on the New
    York Stock Exchange. Many argued that the
    American economic prosperity would last forever

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The Great Depression Foreshowed
  • By late 1929 cracks were beginning to show in the
    US economy. Unemployment was on the rise, farmers
    were losing their land and stock prices were
    dropping. While many historians debate the exact
    cause of the Great Depression, they generally
    agree on five key factors

1. Republican domestic and international policies
  • The administration of President Calvin Coolidge,
    from 1923 to 1929, and his Republican successor,
    Herbert Hoover, implemented many pro-business
    policies based on the doctrine of trickle-down
    economics and a conservative approach to
    international economics. Their belief was that if
    the government provided business and the wealthy
    individuals with significant tax cuts, they in
    turn would reinvest in the US economy. To make up
    for lost revenue the Government cut government
    expenditures and raised taxes on the middle and
    lower classes. Yet wealth did not trickle down,
    instead corporations devoted their profits to
    expand their factories, increase the production
    of goods and lining their own pockets.
    Furthermore, owners kept workers wages low, thus
    increasing the gap between the rich and the poor.

1. Republican domestic and international policies
  • After WWI most European nations were broke and
    could not pay pack the 11 billion loans they
    owed the US. In Response, the US began to
    reschedule the loan payments and began lending
    European nations even more money in an attempt to
    help them repay the original loan debt. In
    addition, Republican in Congress imposed high
    tariffs on imports to promote consumer spending
    on American made products. As a result, without
    substantial markets for their goods, European
    nations had no hope of repaying loans.

2. Unchecked Stock Speculation
  • Investor speculated which companys stock would
    rise and then bought large quantities of stock,
    which they then resold at a higher price for a
    quick profit. Some rich investors would pool
    their money together and buy large amount of
    stock at a cheap price. Smaller investors would
    conclude that the company was profitable and
    would begin a buying frenzy. When the stock price
    peaked the investor pool operators would quickly
    sell off. Since the price of the stock was
    artificially inflated the value of the stock
    plummeted when the investor pool pulled out of
    the company stock. This practice drove stock
    value artificially higher and higher causing some
    economist to fear that the market would soon head
    for a big fall.

3. Weak and unregulated Banking
  • The banking industry had grown increasingly
    unstable over the course of the 1920s because of
    the banks over-extension of credit to stock
    investors. During the period, Banks permitted
    investors to buy stock on large margins of
    credit, called buying on margin. Investor put 10
    cash down on stock purchases, and then the bank
    lent the rest of the money to buy the stock using
    the stock as collateral. So if a person wanted
    20,000 in stock they had to invest 2,000 with
    the bank loaning 18,000. The Federal government
    did nothing to prevent the banks from loaning
    their depositors money on high risk ventures, to
    require keep a certain part of the deposits in
    reserve, or to insure the depositors money.

3. Weak and unregulated Banking
  • So when the Stock market collapses in 1929
    investor who had bought on margin could not pay
    back the loans. Banks in turn could not replace
    their depositors money which they had used to
    fund the high risk loans. Therefore, not only did
    investor and banks lose money and close, but even
    families who had not played the stock market lost
    all their money. By 1932 almost 6,000 Banks had

4. Overproductions of goods
  • Before 1929 American production of goods
    parallel the course of the stock market. Consumer
    demand for goods was high and new inventions
    allowed companies to produce more goods in less
    time. As a result companies continued to expand
    their factories, increase their production and
    flooded the market with endless supply of goods.
    But by 1929 companies had more plants than they
    needed and the market place was saturated with
    goods few Americans could afford. In addition,
    Farmers began to take advantage of the same
    technological advancements to increase
    agricultural production. To buy this new
    technology farmer borrowed heavily from banks
    believing he market for their goods would
    continue to grow.

4. Overproductions of goods
  • However, competition with farmers in other parts
    of the world, particularly a recovering Europe,
    caused the demand for US agricultural products to
    drop sharply. Farmers were often stuck with crops
    they could not sell or only sell at a very low
    price. As a result, many farmers defaulted on
    loan payments and lost their farms to bank
    foreclosure. To make matters worse the mid- and
    southwest were hit with droughts so severe that
    it cause the top soil to turn to powered and blow
    away, causing the area to be called the Dust
    Bowl. Between 1930 1934, due to drought and
    defaulted loans, 1 million families lost their

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5. Unequal Distribution of Wealth
  • By 1929 1 of the population possessed over 60
    of the countrys wealth. From 1920 1929, the
    average American saw his net income increase by
    9. I comparison, the income of the rich
    Americans rose by 75. In short the rich were
    getting richer and the poor were getting poorer.
    This distribution of wealth had a significant
    impact on the stability of the US economy.

Stock Market Crashes October 1929
  • Economist warned that the bull market, a market
    in which prices are constantly rising, could not
    continue indefinitely made investors nervous. In
    1929 many investor began selling their stocks
    while they could still get a high price for them.
    As a result stock prices fell, companies slowed
    down production because of this decline, which in
    turn led to additional price drops. By October
    1929 stock prices were on a devastating downward
    spiral. On October 29, 1929, known as Black
    Tuesday, orders to sell at any price swamped the
    stock market in New York. In a matter of hours
    people lost fortunes it had taken a decade to
    make. By the end of the Black Tuesday, investors
    had lost 16 billion, the Great Depression had

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