CAUSES OF THE GREAT DEPRESSION What caused the most severe economic crisis in American history?

Causes of the Great Depression  Prior to October 29, 1929, describe life in America  Did this include rural America/farmers?  Describe ‘Black Tuesday’  Remember, the stock market crash was a cause, not the cause, of the Great Depression.  Today we will discuss the stock market in greater detail  Speculation, markets, buying on margin, bank runs, etc.

Bull!  The purpose of the stock market is to provide companies with capital (money).  Companies sell shares of stock to raise money to expand and produce more.  As businesses thrived in the 1920s, people thought they could make money by investing in them.  Lead to a bull market – steady rise in stock prices.

Up, Up, and Away…  If prices are high today, they’re only going to go up tomorrow… so buy NOW. People bought as much stock as they could. Started counting profits on ‘paper.’  Optimism caused people to put everything into stocks + borrowed $ from brokers (stock sellers). Borrowing $ in the 1920s was pretty easy.

Buying on Margin  A buyer might only pay 10% of a stocks price, then borrow the other 90% from a broker. If I only had $1,000 I could borrow $9,000 from a broker and buy $10,000 worth of stock.  This is called buying on margin. With soaring prices, brokers were all too happy to lend $.

Speculation Leads to Devastation  Speculation – pumping up stock price.  Speculators buy stock to make $ fast (buy a stock today worth $10, sell it tomorrow for $20) Speculation drives up a company’s stock price. The stock price may actually be worth more than the value of the company.

We All Fall Down  When people couldn’t pay back their loans, they had to sell their homes, cars, etc. BROKE!  Companies who invested in the stock market lost all their money and closed their doors… bye-bye jobs

Wipe Out - The Banking Crisis  How do banks operate?  Banks loan money and charge interest – $ doesn’t just sit in the vault.  Buy homes, cars, plant crops, expand business, etc.  Banks were caught up in stock speculation - loaned $ to brokers.  Brokers lent that $ to people to buy stock.

Run Forrest, Run…  Black Tuesday – investors couldn’t repay loans from brokers, so brokers couldn’t repay loans from banks.  With bad loans piling up, banks didn’t look like a safe place to deposit your $.  Before Depression, some banks closed – adios savings.  People wanted their money out of the banks NOW  Bank run – customers run to the bank to get $ out. Those first in line were paid back… if you were in the back?  One-fifth of all banks closed by 1933.

Sum Up  Let’s review your chart.