The Start of the Great Depression Black Tuesday The Start of the Great Depression

The Bull Market and the “Strong Economy” of the 1920s Prolonged bull market encouraged people to invest in stock! – STRONG economy! Bull Market – optimism, investor confidence and expectations; prices of market rise or are expected to rise Peak of stock market is in August 1929 What is the Dow Jones Industrial Average? (the average value of 30 large, industrial stocks) – indicator of the stock market! If the DJIA is going up, then the stock market is doing well; if the DJIA is going down, then the stock market is not doing well * 'Bull Market' Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets… The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market… The Dow Jones Industrial Average is simply the average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the kinds of companies that make up this index. The thing to understand is that the Dow Jones Industrial Average is nothing magic – someone has chosen 30 companies and averaged their values together by following a specific formula. That's all it is. What these averages tell you is the general health of stock prices as a whole. If the economy is "doing well," then the prices of stocks as a group tend to rise. If it is "doing poorly," prices as a group tend to fall. The averages show you these tendencies in the market as a whole. If a specific stock is going down while the market as a whole is going up, that tells you something. Or if a stock is rising, but is rising faster or slower than the market as a whole, that tells you something as well.

The Bull Market and the “Strong Economy” of the 1920s Speculation and buying stocks “on margin” (buying stocks on margin – 10% necessary – plus speculation led to falsely high stocks) Example: with $1,000 an individual could buy $10,000 worth of stock – the other $9,000 became a loan to the stockbroker… BUT, no worries! (yeah, right) IF price of stock rose, investor made a profit (value of stock to $11,000 – investor made a $1,000 profit) IF price of stock fell, the stock broker could make a margin call (call for repayment of loan all at once) Speculation And Overleverage In The Great Depression With only loose stock market regulations in place before the Great Depression, investors were able speculate wildly, buying stocks on margin, needing only 10% of the price of a stock to be able to complete the purchase. Rampant speculation led to falsely high stock prices, and when the stock market began to tumble in the months leading up to the October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began. While the great rise in the stock market (from 181 points in early 1928 to 381 points in September 1929) was fueled by optimism and false hope, the plunge was flamed by stark fear. What was the result? Sensitivity to price change in the stock market; as long as prices were rising, everything was good, if prices fells, the system fell apart

The Bull Market and the “Strong Economy” of the 1920s False sense of prosperity in the “Roaring Twenties” (wide-gap between the rich and poor – 60% of population below poverty level; 1% owned 40% of nation’s wealth) Over-production and under-consumption (wages for unskilled workers barely rose during the 1920s – so, the BUBBLE industries were being created – consumption could keep up with production only for a short period of time…)

The Great Crash and Black Thursday By early October, 1929, the NYSE stock market prices had begun to slowly fluctuate (August was the high point of the market) Monday, Oct. 21, 1929 – Stockbrokers began to make large- scale margin calls (by that Thursday, Oct. 24, the NYSE had lost 11% of it’s market) Panic set in, and on October 24, Black Thursday, a record 12,894,650 shares were traded!

The Great Crash and Black Tuesday Investment companies and leading bankers attempted to stabilize the market by buying up blocks of stock, producing a moderate rally on Friday (on Monday, the market went into free fall) Black Tuesday (October 29), stock prices collapsed completely and 16,410,030 shares were traded on the NYSE in a single day! ($10-$15 billion lost) By mid-November, $30 billion had been lost! (wiped out thousands of investors, companies – more money lost than all wages earned in 1929)

Bank Runs Banks throughout the country had loaned money to potential investors – when stock market crashed thousands of people lost ability to pay debts (not THAT bad, but…) Banks also began to invest depositor's money into the stock market (uh-oh)

Banks Begin to Close and Bank Runs What was the result of this? When stock market collapsed: banks lost money on investments speculators defaulted on their loans banks stopped lending money, making less credit available, economy sent into recession banks begin to close due to their inability to absorb loses

The Roots and Long-Term Causes of the Great Depression 2.) Over-production and under-consumption 3.) Low Interest Rates (Federal Reserve) 5.) Stock Market speculation 4.) High Tariffs (Hawley-Smoot Tariff)… meant a loss of export sales! 1.) Uneven distribution of wealth (failing DEMAND)… BUBBLE industries!