The Banking System Before the Great Depression

Objective By the end of the lesson, SWBAT explain how the over value of companies and the flow of money led to the collapse of the stock market.

Vocabulary Depositor - A person that puts money into the bank. Borrower - A person that borrows money from the bank. Loan - When a person gets money from a bank and agrees to pay back the money with interest. Interest - A fee that the bank charges or pays out.

World War I ENDED After World War I what was Europe like?

Europe Europe was destroyed!

World War ENDED What was the U.S. like after World War I?

America after WWI America was booming because it was not hurt by the war, and big business was doing the best it had ever done! Why was big business doing so well?

America After WWI

America after the War People all over the country were opening new businesses because of the inventions of electricity, the assembly line, and of course steel! What kind of businesses were people opening?

Where did people get money to open businesses? Larry wants to open up a lamp business. Larry needs to buy a bunch of lamps, buy a store, and pay co- workers. Where does Larry get the money to open this business?

Larry

Larry the Lamp Man Larry doesn’t have a rich uncle so he has to borrow money from the bank! Larry takes a loan out from the bank.

Bank Where does the bank get the money to loan out to Larry?

Bank The bank gets money from depositors. Depositors put money in the bank because they get interest back at the end of the year.

Bank

Dana Dana the depositor puts in $20. The bank says that the bank will pay 10% interest on the money she has in the bank after one year. 10% of $20 = $2 ($20 x .10% = $2) $20 + $2 = $22 So after one year Dana’s $20 will be worth $22 because she put her money in the bank.

Dana

The bank needs Dana’s money to loan out to Larry so that Larry can start his business. However, the bank needs Larry to pay back the money to the bank so the bank can repay Dana.

Larry Larry decides he needs $20 to start his business. Larry borrows $20 and agrees to pay 20% interest on his loan. 20% of $20 = $4 ($20 x .20 = $4) $20 + $4 = $24 This means that in one year Larry has to pay $24 back to the bank.

After WWI After WWI, many people were making more money, so they saved in the bank. Also, many people wanted to start business so they went to the bank to borrow money.

PROBLEM The problem happened when the banks loaned out most of the money they got from the depositors to the borrowers.

Value of Companies In 1929, the stock market, a place where people can buy and sell pieces of a company, went down a lot because the true value of companies was not what people thought!

Black Tuesday On October 29, 1929, the stock market crashed! Values of many companies went down a lot!

Borrowers Because the value of companies went down, many of these businesses could not repay the banks the money that they borrowed? The banks didn’t have any money!

Banking Problem Why didn’t the banks have the money?

Banking Problem The banks loaned out all of the money to the borrowers.

Banking Problem HUGE PROBLEM! People that put money into the banks were not able to get their money back from the bank! People lost a lot of money!

Banking What happened to the depositors when they wanted their money back? What happened to the borrowers?

Rush on the Banks Many of the depositors rushed the banks to get whatever money the bank had before it was totally out of money! It was chaos!

Run on the Banks

Borrowers The borrowers (businesses) went out of business! The borrowers could not repay the loans they took out from the bank!

OH NO! Many business were closed A lot of people lost their jobs A lot of people were very poor because they did not have a job and they lost the money that they put into the bank!

Conclusion The banking system failed in 1929 because the borrowers were unable to pay the banks back, and the depositors were unable to get all of the money that they had put into the bank.