The Stock Market Crash Mr. Dodson

The Stock Market Crash What events led to the stock market’s Great Crash in 1929? Why did the Great Crash produce a ripple effect throughout the nation’s economy? What were the main causes of the Great Depression?

The Market Crashes The market crash in October of 1929 happened very quickly. In September, the Dow Jones Industrial Average, - an average of stock prices of major industries, had reached an all time high of 381. On October 23 and 24, the Dow Jones Average quickly plummeted, which caused a panic. On Black Tuesday, October 29, 1929, most people sold their stocks at a tremendous loss. This collapse of the stock market is called the Great Crash. Overall losses totaled $30 billion. The Great Crash was part of the nation’s business cycle, a span in which the economy grows, and then contracts.

Some Basic Economics The results of the Great Crash are all symptoms of an economy beginning to contract. Contraction is an economic decline marked by a falling output of goods and services, and increased unemployment. Contraction - Bad Expansion – Good A long and severe contraction is known as a depression.

Business Cycle $$“Boom”$$  Decreasing business activity; unemployment Contraction  Expansion or Growth  Expansion  $$Increasing employment income & general prosperity$$ Contraction  Depression or Recession  Today, the Federal Reserve attempts to make the business cycle look like this 

Effects of the Great Crash, 1929 Investors Businesses and Workers Investors lose millions. Businesses lose profits. Consumer spending drops. Workers are laid off. Businesses cut investment and production Some fail. Banks Businesses and workers cannot repay bank loans. Savings accounts are wiped out. Bank runs occur. Banks run out of money and fail. World Payments Overall U.S. production plummets. U.S. investors have little or no money to invest. U.S. investments in Germany decline. German war payments to Allies fall off. Europeans cannot afford American goods. Allies cannot pay debts to United States.

The Effect of the Great Crash Initially, the crash only effected those who heavily invested in the stock market, soon it effected millions. Risky loans hurt banks – in the 1920s, banks loaned huge $ to high-risk businesses – when stocks fell, these businesses were unable to repay loans. Consumer Borrowing – Consumers had borrowed heavily to buy consumer goods, when banks called in their loans (wanted their money back) customers did not have cash to repay them Bank Runs – afraid that banks would run out of money people rushed to withdraw their money. To pay back these deposits, banks had to recall loans from borrowers.

The Effect of the Great Crash Bank Failures – the combination of unpaid loans and bank runs meant that many banks failed. 5,500 failed! Savings wiped out – bank failures wiped out what little savings people had. Cuts in production – Businesses could not borrow money – couldn’t produce more goods – few people had money to buy Rise in Unemployment – as businesses cut production, they laid off workers, unemployment increased Further Production Cuts – as unemployment grew, incomes shrank, consumers spent less, businesses produced even fewer goods

Impact on Farmers and Workers With cuts in production, factories began to close and workers lost jobs Soon small factories closed – local businesses and restaurants closed too (workers had no money to go to them) Already low farm prices fell lower (no one could afford them at the current price) farmers lost money and their homes

Impact on the World Many of the world’s banking, manufacturing, and trade were interdependent When the U.S. economy fell, the global economic system began to contract After WW1 France & Britain needed to repay their war debts Congress kept import taxes high making it hard for European nations to sell to the U.S. German banks failed, so the Allies could not repay the U.S.

The Great Depression The economic contraction that began with the Great Crash triggered the most severe economic downturn in the nation’s history—the Great Depression. The Great Depression lasted from 1929 until the United States entered World War II in 1941. The stock market crash of 1929 did not cause the Great Depression. Rather, both the Great Crash and the Depression were the result of deep underlying problems with the country’s economy. Economists dispute what exactly caused it.

Underlying Causes of the Depression An Unstable Economy The prosperous economy of the 1920s lacked a firm base. The nation’s wealth was unevenly distributed. Those who had the most tended to save or invest rather than buy goods. Industry produced more goods than most consumers wanted or could afford. The uneven prosperity of the 1920s made rapid recovery from a poor economy impossible. (not enough money in enough hands) Over-speculation Speculators bought stocks with borrowed money and then pledged those stocks as collateral to buy even more stocks. The stock market boom was based on borrowed money! About 10 cents on the dollar!) When loans were called in borrowers could not come up with the balance.

Underlying Causes of the Depression Government Policies During the 1920s, the Federal Reserve System cut interest rates to assist economic growth (you can borrow at lower rate, so money is cheaper) Then, in 1929, it limited the money supply to discourage lending. As a result, there was too little money in circulation to help the economy after the Great Crash. During the Depression, political leaders debated whether to stimulate the economy with higher government spending or to let the natural operation of the free market restore economic expansion & prosperity

Underlying Causes of the Depression Too much Debt Many people were in debt and were vulnerable to poor economic conditions – too many loans Many businesses were heavily in debt counting on good times. Banks Failures Many banks were structurally weak Many banks did not keep enough money in reserve so they could not deal with bank runs or bad loans Failed banks had no money to lend Breakdown of International Trade. Many European countries had large debts with U.S. banks High Tariffs (Smoot Hawley Act) reduced amount of European goods purchased – no new income for Europe – can’t pay back loans Also demand for U.S. goods decreased