3 Causes of the Stock Market Crash

Was the crash of the stock market in 1929 a essential reason our nation experienced a Great Depression? Yes, but it was only ONE of the reasons! So, what in Joe Biden’s name happened?

How?: The 1920s = great optimism –reflected in the stock exchanges From the volume & value of stocks traded on the NYSE soared –a very conservative $1,000 invested at the high point of 1924 was worth $3,000 at the 1929 peak, a 40% annual return Three conditions no longer prevalent contributed to the great bull market –margin buying, the investment trust, & banking practices The 1920s = great optimism –reflected in the stock exchanges From the volume & value of stocks traded on the NYSE soared –a very conservative $1,000 invested at the high point of 1924 was worth $3,000 at the 1929 peak, a 40% annual return Three conditions no longer prevalent contributed to the great bull market –margin buying, the investment trust, & banking practices

The Stock Market Crash of 1929 –REASON #1: Overpriced Stock –there was too much financial commitment to a rising market & no political profit in trying to slow it down On Thursday, Oct. 24, 1929, investors sold 12,894,560 shares of stocks –this was over twice the record of 6,000,000 set the day before (OVERPRICED STOCKS) $6-7 billion in values disappeared The next Tues., Oct. 29 (Black Tuesday), 16.4 million shares traded & another $8-9 billion evaporated –over the next six weeks market prices declined 40% as credit & money disappeared Over the next year bankruptcies, fore-closures, & business failures skyrocketed –REASON #1: Overpriced Stock –there was too much financial commitment to a rising market & no political profit in trying to slow it down On Thursday, Oct. 24, 1929, investors sold 12,894,560 shares of stocks –this was over twice the record of 6,000,000 set the day before (OVERPRICED STOCKS) $6-7 billion in values disappeared The next Tues., Oct. 29 (Black Tuesday), 16.4 million shares traded & another $8-9 billion evaporated –over the next six weeks market prices declined 40% as credit & money disappeared Over the next year bankruptcies, fore-closures, & business failures skyrocketed

REASON #2: Buying on Margin Buying on margin simply meant borrowing a part of the purchase price of stocks from the seller, usually a broker –a 10% margin allowed a buyer to control $10,000 in stock for a $1,000 investment –this was great as long as prices moved up but if they dropped you could lose your investment Example: In Jan GE sold for $81/share so you could have bought 100 shares on a 10% margin for $810 eight months later you could have sold your shares for $141 each collecting a $6,500 profit Buying on margin simply meant borrowing a part of the purchase price of stocks from the seller, usually a broker –a 10% margin allowed a buyer to control $10,000 in stock for a $1,000 investment –this was great as long as prices moved up but if they dropped you could lose your investment Example: In Jan GE sold for $81/share so you could have bought 100 shares on a 10% margin for $810 eight months later you could have sold your shares for $141 each collecting a $6,500 profit

REASON #3: Uneducated Consumers Too many “Uneducated Consumers” Buying on margin potentially gave great profits for minimal investments In 1929 brokers’ loans totaled $9 billion meaning that stocks of at least that value weren’t paid for This means that falling prices would trigger sales which would cause prices to drop further triggering sales causing prices to drop even more triggering… Too many “Uneducated Consumers” Buying on margin potentially gave great profits for minimal investments In 1929 brokers’ loans totaled $9 billion meaning that stocks of at least that value weren’t paid for This means that falling prices would trigger sales which would cause prices to drop further triggering sales causing prices to drop even more triggering…

In a Nutshell….  The economy had been growing/”booming” for most of the so-called Roaring Twenties.  Investors were infatuated with the returns available in the stock market and bought on margin.  The stock market soon went through a series of unsettling price declines in early October.  These declines fed investor anxiety and events soon came to a head. October 24 was the first in a number of increasingly shocking market drops including Black Tuesday on October 29  Black Tuesday was a day of chaos. Forced to get rid of their stocks because of margin calls, overextended investors flooded the NYSE with sell orders.  The economy had been growing/”booming” for most of the so-called Roaring Twenties.  Investors were infatuated with the returns available in the stock market and bought on margin.  The stock market soon went through a series of unsettling price declines in early October.  These declines fed investor anxiety and events soon came to a head. October 24 was the first in a number of increasingly shocking market drops including Black Tuesday on October 29  Black Tuesday was a day of chaos. Forced to get rid of their stocks because of margin calls, overextended investors flooded the NYSE with sell orders.

5 Causes of the Great Depression One is the stock market crash! Holy Barack Obama!

Reason #1 The Stock Market Crash  The symbol of everything that went wrong  This crash in itself hurt a small minority of people, but it triggered a “ripple effect” and hurt other aspects of the economy  The symbol of everything that went wrong  This crash in itself hurt a small minority of people, but it triggered a “ripple effect” and hurt other aspects of the economy

Reason #2 Stagnation in Agriculture (Smoot-Hawley Tariff of 1930)  Originally meant to keep agriculture “American.” Created to help American farmers  Raised U.S. tariffs (prices) on over 20,000 imported goods to record levels  Imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.  Other countries imposes tariffs to match the United States’ tariffs  Originally meant to keep agriculture “American.” Created to help American farmers  Raised U.S. tariffs (prices) on over 20,000 imported goods to record levels  Imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.  Other countries imposes tariffs to match the United States’ tariffs

Reason #3 Banks of the United States Fail  Banks take in deposits. Bank Reserves are the amount of deposits not loaned out by banks.  Fractional Reserve Banking System-banks take in deposits and lend most of the money that they take in (keep only a fraction)  Depends on the willingness of people to hold bank accounts  Banks take in deposits. Bank Reserves are the amount of deposits not loaned out by banks.  Fractional Reserve Banking System-banks take in deposits and lend most of the money that they take in (keep only a fraction)  Depends on the willingness of people to hold bank accounts

Banks of the United States (cont.)  People borrow money from banks (loans)  The money loaned out is spent almost immediately by borrowers to pay for purchases  Because only a small fraction of the banks’ customers’ deposits are kept on reserve, not everyone can get their money out of the bank on the same day.  People borrow money from banks (loans)  The money loaned out is spent almost immediately by borrowers to pay for purchases  Because only a small fraction of the banks’ customers’ deposits are kept on reserve, not everyone can get their money out of the bank on the same day.

FDIC (Federal Deposit Insurance Corporation)  An independent deposit insurance agency created by Congress in 1933  Developed in order to maintain stability and public confidence in the nation’s banking system  Insures consumer deposits in a bank or savings and loan for up to $100,000 per account (now 250,00)  Works for checking and savings accounts, plus deposits  An independent deposit insurance agency created by Congress in 1933  Developed in order to maintain stability and public confidence in the nation’s banking system  Insures consumer deposits in a bank or savings and loan for up to $100,000 per account (now 250,00)  Works for checking and savings accounts, plus deposits

Bank Panics and Suspensions  Bank failures occur when banks are unable to meet depositors’ demands for their money  When many depositors run into a bank at the same time to get their money out, it is called a “bank run.”  When a bank run begins at one bank and spreads to other banks, causing people to lose confidence in banks, it is called a bank panic.  Bank failures occur when banks are unable to meet depositors’ demands for their money  When many depositors run into a bank at the same time to get their money out, it is called a “bank run.”  When a bank run begins at one bank and spreads to other banks, causing people to lose confidence in banks, it is called a bank panic.

Money supply  The shrinking money supply means that people and businesses are able to borrow less from banks  People buy fewer goods and services  Businesses sell fewer goods and services because people have less to spend.  Prices decline  Business Revenues decline  Businesses are able to buy fewer supplies and equipment. Businesses are unable to employ as many workers,  Workers who are paid less or lose their jobs  More banks fail  The shrinking money supply means that people and businesses are able to borrow less from banks  People buy fewer goods and services  Businesses sell fewer goods and services because people have less to spend.  Prices decline  Business Revenues decline  Businesses are able to buy fewer supplies and equipment. Businesses are unable to employ as many workers,  Workers who are paid less or lose their jobs  More banks fail

Outflow of Gold from the U.S. Banking System  In the 1930s, the United States was on a gold standard  The United States would exchange dollars for gold at a fixed price  Large withdrawals of gold (or cash) could reduce bank reserves so much that banks would be forced to contract their outstanding loans.  In the 1930s, the United States was on a gold standard  The United States would exchange dollars for gold at a fixed price  Large withdrawals of gold (or cash) could reduce bank reserves so much that banks would be forced to contract their outstanding loans.

Reason #4 Flattening Sales  Automobile, housing, and manufacturing  Consumer market was saturated (full)- everyone who was going to buy the items had already done so  Automobile, housing, and manufacturing  Consumer market was saturated (full)- everyone who was going to buy the items had already done so

Reason #5 Failure of International Loans  U.S. government and independent banks failed to recover loans from WWI from Allies and post-WWI loans for German reparations