Transcript 15.1The Stock Market Crash

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
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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
$$“Boom”$$

$$Increasing
employment
income &
general
prosperity$$
Decreasing
business
activity;
unemployment
Depression or
Recession 
Today, the Federal Reserve attempts to
make the business cycle look like this 
Effects of the Great Crash, 1929
Great
Crash
World Payments
Investors
Investors lose
millions.
Businesses
lose profits.
Businesses
and Workers
Consumer
spending drops.
Workers
are laid
off.
Businesses cut
investment and
production
Some fail.
Overall U.S.
production
plummets.
Banks
Businesses
and workers
cannot repay
bank loans.
Savings
accounts
are wiped
out.
Allies cannot
pay debts to
United States.
U.S.
investors
have little or
no money to
invest.
Banks run
out of
money
and fail. Europeans
U.S.
cannot afford
investments
American
in Germany
Bank
goods.
decline.
runs
occur.
German war
payments to
Allies fall off.
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
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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
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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