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Economic Weaknesses
Uneven Distribution of Wealth Few people prospered Income of wealthiest 1% of Americans
grew 60% Most workers - 8% increase
By 1929 70% of families had income below level needed for a good standard of living
People stopped saving
Overuse of credit
Buying slowed Warehouses
filled with goods
Credit also used to buy stocks Risky practice, popular trend
BUYING ON MARGIN: buying stocks with loans from stockbrokers
Mr. B
•Mr. B buys 100 shares of stock at $10 a share•100 X $10 = $1000 TOTAL COST
•Mr. B pays $500 and borrows other $500 from a stockbroker
•Mr. B plans to pay off the loan when he sells the stock
B.O.M. grew in popularity Brokers began
requiring lower margins
As little as 10% Mr. Investor
10% = only $100 of $1000 investment
Seemed like an easy way to make $$$
B.O.M. = huge risk If stock price rises $15/share
Mr. Investor could sell stock for $1,500 Get back $500 Pay back $500 to broker $500 profit
Stock price drops to $5/share Mr. Investor can only sell stock for $500
$500 pays of loan Loses his own $500 No profit
MARGIN CALL: Brokers force investors to repay loans if stock’s value falls below certain point Made sure brokers get repaid Investors in big trouble if stock lost value
quickly
Federal Reserve Board: works to regulate nation’s money supply to promote healthy economic activity Worried about B.O.M. Made it difficult and expensive to offer
margin loans Helped decrease borrowing from banks But large corporations began loaning
“Sooner or later a crash is coming, and it may be terrific.” Roger Babson
“I see now reason for the end-of-the-year slump which some have been predicting.” Charles E. Mitchell
1928 - market value increased 50%
1929 – market value increased 27%
People in financial world saw trouble Sales down Fears up
Thursday October 24th 1929
Friday, October 25, 1929 Market returned to normal
Monday, October 28, 1929 Market sank
Tuesday, October 29, 1929 BLACK TUESDAY Markets in panic Investors tried to sell 16
million shares Even best companies
collapsed
October 1929 – stock market value drops by $16 billion (1/2 of its value)
EFFECTS ON INDIVIDUALS EFFECTS ON BANKS
Investors lost huge fortunes Especially people who
bought on margin Forced to sell shares for far
less than what they had paid People lost entire savings
making up the difference Lost jobs Pay decreased Stopped buying
Triggered banking crisis People freaked out,
withdrew money and drained banks of funds
Lost money from own investments
Banks absorbed losses from stocks sold on margins
Drove many banks out of business
EFFECTS ON BUSINESS EFFECTS OVERSEAS
Banks and investors unable to provide industry w/ money needed to grow
Consumer spending down
Laid off employees People w/o jobs have
even less money to spend Lowered wages
American banks called in loans from European nations/businesses Couldn’t pay back loans
Foreign businesses couldn’t sell products in U.S. Laid off workers Less money pumped into
their economy Tariffs passed – made
things worse
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