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

Terms