3 Causes of the Stock Market Crash

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?

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?:How?:

• The 1920s = great optimism– reflected in the stock exchanges

• From 1924-1929 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 1924-1929 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

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

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. 1927 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. 1927 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

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….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

5 Causes of the Great Depression

One is the stock market crash!

Holy Barack Obama!

Reason #1The Stock Market Crash

Reason #1The 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 #2Stagnation in Agriculture(Smoot-Hawley Tariff of

1930)

Reason #2Stagnation 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 #3Banks of the United

States Fail

Reason #3Banks 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.)

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)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 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 supplyMoney 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

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 #4Flattening Sales

Reason #4Flattening 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 #5Failure of International

Loans

Reason #5Failure of International

Loans U.S. government and

independent banks failed to recover loans from WWI from Allies and post-WWI loans for German reparations

U.S. government and independent banks failed to recover loans from WWI from Allies and post-WWI loans for German reparations