The Stock Market CrashThe Stock Market CrashMr. DodsonMr. Dodson

The Stock Market CrashThe Stock Market Crash

What events led to the stock market’s What events led to the stock market’s Great Crash in 1929?Great Crash in 1929?

Why did the Great Crash produce a ripple Why did the Great Crash produce a ripple effect throughout the nation’s economy?effect throughout the nation’s economy?

What were the main causes of the Great What were the main causes of the Great Depression?Depression?

The Market CrashesThe Market Crashes

The market crash in October of 1929 happened very quickly. The market crash in October of 1929 happened very quickly. In September, the In September, the Dow Jones Industrial AverageDow Jones Industrial Average, - an , - an

average of stock prices of major industries, had reached an all average of stock prices of major industries, had reached an all time high of 381.time high of 381.

On October 23 and 24, the Dow Jones Average quickly On October 23 and 24, the Dow Jones Average quickly plummeted, which caused a panic.plummeted, which caused a panic.

On On Black TuesdayBlack Tuesday, October 29, 1929, most people sold their , October 29, 1929, most people sold their stocks at a tremendous loss.stocks at a tremendous loss.

This collapse of the stock market is called the This collapse of the stock market is called the Great CrashGreat Crash. . Overall losses totaled $30 billion.Overall losses totaled $30 billion.

The Great Crash was part of the nation’s The Great Crash was part of the nation’s business cyclebusiness cycle, a , a span in which the economy grows, and then contracts. span in which the economy grows, and then contracts.

Some Basic EconomicsSome Basic Economics

The results of the The results of the Great CrashGreat Crash are all are all symptoms of an economy beginning to symptoms of an economy beginning to contract. contract.

ContractionContraction is an economic decline is an economic decline marked by a falling output of goods and marked by a falling output of goods and services, and increased unemployment.services, and increased unemployment.

Contraction - Bad Expansion – GoodContraction - Bad Expansion – Good A long and severe contraction is known as A long and severe contraction is known as

a a depressiondepression..

Business CycleBusiness Cycle

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Depression or Depression or Recession Recession

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Today, the Federal Reserve attempts to Today, the Federal Reserve attempts to make the business cycle look like this make the business cycle look like this

Effects of the Great Crash, 1929Effects of the Great Crash, 1929

Great Crash Investors

Businesses and WorkersInvestors lose

millions.

Businesses lose profits.

Consumer spending drops.

Workers are laid

off.

Businesses cut investment and

production Some fail.

Banks

Businesses and workers cannot repay bank loans.

Savings accounts are wiped

out.

Bank runs

occur.

Banks run out of money

and fail.

World Payments

Overall U.S. production plummets.

U.S. investors

have little or no money to

invest.

U.S. investments in Germany

decline.

German war payments to Allies fall off.

Europeans cannot afford

American goods.

Allies cannot pay debts to

United States.

The Effect of the Great CrashThe Effect of the Great Crash Initially, the crash only effected those who heavily Initially, the crash only effected those who heavily

invested in the stock market, soon it effected millions.invested in the stock market, soon it effected millions. Risky loans hurt banksRisky loans hurt banks – in the 1920s, banks loaned – in the 1920s, banks loaned

huge $ to high-risk businesses – when stocks fell, these huge $ to high-risk businesses – when stocks fell, these businesses were unable to repay loans.businesses were unable to repay loans.

Consumer BorrowingConsumer Borrowing – Consumers had borrowed – Consumers had borrowed heavily to buy consumer goods, when banks called in heavily to buy consumer goods, when banks called in their loans (wanted their money back) customers did not their loans (wanted their money back) customers did not have cash to repay themhave cash to repay them

Bank RunsBank Runs – afraid that banks would run out of money – afraid that banks would run out of money people rushed to withdraw their money. To pay back people rushed to withdraw their money. To pay back these deposits, banks had to recall loans from these deposits, banks had to recall loans from borrowers.borrowers.

The Effect of the Great CrashThe Effect of the Great Crash

Bank FailuresBank Failures – the combination of unpaid loans and – the combination of unpaid loans and bank runs meant that many banks failed. 5,500 failed!bank runs meant that many banks failed. 5,500 failed!

Savings wiped outSavings wiped out – bank failures wiped out what little – bank failures wiped out what little savings people had.savings people had.

Cuts in productionCuts in production – Businesses could not borrow – Businesses could not borrow money – couldn’t produce more goods – few people had money – couldn’t produce more goods – few people had money to buymoney to buy

Rise in UnemploymentRise in Unemployment – as businesses cut production, – as businesses cut production, they laid off workers, unemployment increasedthey laid off workers, unemployment increased

Further Production CutsFurther Production Cuts – as unemployment grew, – as unemployment grew, incomes shrank, consumers spent less, businesses incomes shrank, consumers spent less, businesses produced even fewer goodsproduced even fewer goods

Impact on Farmers and WorkersImpact on Farmers and Workers

With cuts in production, factories began to With cuts in production, factories began to close and workers lost jobsclose and workers lost jobs

Soon small factories closed – local Soon small factories closed – local businesses and restaurants closed too businesses and restaurants closed too (workers had no money to go to them)(workers had no money to go to them)

Already low farm prices fell lower (no one Already low farm prices fell lower (no one could afford them at the current price) could afford them at the current price) farmers lost money and their homesfarmers lost money and their homes

Impact on the WorldImpact on the World

Many of the world’s banking, manufacturing, and Many of the world’s banking, manufacturing, and trade were interdependenttrade were interdependent

When the U.S. economy fell, the global When the U.S. economy fell, the global economic system began to contracteconomic system began to contract

After WW1 France & Britain needed to repay After WW1 France & Britain needed to repay their war debtstheir war debts

Congress kept import taxes high making it hard Congress kept import taxes high making it hard for European nations to sell to the U.S.for European nations to sell to the U.S.

German banks failed, so the Allies could not German banks failed, so the Allies could not repay the U.S. repay the U.S.

The Great DepressionThe Great Depression

The economic contraction that began with the The economic contraction that began with the Great Crash triggered the most severe economic Great Crash triggered the most severe economic downturn in the nation’s history—the downturn in the nation’s history—the Great Great DepressionDepression..

The Great Depression lasted from 1929 until the The Great Depression lasted from 1929 until the United States entered World War II in 1941.United States entered World War II in 1941.

The stock market crash of 1929 did not cause The stock market crash of 1929 did not cause the Great Depression. Rather, both the Great the Great Depression. Rather, both the Great Crash and the Depression were the result of Crash and the Depression were the result of deep underlying problems with the country’s deep underlying problems with the country’s economy.economy.

Economists dispute what exactly caused it.Economists dispute what exactly caused it.

Underlying Causes of the Underlying Causes of the DepressionDepression

An Unstable EconomyAn Unstable Economy The prosperous economy of the 1920s lacked a firm base.The prosperous economy of the 1920s lacked a firm base. The nation’s wealth was unevenly distributed. Those who had the The nation’s wealth was unevenly distributed. Those who had the

most tended to save or invest rather than buy goods.most tended to save or invest rather than buy goods. Industry produced more goods than most consumers wanted or could Industry produced more goods than most consumers wanted or could

afford. afford. The uneven prosperity of the 1920s made rapid recovery from a poor The uneven prosperity of the 1920s made rapid recovery from a poor

economy impossible. (not enough money in enough hands)economy impossible. (not enough money in enough hands)Over-speculationOver-speculation Speculators bought stocks with borrowed money and then pledged Speculators bought stocks with borrowed money and then pledged

those stocks as collateral to buy even more stocks.those stocks as collateral to buy even more stocks. The stock market boom was based on borrowed money! About 10 The stock market boom was based on borrowed money! About 10

cents on the dollar!)cents on the dollar!) When loans were called in borrowers could not come up with the When loans were called in borrowers could not come up with the

balance.balance.

Underlying Causes of the Underlying Causes of the DepressionDepression

Government PoliciesGovernment Policies During the 1920s, the Federal Reserve System cut During the 1920s, the Federal Reserve System cut

interest rates to assist economic growth (you can borrow interest rates to assist economic growth (you can borrow at lower rate, so money is cheaper)at lower rate, so money is cheaper)

Then, in 1929, it limited the money supply to discourage Then, in 1929, it limited the money supply to discourage lending.lending.

As a result, there was too little money in circulation to As a result, there was too little money in circulation to help the economy after the Great Crash.help the economy after the Great Crash.

During the Depression, political leaders debated whether During the Depression, political leaders debated whether to to stimulate the economy with higher government stimulate the economy with higher government spendingspending or to let the or to let the natural operation of the free natural operation of the free marketmarket restore economic expansion & prosperity restore economic expansion & prosperity

Underlying Causes of the Underlying Causes of the DepressionDepression

Too much DebtToo much Debt Many people were in debt and were vulnerable to poor economic Many people were in debt and were vulnerable to poor economic

conditions – too many loansconditions – too many loans Many businesses were heavily in debt counting on good times.Many businesses were heavily in debt counting on good times. Banks FailuresBanks Failures Many banks were structurally weakMany banks were structurally weak Many banks did not keep enough money in reserve so they could Many banks did not keep enough money in reserve so they could

not deal with bank runs or bad loansnot deal with bank runs or bad loans Failed banks had no money to lendFailed banks had no money to lendBreakdown of International Trade.Breakdown of International Trade. Many European countries had large debts with U.S. banksMany European countries had large debts with U.S. banks High Tariffs (Smoot Hawley Act) reduced amount of European High Tariffs (Smoot Hawley Act) reduced amount of European

goods purchased – no new income for Europe – can’t pay back goods purchased – no new income for Europe – can’t pay back loansloans

Also demand for U.S. goods decreasedAlso demand for U.S. goods decreased