The Stock Market Crash and its Effects
Causes of the Depression
APUSH - Cornwell
THE STOCK MARKET CRASH AND ITS EFFECT ON THE UNITED STATES
During the 1920s, industries produced goods at a record rate. Profits in industry had soared 80%. Bank profits were as much as 150%. People tried to take advantage of these profits by investing in the stock market. Overnight millionaires were a fairly common story. Many people who could not afford to invest did with their life savings.
Investing in the stock market was easy because of “buying on margin”. A “broker’s loan” made it possible for anyone to borrow money. A broker is someone who buys or sells stock for you. A broker would be willing to loan you as much as 90% of the money to buy stock. A common method was to put 25% down, borrow 75% and pay back the broker when the stock went up.
Using a brokers’ loan a person could buy $100 worth of stock for $25 by borrowing $75 from the broker. If the customer sold the stock in a couple of months for $150, then they could repay the broker and still make a $50 profit. Millions of dollars were invested this way.
Banks also made the same kinds of loans to individuals that could not afford them. Banks took peoples saving accounts and invested that money in the stock market. Industrial leaders took money from their companies profits and invested that in stocks rather than improving their factories.
This system works as long as prices continue to go up. People began to feel that the stock market was not going to go up any longer and began to sell their stock. As demand for stock decreased, so did prices. On October 24, 1929, stock prices began to fall as more and more people sought to get their investment back. Everyone wanted to sell and few wanted to buy. Price dropped even faster. Soon the collapse began to hit everyone.
The stock market crash did not cause the Great Depression but rather showed how bad off the American economy was.
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The real reasons for the Depression are listed below.:
1. Worldwide economic problems were caused by WW I, especially in Europe.
2. American industries couldn’t sell as many goods overseas as they once could.
3. American industries produced more goods than the public could buy.
4. Increasing use of machines caused unemployment.
5. Buying on credit increased too rapidly during the 1920’s.
6. Corporations to attract investors released false and misleading information about profits.
7. Many people who could not afford to borrowed money.
8. Banks used people’s savings to invest in the stock market.
9. No savings accounts were insured, if the bank went broke so did you!
10. Farmers grew too many crops causing crop prices to go down.
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Answer the following questions on a separate sheet of paper.
1. List four things that American corporations were doing that could lead to the failure of their business.
2. Why did brokers lose great amounts of money because of the stock market crash?
3. How did raising too many crops cause farm prices to go down? Why had the demand for American farm products gone down?
4. Many people who did not invest in the stock market but rather, saved their money also suffered. Why?
5. What are two things that would cause wide-spread unemployment during the Great Depression?
6. Why did it happen that many corporations survived the stock market crash but went broke during the Great Depression?
7. Why would people in service industries (hairdressers, waiters, barbers, etc,) lose their jobs during the Depression? What would happen to the pay of those people that still worked in those jobs?
8. What would happen to prices at the beginning of a depression? What would happen as the depression worsened?