The Stock Market Crash of 1929

Causes of the Stock Market Crash

From Prosperity to Despair

Today's Objectives:

• I can define the words "stocks," "buying on margin" and "speculation"

• I can determine which economic policies caused the stock market collapse

What caused the United States to become an economic power?

• Industrialization - The U.S. produced many of the goods used worldwide

• Imperialism - The U.S. had a basically unlimited supply of resources and markets

• World War I - U.S. comes out of the war as a superpower

Multiple Choice

REVIEW: Imperialism can be defined as...

• Increasing the size of a country's military

• Economic and political control over a foreign country

• Extreme pride in one's country

• Modernizing a country's infrastructure and industry

Multiple Choice

REVIEW: How did "industrialization" help the American economy?

• More markets available for them to BUY goods

• More markets available for them to SELL goods

• The country had numerous modern factories that could produce desired goods

• Cash Crops became highly sought after World War I

Roaring 20s

• The era is marked with a higher standard of living than the past

• New technological innovations make life better

Roaring 20s

• People even begin getting involved more with investing

• INVESTING: spending money in hopes of making more money

• People began investing their paychecks into stocks

Multiple Choice

What is a stock??

• Ownership of a fraction of a company

• Becoming partners with a bank

• Trading business assets amongst corporations

• One Business buying out a smaller one

Buying on Margin

• Many people did not have the funds to get into the stock market

• To help them invest, banks would issue loans to cover the cost of a stock

• Does this sound like a good idea?

Poll

Buying on margin...good idea??

• Oh yes sign me up!

• Eh I'd rather spend my money more wisely

• Not really sure yet, need to learn more

Buying on Margin

• People buy stocks, but only pay 10% as a down payment

• The rest was covered with a loan

• People are using borrowed money to purchase stocks...which means the stock market is only being supported by borrowed money

Poll

Does this sound like good business practice?

• Yes sir!

• No way!

Why is this a risky practice?

• The stock market keeps on rising, which people think signals a strong economy

• But...this not always true!

• The buying power of the public is not real, it's all based on loans and increasing debt

This is important because...

The rising stock market is masking some major issues going on in the 1920s economic climate!

Speculation

• Definition: buying stocks that have a high risk of failing, but also have a high rate of return IF successful

• Prices continue to rise...people continue taking out loans because they feel like they're missing out on a profit

• People are taking out LARGER and LARGER loans, which they cannot pay back

Speculation

• Why are people so hooked in stocks?

• They feel like a small investment that they do not need to work towards can lead to a large profit

Multiple Choice

When an investor makes a 10% down payment on a stock, and puts the rest on credit, this is known as...

• Bear Market

• Bull Market

• Speculation

• Buying On Margin

Multiple Choice

Ignoring the obvious risks, and buying stocks in hopes of making a quick and big profit, is known as...

• Bear Market

• Bull Market

• Speculation

• Buying On Margin

Loans and Lending

• Loan: money that is borrowed from the bank, that must be paid back WITH INTEREST

• Interest: a percentage that someone must pay back ON TOP OF a loan

• Example: If you take out a loan for $100, you must pay back that $100, ALONG WITH 5% interest.

Multiple Choice

MATH!!! FUN! If you take out a loan for $100, and must pay 5% interest, how much extra do you owe the bank?

• $2.00

• $5.00

• $10.00

• $20.00

Multiple Choice

More Math?? More Fun! If you borrow $1000 from the bank, and you are paying back 3% interest, how extra much do you owe?

• $3.00

• $30.00

• $300.00

• $3,000.00

Loans and Lending

• Typically, you must apply for a loan, and prove that you have enough income

• Using loans for goods is common in today's society

• What are some things you can buy with a loan?

Open Ended

What are some things that people use loans for?

Bad Loan Practices

• In the 1920s, it was REALLY easy to get a loan

• At its peak, about 90% of purchases were based off of paying in installments

• Installments- monthly payments made to satisfy the entire cost of a good

• Example: If a dishwasher costs $250, you can pay it out over 5 months, at $50/month

At its peak, over 6 billion dollars were being loaned out to Americans!

Why was all of this lending bad?

• People were purchasing products that they could not afford

• Ex: Farmers buy the latest, greatest equipment, without proper savings

• Ex: Families are purchasing cars and appliances on credit, without enough income

• Ex: People use LOANS to get involved with the stock market

The Stock Market Crash

• Thursday, October 24th

• A frenzy of selling causes the market to crash 11% in minutes

• But, at the end of the day, banks put huge sums of money into the stock market.

• HOWEVER...where are these banks getting their money from?

The Stock Market Crash

• All of those loans that were handed out to Americans need to be repaid

• "Margin Calls" go out, meaning that common citizens need to figure out a way to repay their loans

• This leads to further selling, and even less trust in the stock market

The Stock Market Crash

• Tuesday, October 29th. "Black Tuesday"

• In a single day, 16 million stocks are sold, signaling a BUST on the market

• Billions of $$$ lost

• Thousands of investors are now bankrupt

Why didn't the Government step in?

• For the entire decade, the economy was run strictly under "LAISSEZ-FAIRE" policies

• The prosperity that many Americans felt was not to be tampered with

• Therefore, the government continued to remain uninvolved with the economy

Multiple Choice

What does the term "laissez-faire" mean?

• Hands-on approach to the economy

• Hands-off approach - less government interference

• Fancy French word for Communism

• A policy of exploiting colonies to help boost the economy

Multiple Choice

In what year does the Stock Market crash?

• 1927

• 1928

• 1929

• 1930

Multiple Choice

Which of the following statements best describes what happened on Black Tuesday?

• Stock prices fell and the stock market crashed

• Bank runs forced many banks to close their doors

• Federal troops attacked the Bonus Army marchers

• The Supreme Court ruled that the NRA was unconstitutional

Multiple Choice

A sudden dramatic decline of stock prices, resulting in a significant loss of wealth

• Bull Market

• Bank Run

• Speculation

• Stock Market Crash

Multiple Choice

Which of the following is NOT a reason for the Stock Market Crash?

• Buying on Margin

• Excessive Lending

• Speculation

• Laissez-Faire Economics

• Bank Runs