The Stock
Market Crash
of the 1920’s
Power point created by Robert L. Martinez
Primary Content Source: A Story of US: War, Peace, and All That Jazz: by Joy Hakim
• In 1927, ‘28, and ‘29 it was easy to get rich.
All you had to do was put a little money in
the stock market. Here is how it worked.
• Imagine that you are the owner of a large
company: the Tech Automobile Company.
You make good cars, and now you want to
expand. You need to build a new plant and
buy a lot of equipment.
• So you decide to look for investors. You
go public. This means you sell shares in
your company to raise money.
• So, you sell shares in your company. You
sell 10,000 shares at $100 each. The
shares are called “stock.” Anyone who
buys stock becomes a part owner of the
Tech Auto Company.
• Your new cars are a big success. The
company earns a great deal of money. The
stockholders get a percentage of the
profits. That money is called a dividend.
• The future of your company looks good.
Many people want to buy stock in the Tech
Automobile Company.
• Here is where the rule of economics, called
the law of supply and demand, comes in.
There are only 10,000 shares available.
There is a big demand for Tech Automobile
stock. Prices go up!
• People will pay $110 a share for it. Later,
they will pay $120 a share. Before long,
Tech Automobile stock is selling for $200 a
share.
• One stockholder, Mr. Martinez, bought 10
shares at $100 each (total is $1000). Now,
he will sell them at $200 each. What is his
profit? ($1,000). He has doubled his
investment.
• Easy to make money that way, isn’t it?
Well, hold on. In the 1920s, it was even
easier than that. People bought stocks on
margin.
• Margin means they borrowed most of the
money. Today, laws restrict margin buying.
Margin means you don’t have to pay the
whole $100 for $100 worth of stock.
• In 1927, you could pay $10 (down
payment), and borrow the other $90 from
the stockbroker. A stockbroker is a person
who buys and sells stock for you.
• Now, if Mr. Martinez puts $100 into Tech
Automobile stock and buys on margin at
10 percent, he can have 10 shares instead
of one (worth $1,000).
• If he sells the shares for $200 each. He has
to pay back the money he borrowed, $90
per share ($900 total), but he still makes a
whole lot of money. $1,000 profit, with
only $100 originally out of his pocket.
• The business of buying and selling stocks
is called the “stock market.” the place
where stocks are bought and sold is called
a “stock exchange.”
• The most important stock exchange is in
New York City, on Wall Street. Brokers
from all over the world call Wall Street with
orders to buy and sell stock.
• The stock market usually reflects the
business world. If things are going well,
stocks go up. If business is poor, stocks
go down.
• Brokers have a nickname for an “up”
market. They call it a “bull” market. A down
market is a “bear” market.
• The Twenties were a prosperous time.
Around 1924, the stock market started
rising. In 1927, the market began to rise
like a comet. Almost overnight, stocks
doubled and sometimes tripled in value.
• Everyone was excited. Newspapers wrote
about it. Many politicians and business
leaders were saying that the economic
boom would just go on and on. No end in
sight. Respected economic professors
agreed.
• Now, suppose you are living in 1927. All
your friends are getting rich and you
aren’t. You feel like a dummy. Why don’t
you take all your savings and buy as many
stocks as you can?
• Buy stock on margin so you can get lots of
shares for your money. That’s the smart
thing to do, say many business experts.
• So that is just what you do, in July of 1929.
and some of your friends do it, too. The
stock boom is fantastic before July. That
summer is terrific.
• Some people are buying stock in anything.
It doesn’t matter if the company has any
real worth or not. No one seems to care.
Just give me stock and more stock, I want
to get rich.
• The stock balloon grows bigger and
bigger. And then guess what happens?
• Picture a balloon being pumped up. Now
watch that needle. You thought the balloon
pumped up fast? Well, whoosh, it will come
down much faster.
• It happens in October of 1929. It is called
the “panic.” People go wild trying to sell
their stock as prices drop. But now, no
one wants to buy stock.
• October 24, 1929 was the Great Stock
Market Crash, also called Black Tuesday.
Examples of Stock
Market Prices
• Company
Sept. 3, 1929
RCA
Nov. 13, 1929
$505
$28
Montgomery Ward $466
$49
General Motors
$36
$ 73
• Remember that $100 stock you bought on
margin for $10? Too bad, you lose your
$10 a share. The shares have little or no
value. But, it gets even worse. You
borrowed money.
• You see, you owe $90 per share on that
stock. Deduct from the $90 the price your
broker gets if any when he sells your
stock. You owe the rest.
• But you bought 100 shares of stock? You
put all your savings into the stock market.
The experts said that was the smart thing
to do.
• Sorry, you owe the money. You don’t have
any money? You can sell your house, or
your car, or both.
• You just lost your job, too? You worked at
the Tech Automobile Company. Oh, that’s
too bad. Most people have stopped buying
cars. Now the company is losing money.
• The Tech Automobile Company has to sell
that new plant and lay-off its workers. Why
doesn’t it sell stock to try to raise more
money? Are you kidding? No one is buying
stock now.
• The banks are all in trouble, too. You see,
the banks lent money to the stock brokers
and all those people who were buying
stocks. Now they have no money. They are
closing their doors (Bank Closings.)
• What is happening in America? We’re
having an economic depression. The Great
Depression will last for 10 years. People
will be out of work. The country will be in
bad shape.