THE STOCK MARKET CRASH
AND THE GREAT DEPRESSION
 EVENTS THAT HELPED CAUSE THE STOCK
MARKET CRASH:
 1. OVERSPECULATION: Stock prices had risen far
above the stock’s actual value.
 - Overspeculation was caused by two events:
 A. MARGIN BUYING
 B. STOCK POOLS
MARGIN BUYING
 Investors did not have enough money to purchase all
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of a stock.
-They borrowed the remainder of the money (banks,
credit unions, etc.)
-This allowed people to invest money they did not
have.
-Demands for the stock rose.
-Which caused stock prices to rise. (usually
artificially high)
STOCK POOLS
 A GROUP OF WEALTHY INVESTORS BOUGHT A
LARGE BLOCK OF STOCK
 -They traded back and forth driving up the price of
the stock.
 Other investors(common person) thought this was a
good stock and wanted to buy it.
 At a certain point the stock pool would decide to sell
the stock = the stock was now at a much higher price
than it was really worth, and the stock pool would
make a huge profit.
STOCK POOLS CONTINUED
 -Prices of the stock would drop and the investors
who bought it at a high price would lose their money.
 -The stock pool would than turn around and buy
back the stock at a very cheap price and usually
make a large amount of money.
 QUESTION = What happens when a person buys a
stock at a very high price and is forced to sell it at a
very low price?
SECOND REASON FOR THE STOCK MARKET
CRASH = ACTIONS BY THE FEDERAL RESERVE
BOARD
 To promote economic growth the interest rate in
banks and other lending institutions was lowered
with the hope of getting more money into
circulation.
 -The hope was that people would borrow money to
build houses, start businesses, and industry. (Why is
this good?)
 -Many people used the borrowed money get richquick schemes (gambling, stock market, etc.)
 This did not work.
FEDERAL RESERVE BOARD
CONTINUED:
 -In August of 1928 the FRB now decided to raise the
interest rate in banks to keep people from borrowing
money for the schemes.
 -Investors began to sell their stock which caused the
prices to fall. Brokers and other investors began to
panic and they began to sell.
 -This led to even more people selling and very few
people buying. (Why is this bad?)
PROBLEMS THAT LED TO THE
GREAT DEPRESSION
 1. UNEQUAL DISTRIBUTION OF WEALTH: The
richest one percent of the population controlled 15
percent of the nations wealth.
 -They usually put their money into stocks and
savings, not into circulation. WHY?
 - Why is this bad?
 -Many other people began to hide what little money
they had.
HIGH TARIFFS AND WAR
DEBTS
 -This slowed trade and the ability for countries to pay
back war debts.
 -Tariff = a tax on an imported good. WHY?
 -Countries could afford to sell products in the U.S.
What did the countries do in response to the tariffs?
 -How did this hurt the U.S.?
THE FARM CRISIS
 -During World War One farmers in the U.S. bought
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new land and new machinery. WHY?
-How did they buy much of the land and
machinery?
-After the war the U.S. did not need all of the food
produced by the farmers which caused many
farmers to have financial trouble.
-WHY WAS THE FOOD NOT NEEDED?
-WHY WAS THERE FINANCIAL TROUBLE?
OVERPRODUCTION
 The productive capability of the U.S. increased after
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World War I.
-Wages did not keep pace with the prices of goods.
People were not making as much money as they
thought = they began buying products on credit.
Eventually people could not afford to buy new
products, since they were paying on old products.
CREDIT = boost the economy in the short run, puts
people in debt, reduces their buying power in the
future.
THE BANKING SYSTEM
 -The banking system was poorly managed and there
were no government regulations on the banks.
 -By 1932 five thousand banks failed. (WHAT DOES
THIS MEAN?)
 -In the first three years of the Great Depression nine
million people lost their saving accounts.
 -Thousands of banks had to shut down because
there were RUNS ON BANKS. (What is this?)
THE DOMINO EFFECT
 Problems in one sector (area) eventually affected all
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the other sectors or areas.
By 1932 twelve million of the eligible workers in the
United States were out of work.
In August of 1932 the unemployment rate hit 32%
Many others who were working were barely making
enough to survive.
The Unemployment rate did fall below 10% until
1941.