The stock market crash

Roaring 1920s Boom- What were some of the causes of the Stock Market bubble in the 1920s?

• Stock market prices had been inflated by investors who used borrowed money

• Many bought on “margin” - put up 10% of the investment.  $1000 on margin allowed you to invest $10 000.

• Markets had expanded so much in the “roaring 1920s” investors began to believe that the boom would never stop

What were some of the reasons that led to the stock market crash in 1929?

After the war Canada and USA sold agricultural products to a devastated Europe - (boom)

• As Europe recovers they stop buying from North America and prices collapse. Farmers can’t buy.

• Pro business and anti-union legislation keep wages low. Workers  can’t afford to buy.

• Companies keep producing even though no one is buying

• Net result: three major companies went bankrupt in the same week in 1929- the crash had begun!

Economic Crisis Goes Global:

Through the 1920s the USA was funding countries around the world for post WW1 recovery.  When the United States stopped lending money and stopped buying foreign products, the crisis went global.

Stock Market Crash:

• Prices on the new york stock exchange stopped rising in october of 1929

• People began to sell their stocks to take profits before prices dropped further.

• This led to stock prices dropping further, and more and more investors began selling stocks.

• Panic ensued -- The market crashed.

• By mid-November, the stock prices of the 30 largest publicly owned companies dropped by 48%.

Aftermath-

• After the crash investors who had borrowed money to buy stocks found themselves with large debts and worthless investments.

• Fearing a wider economic downturn after the crash, banks began calling in loans-many who had overextended themselves became bankrupt.

People feared about what little savings they had in the banks and bank runs became common. Bank runs are a situation when too many depositors try to withdraw their savings from a financial institution causing it to go bankrupt. When the banks went bankrupt, so did businesses that had borrowed from them to survive.

Classical Liberals Respond

• In response to the economic crisis governments imposed tariffs to protect domestic industry and jobs.

• They raised interest rates and balanced the budget by cutting spending.

• The effect of this was to make things worse.  World trade declined and the world economy shrunk. Unemployment skyrocketed.

Some say the real cause of the Great Depression was poor Monetarist policy

Monetarist comes from the word MONEY

These people believe that the central bank in the USA known as the Federal Reserve or simply “the Fed” made a mistake.  The Fed controls money supply.  In 1929 the Fed should have allowed more money to circulate.  According to monetarists the Fed caused the depression reducing the money supply.