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The Stock Market Crashes

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  • 1. The Stock Market Crashes Explain the relationship of each item below to the economic problems of the late 1920s. Speculation – People began speculating on rising stock prices on the chance that the prices would continue to rise and they would be able to sell the stocks for profit. When the stock prices fell rapidly, they quickly lost their investments. Buying on margin – To maximize the potential profits on their investments, speculators made a small cash down payment and borrowed the rest from a stockbroker, to whom they were obliged to pay on demand. When stock prices fell, the stocks were offered for sale if the borrower could not repay the debt. When the overvalued market collapsed, many investors lost their entire life savings. Bank loans to brokerage houses - Banks loaned money to brokerage houses that either bought stock with their bank loans or loaned money to investors for speculative stock purchases. When loan payments were not forthcoming, many banks went bankrupt. Millions of people who had savings accounts with such banks lost their entire life savings. Labor-saving machinery – Labor-saving machinery helped the nation’s industry produce more than the American population could consume. At the same time, policies that interfered with world trade destroyed foreign markets for these goods. Underconsumption - Though production increased, employment stood still, and workers’ wages went up slower that corporation profits; thus, there was insufficient purchasing power to support the nation’s mass production industries. A prolonged slump in agriculture also added to underconsumption.
  • 2. Fordney-McCumber Tariff – The Fordney_MCCumber tariff was a prohibiting high tariff that, together with the administration’s insistence on collecting war debts, interfered with world trade and destroyed foreign markets for American good, especially agriculture. Mellon tax policies – The Mellon tax policies aided the upper class and contributed to the uneven distribution of wealth, making the early stock market boom and ultimate crash more severe. Farm surplus – Huge farm surpluses produced a drop in farm prices, resulting in loss of farmers’ purchasing power, loss of property, and failure of banks heavily invested in farm mortgages.

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