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
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
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.
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,
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.