Economic Weaknesses

Uneven Distribution of Wealth Few people prospered Income of wealthiest 1% of Americans grew 60% Most workers - 8% increase By 1929 70% of families had income below level needed for a good standard of living

Uneven Distribution of Wealth

Few people prospered

Income of wealthiest 1% of Americans grew 60%

Most workers - 8% increase

By 1929 70% of families had income below level needed for a good standard of living

People stopped saving Overuse of credit Buying slowed Warehouses filled with goods

People stopped saving

Overuse of credit

Buying slowed

Warehouses filled with goods

Credit also used to buy stocks Risky practice, popular trend BUYING ON MARGIN: buying stocks with loans from stockbrokers Mr. B Mr. B buys 100 shares of stock at $10 a share 100 X $10 = $1000 TOTAL COST Mr. B pays $500 and borrows other $500 from a stockbroker Mr. B plans to pay off the loan when he sells the stock

Credit also used to buy stocks

Risky practice, popular trend

BUYING ON MARGIN: buying stocks with loans from stockbrokers

Mr. B buys 100 shares of stock at $10 a share

100 X $10 = $1000 TOTAL COST

Mr. B pays $500 and borrows other $500 from a stockbroker

Mr. B plans to pay off the loan when he sells the stock

B.O.M. grew in popularity Brokers began requiring lower margins As little as 10% Mr. Investor 10% = only $100 of $1000 investment Seemed like an easy way to make $$$

B.O.M. grew in popularity

Brokers began requiring lower margins

As little as 10%

Mr. Investor 10% = only $100 of $1000 investment

Seemed like an easy way to make $$$

B.O.M. = huge risk If stock price rises $15/share Mr. Investor could sell stock for $1,500 Get back $500 Pay back $500 to broker $500 profit Stock price drops to $5/share Mr. Investor can only sell stock for $500 $500 pays of loan Loses his own $500 No profit

B.O.M. = huge risk

If stock price rises $15/share

Mr. Investor could sell stock for $1,500

Get back $500

Pay back $500 to broker

$500 profit

Stock price drops to $5/share

Mr. Investor can only sell stock for $500

$500 pays of loan

Loses his own $500

No profit

MARGIN CALL: Brokers force investors to repay loans if stock’s value falls below certain point Made sure brokers get repaid Investors in big trouble if stock lost value quickly

MARGIN CALL: Brokers force investors to repay loans if stock’s value falls below certain point

Made sure brokers get repaid

Investors in big trouble if stock lost value quickly

Federal Reserve Board: works to regulate nation’s money supply to promote healthy economic activity Worried about B.O.M. Made it difficult and expensive to offer margin loans Helped decrease borrowing from banks But large corporations began loaning

Federal Reserve Board: works to regulate nation’s money supply to promote healthy economic activity

Worried about B.O.M.

Made it difficult and expensive to offer margin loans

Helped decrease borrowing from banks

But large corporations began loaning

“ Sooner or later a crash is coming, and it may be terrific.” Roger Babson “ I see now reason for the end-of-the-year slump which some have been predicting.” Charles E. Mitchell

“ Sooner or later a crash is coming, and it may be terrific.”

Roger Babson

“ I see now reason for the end-of-the-year slump which some have been predicting.”

Charles E. Mitchell

1928 - market value increased 50% 1929 – market value increased 27% People in financial world saw trouble Sales down Fears up

1928 - market value increased 50%

1929 – market value increased 27%

People in financial world saw trouble

Sales down

Fears up

Thursday October 24 th 1929

Thursday October 24 th 1929

Friday, October 25, 1929 Market returned to normal Monday, October 28, 1929 Market sank Tuesday, October 29, 1929 BLACK TUESDAY Markets in panic Investors tried to sell 16 million shares Even best companies collapsed

Friday, October 25, 1929

Market returned to normal

Monday, October 28, 1929

Market sank

Tuesday, October 29, 1929

BLACK TUESDAY

Markets in panic

Investors tried to sell 16 million shares

Even best companies collapsed

October 1929 – stock market value drops by $16 billion (1/2 of its value)

October 1929 – stock market value drops by $16 billion (1/2 of its value)

EFFECTS ON INDIVIDUALS EFFECTS ON BANKS Investors lost huge fortunes Especially people who bought on margin Forced to sell shares for far less than what they had paid People lost entire savings making up the difference Lost jobs Pay decreased Stopped buying Triggered banking crisis People freaked out, withdrew money and drained banks of funds Lost money from own investments Banks absorbed losses from stocks sold on margins Drove many banks out of business

EFFECTS ON INDIVIDUALS

EFFECTS ON BANKS

Investors lost huge fortunes

Especially people who bought on margin

Forced to sell shares for far less than what they had paid

People lost entire savings making up the difference

Lost jobs

Pay decreased

Stopped buying

Triggered banking crisis

People freaked out, withdrew money and drained banks of funds

Lost money from own investments

Banks absorbed losses from stocks sold on margins

Drove many banks out of business

EFFECTS ON BUSINESS EFFECTS OVERSEAS Banks and investors unable to provide industry w/ money needed to grow Consumer spending down Laid off employees People w/o jobs have even less money to spend Lowered wages American banks called in loans from European nations/businesses Couldn’t pay back loans Foreign businesses couldn’t sell products in U.S. Laid off workers Less money pumped into their economy Tariffs passed – made things worse

EFFECTS ON BUSINESS

EFFECTS OVERSEAS

Banks and investors unable to provide industry w/ money needed to grow

Consumer spending down

Laid off employees

People w/o jobs have even less money to spend

Lowered wages

American banks called in loans from European nations/businesses

Couldn’t pay back loans

Foreign businesses couldn’t sell products in U.S.

Laid off workers

Less money pumped into their economy

Tariffs passed – made things worse

Terms

Terms