Economic Weaknesses of the 1920s and Wall Street Crash

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Questions and Answers

What significant event is referred to as Black Tuesday and what was its impact on share prices?

Black Tuesday occurred on October 29th when 16.4 million shares were traded without buyers, leading to a significant loss in share prices.

What actions did banks take on October 25th to address the panic selling in the stock market?

On October 25th, six major banks intervened by buying shares to stabilize the market and calm the panic selling.

Describe the circumstances leading up to Black Thursday on October 24th.

On October 24th, known as Black Thursday, nearly 13 million shares were sold due to panic selling, which further pushed prices down amidst rising fear in the market.

What happened to share prices from October 20th to October 22nd, and what does it indicate about market sentiment at that time?

From October 20th to 22nd, share prices initially fell significantly but saw a slight rise on the 22nd, indicating a brief moment of optimism amidst ongoing volatility. Signup and view all the answers

What effect did President Hoover's speech on October 26th have on public perception of the market?

President Hoover's speech on October 26th, claiming that the market was okay, aimed to reassure the public, although it had limited immediate impact on restoring confidence. Signup and view all the answers

What percentage of the population lived below the poverty line in 1925, and how did this contribute to the Wall Street Crash?

Almost 42% of the population lived below the poverty line, reducing their purchasing power and leading to decreased demand for consumer goods. Signup and view all the answers

How did the wealth gap contribute to the saturation of the consumer market in the late 1920s?

The wealth gap meant that a large portion of the population could not afford to buy more goods, leading to market saturation once everyone had purchased their necessary consumer products. Signup and view all the answers

What role did overproduction play in the economic problems leading up to the Wall Street Crash?

Overproduction by both industries and farmers led to a surplus of goods that could not be sold, causing falling profits and share prices. Signup and view all the answers

What was the impact of the tariffs imposed by the Republican government on American farmers?

Tariffs on US goods led to retaliatory tariffs from European countries, reducing export markets for American farmers and contributing to their financial struggles. Signup and view all the answers

Describe how unemployment worsened the economic situation in the lead-up to the Wall Street Crash.

As company profits fell, companies laid off workers or reduced wages, leading to higher unemployment and diminished consumer purchasing power. Signup and view all the answers

What technological advancements contributed to overproduction in American industries during the 1920s?

Mass production technologies like the assembly line and management techniques such as Taylorism significantly increased production capacity. Signup and view all the answers

How did the combination of bankrupt farmers and rural banks affect the banking system?

As farmers went bankrupt and could not repay loans, rural banks succumbed to financial strain and collapsed. Signup and view all the answers

How did competition from Canadian wheat imports affect American farmers in the late 1920s?

The availability of cheaper Canadian wheat imports further depressed prices for American crops, making it harder for American farmers to make a profit. Signup and view all the answers

What impact did the saturation of the US market have on US companies' profits?

It led to less sales and declining profits. Signup and view all the answers

Explain the concept of 'Buying on Margin' in the context of the 1920s stock market.

Buying on Margin involved speculators borrowing 90% of the share value from banks while using only 10% of their own money. Signup and view all the answers

What led to the nervousness among speculators in the late 1920s?

Economic growth slowed, leading to declines in industrial output and bank closures. Signup and view all the answers

What event occurred on October 29, 1929, and what was its significance?

On October 29, nearly 13 million shares were sold, leading to a dramatic drop in share prices. Signup and view all the answers

Why did panic selling occur among shareholders in 1929?

Shareholders panicked as the value of their stocks continued to decline and the banks did not assist in stabilizing prices. Signup and view all the answers

What was the effect of bank bankruptcies on individuals during the stock market crash?

Many people lost their life savings as they rushed to withdraw money from banks that lacked sufficient liquidity. Signup and view all the answers

What action did the top six banks take on October 25, 1929, regarding stock prices?

They decided to buy shares in an effort to stabilize share prices. Signup and view all the answers

Identify one consequence of speculators not being able to pay back their loans.

Banks faced bankruptcy due to the lack of liquidity caused by the inability of speculators to repay their loans. Signup and view all the answers

What was one major sign of economic decline in the late 1920s?

A downturn in construction began in 1926. Signup and view all the answers

How many banks went bankrupt annually leading up to the Wall Street Crash?

Approximately 500 banks a year were going bankrupt. Signup and view all the answers

What key factor contributed to the panic selling of shares in October 1929?

A loss of confidence in the stock market caused speculators to rush to sell their shares. Signup and view all the answers

What was the role of banks in the speculation boom of the 1920s?

Banks lent $9 billion to speculators, contributing to the speculation boom. Signup and view all the answers

In what way did speculation resemble gambling during the 1920s?

Speculators used borrowed money to buy shares, hoping to sell them for profit. Signup and view all the answers

What happened to share prices during the speculators' rush to buy in 1928?

Share prices rose rapidly due to the surge in buying by speculators. Signup and view all the answers

How did the increase in the number of share owners reflect the investment climate of the 1920s?

The number of share owners grew from 4 million to 20 million by 1929. Signup and view all the answers

What was the consequence for speculators when the stock market began to fall?

Speculators found their shares worth less than what they had paid and went bankrupt. Signup and view all the answers

What was the primary economic policy of the Republican Party during the 1920s and its implications on the banking system?

The Republican Party adhered to a Laissez faire economic policy, which led to minimal government regulation of the banking system. Signup and view all the answers

How many banks went bankrupt annually in the USA during the 1920s, and what does this indicate about the economic health of that period?

Approximately 500 banks went bankrupt each year, indicating significant instability and financial distress in the banking sector. Signup and view all the answers

What were the liquidity issues faced by many small rural banks in the 1920s?

Many small rural banks lacked adequate cash reserves to cover deposits, making them unable to manage financial crises. Signup and view all the answers

What role did speculation play in the financial markets leading up to the Wall Street Crash in 1929?

Speculation increased significantly, with banks providing loans for buying stocks on margin, which fueled overvaluation of shares. Signup and view all the answers

Describe the sequence of major events that occurred on Black Thursday, October 24, 1929.

On Black Thursday, nearly 13 million shares were sold amidst panic selling, which drastically lowered stock prices. Signup and view all the answers

What action did big banks take on October 25, 1929, in response to the panic selling on the stock market?

Six major banks intervened by buying shares to stabilize the market and calm panic selling. Signup and view all the answers

What was the Babson Break, and when did it occur in relation to the Wall Street Crash?

The Babson Break occurred in September 1929 and involved a forecast predicting a stock market crash. Signup and view all the answers

How did President Hoover attempt to reassure the public about the stock market on October 26, 1929?

President Hoover delivered a speech asserting that the stock market was stable and would recover. Signup and view all the answers

Study Notes

Underlying Economic Weaknesses of the 1920s Leading to the Wall Street Crash

Wealth Gap: In 1925, nearly 42% of the population earned less than $2000 a year, placing them below the poverty line. This meant limited purchasing power for consumer goods.
Overproduction: Mass production techniques and new management strategies (like Taylorism) led to a massive increase in the production of consumer goods. The market became saturated, and sales decreased, leading to falling company profits and share prices.
Farmer Problems: New technologies (like combine harvesters) allowed farmers to produce much more wheat and other crops. However, low prices and tariffs on US goods reduced their sales and profits. Many farmers went bankrupt due to debts.
Limited Export Markets: US companies faced stiff competition from other countries and tariffs imposed on US products, restricting their export sales. This further decreased profitability and share values.

Speculation and the Stock Market Crash

Speculators: Individuals who could not afford to buy shares bought them on margin (borrowing 90% of the cost). Their hope was to sell the shares later at a higher price to repay the loans.
Economic Slowdown: Beginning in the late 1920s, economic growth slowed, and industrial output decreased. This heightened anxieties among speculators about the value of their investments.
Panic Selling: Increased selling and fear of losing money led to panic selling by shareholders, dramatically lowering share prices.
Bank Failure: Panic by investors to withdraw their money caused bank runs and failures, as banks didn't have enough liquid assets.

Banking Failures and the Crash

Outdated Banking System: The US banking system, largely decentralized, was outdated and lacked sufficient regulations.
Local Banks: Many small local banks were unable to cope with financial problems and went bankrupt.
Lack of Government Regulation: A policy of minimal government intervention in the economy, especially regarding banks, allowed the situation to worsen.
Speculation and Loans: Banks actively lent money to speculators who were buying stocks with borrowed funds. This fueled the speculative bubble.

Timeline of the Wall Street Crash (October 1929)

October 19th: Share prices began falling. This triggered a chain reaction.
October 24th: Black Thursday. Massive panic selling plunged share prices even lower.
October 29th Black Tuesday. The market crashed, losing billions of dollars in value.

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Description

This quiz explores the underlying economic weaknesses of the 1920s that contributed to the Wall Street Crash. Key topics include wealth gaps, overproduction, farmer issues, and limited export markets. Test your knowledge on how these factors intertwined to create a financial crisis.