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?

<p>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.</p> Signup and view all the answers

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

<p>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.</p> 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?

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

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

<p>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.</p> Signup and view all the answers

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

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

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

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

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

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

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

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

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

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

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

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

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

<p>It led to less sales and declining profits.</p> Signup and view all the answers

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

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

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

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

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

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

Why did panic selling occur among shareholders in 1929?

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

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

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

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

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

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

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

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

<p>A downturn in construction began in 1926.</p> Signup and view all the answers

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

<p>Approximately 500 banks a year were going bankrupt.</p> Signup and view all the answers

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

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

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

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

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

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

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

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

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

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

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

<p>Speculators found their shares worth less than what they had paid and went bankrupt.</p> 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?

<p>The Republican Party adhered to a Laissez faire economic policy, which led to minimal government regulation of the banking system.</p> 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?

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

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

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

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

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

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

<p>On Black Thursday, nearly 13 million shares were sold amidst panic selling, which drastically lowered stock prices.</p> 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?

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

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

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

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

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

Flashcards

Buying on Margin

Borrowing a large portion of the money needed to buy shares, using only a small percentage of your own funds.

Speculator

Someone who buys and sells shares hoping to make a quick profit from price fluctuations.

Panic Selling

When many investors rapidly sell their shares due to fear of further losses, causing a rapid decline in prices.

Share Value

The current price of a single share of a company's stock.

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Liquidity

The ability of a bank to easily convert assets into cash to meet customer withdrawals.

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Impact of Slowing Economy on Share Prices

When economic growth weakens, investors become nervous about companies' profits, leading to a decline in share prices.

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Role of Major Banks in the Stock Market

Large banks can influence share prices by buying or selling shares, potentially stabilizing or destabilizing the market.

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Impact of Speculators on the Stock Market

Speculators can both boost and crash the stock market by driving up or down prices through their buying and selling activity.

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Wealth Gap

The unequal distribution of money and resources, where a small portion of the population holds most of the wealth, while a large portion struggles with poverty.

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Overproduction

Producing more goods or services than consumers can buy, leading to a surplus and falling prices.

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Saturated Market

A situation where consumers have already purchased enough of a particular product, leading to decreased demand and sales.

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Falling Share Prices

When the value of company stocks decreases because of lower profits or investor uncertainty.

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Tariffs

Taxes on goods imported from other countries, making them more expensive for consumers.

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How did tariffs impact American farmers?

Tariffs on imported goods from other countries, like wheat from Canada, made it harder for American farmers to sell their products abroad, contributing to overproduction and lower prices.

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How did overproduction affect businesses?

Overproduction in industries led to falling prices and decreased demand, causing companies to make lower profits, lay off workers, and reduce wages, further decreasing consumer spending.

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Why did farmers go bankrupt?

Farmers faced low prices due to overproduction, stiff competition from abroad due to trade barriers, and a lack of demand for their products, leading to financial losses and bankruptcy.

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What was the impact of increased speculation?

Speculation pushed share prices up rapidly, creating a bubble. When confidence dwindled, everyone sold simultaneously, crashing the market prices and causing widespread losses.

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What role did banks play in the 1929 crash?

Banks fueled speculation by lending enormous sums to individuals to buy shares. When the market crashed, speculators couldn't repay their loans, leading to bank failures.

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Signs of a weakening economy in 1929

Several indicators showed a decline in economic health, including a downturn in construction, bank failures, decreasing car sales, and lower industrial output.

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How did speculators react to the economic downturn?

When speculators lost confidence in the market's upward trend, they rushed to sell shares simultaneously, causing a rapid and dramatic drop in prices. This led to widespread bankruptcies.

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Loan Default

Failing to repay a loan, resulting in financial consequences for both the borrower and lender.

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Impact of speculators selling shares

Massive selling by speculators caused a sharp drop in share prices, leading to the Wall Street Crash. Investors lost their money, and the economy suffered severely.

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What happened on Black Tuesday?

On October 29, 1929, the stock market crashed. A record 16.4 million shares were traded, but there were no buyers. Panic ensued, and share prices plummeted.

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Why did banks stop buying shares?

Banks stopped buying shares on October 28th to prevent further panic selling. Their goal was to stop the downward spiral of share prices.

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What caused the panic selling?

Fear fueled the panic selling. As share prices dropped, investors feared losing even more money, prompting them to sell their shares quickly, driving prices down further.

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What was the role of speculators?

Speculators, who bought shares on margin (borrowed money), were forced to sell as the market crashed to pay their loans. This amplified the downward spiral.

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How did share prices change in the days leading up to Black Tuesday?

Share prices fluctuated. They fell on October 23rd, rose slightly on October 22nd, and then fell again on October 24th (Black Thursday), culminating in the devastating crash on October 29th (Black Tuesday).

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Laissez-faire economics

A policy where the government minimally interferes in the economy, allowing businesses to operate freely with little regulation.

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Bank liquidity

A bank's ability to readily meet its financial obligations by having enough cash reserves to cover deposits and loans.

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What caused the Wall Street Crash? (Timeline)

Multiple factors, including: 1920-1929: 500 banks failed annually. 1920-1929: Farming struggled. 1926: Construction slowed down. 1929: Industry spending on advertising plummeted, car sales slowed, and production decreased. September 1929: 'Babson Break' predicted the crash. September to early October: Stock prices recovered slightly. 1919-1929: Underlying problems, including bank fragility, speculation, and low liquidity, contributed to the crash.

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Black Thursday

On October 24, 1929, when the stock market crashed significantly. Nearly 13 million shares were sold, leading to panic selling, and plummeting prices.

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The Role of the Big Banks

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

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President Hoover's Speech

On October 26th, President Hoover assured the public that the market was alright, attempting to restore confidence. However, the crash continued.

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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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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.

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