Economic Weaknesses of the 1920s
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Questions and Answers

What action did banks take to address panic selling on the market?

  • They issued loans to investors.
  • They stopped buying shares to prevent further panic. (correct)
  • They increased interest rates on stock purchases.
  • They bought more shares to stabilize prices.

Which event is referred to as 'Black Tuesday'?

  • The day when heavy selling reached 9 million shares traded.
  • The day with 16.4 million shares traded and no buyers present. (correct)
  • The day when banks intervened and bought shares to calm the market.
  • The day when 6 million shares were traded and some were still bought.

On what date did President Hoover make a speech declaring that the market was okay?

  • October 26th (correct)
  • October 25th
  • October 28th
  • October 29th

What was the primary reason for the stock prices to continue falling leading up to Black Thursday?

<p>Speculators were told to pay off some of their bank loans. (A)</p> Signup and view all the answers

How many shares were traded on October 24th, known as Black Thursday?

<p>13 million shares (D)</p> Signup and view all the answers

How did the wealth gap in the US contribute to the Wall Street Crash?

<p>It left many people unable to afford basic goods. (D)</p> Signup and view all the answers

What was a result of overproduction by US industries in the late 1920s?

<p>Decrease in the share prices of companies. (C)</p> Signup and view all the answers

How did tariffs imposed by the Republican government affect American farmers?

<p>They limited the export of American agricultural products. (D)</p> Signup and view all the answers

What was one of the consequences of the saturation of the market by the late 1920s?

<p>Reduced company profits and share values. (A)</p> Signup and view all the answers

What impact did increased unemployment have on the economy during this period?

<p>It decreased the number of buyers for products. (B)</p> Signup and view all the answers

What caused many farmers to go bankrupt by 1929?

<p>Decline in crop prices due to overproduction. (D)</p> Signup and view all the answers

Which management technique contributed to overproduction in industries?

<p>Frederick Taylor's principles of scientific management. (A)</p> Signup and view all the answers

Why were American farmers unable to compete effectively in the global market during the late 1920s?

<p>Tariffs limited access to foreign markets. (D)</p> Signup and view all the answers

What was a primary reason US companies struggled to sell their products internationally in the 1920s?

<p>Saturation of the US market with their products (B)</p> Signup and view all the answers

What does 'Buying on Margin' refer to?

<p>Borrowing money to purchase shares with minimal personal investment (C)</p> Signup and view all the answers

Why did speculators become nervous in the late 1920s?

<p>Declining economic growth and industry performance (A)</p> Signup and view all the answers

What event triggered the panic selling of shares in October 1929?

<p>A significant drop in shareholder confidence (B)</p> Signup and view all the answers

What was the consequence of the decision made by the top 6 banks on October 25?

<p>They decided to buy shares to support share values (C)</p> Signup and view all the answers

How did the public's reaction during the stock market crash affect banks?

<p>Banks experienced a liquidity crisis resulting in bankruptcies (B)</p> Signup and view all the answers

What impact did the decline in the construction and car industries have on the economy?

<p>It led to decreased manufacturing and rising unemployment (C)</p> Signup and view all the answers

What was the outcome for many speculators when share prices fell?

<p>They faced difficulties repaying their bank loans (C)</p> Signup and view all the answers

What major economic indicator showed a downturn in the late 1920s?

<p>Decline in construction (A)</p> Signup and view all the answers

Which factor contributed to the panic in the stock market in October 1929?

<p>Banks started to sell their shares (B)</p> Signup and view all the answers

What percentage of their own money did speculators typically use when buying shares on margin?

<p>10% (A)</p> Signup and view all the answers

What was a common misconception among speculators during the 1920s regarding share prices?

<p>Share prices would rise indefinitely (A)</p> Signup and view all the answers

By what year had the number of share owners in the U.S. reached 20 million?

<p>1929 (C)</p> Signup and view all the answers

What effect did the banks' lending practices have on speculation?

<p>Boosted the speculation boom significantly (C)</p> Signup and view all the answers

What realization led to the rapid selling of shares in the market during the crisis?

<p>Share prices had reached unsustainable levels (A)</p> Signup and view all the answers

How did the increase in share price speculation contribute to the eventual market crash?

<p>It created an illusion of economic stability (C)</p> Signup and view all the answers

What was one significant issue faced by small rural banks in the USA during the 1920s?

<p>They lacked sufficient liquidity to cover deposits. (C)</p> Signup and view all the answers

What economic policy did the Republican Party endorse during the 1920s?

<p>Laissez faire economic policies (B)</p> Signup and view all the answers

What event marked the beginning of panic selling on Wall Street in October 1929?

<p>Black Thursday on October 24th (D)</p> Signup and view all the answers

What was a key factor that encouraged speculation in the stock market from 1928 onward?

<p>Loans to speculators for buying on margin (A)</p> Signup and view all the answers

What occurred on October 26, 1929, that illustrated the government's reaction to the stock market turmoil?

<p>Major Banks intervened to calm the market. (B)</p> Signup and view all the answers

Which of the following conditions was evident in the US economy prior to the Wall Street Crash?

<p>Fluctuations in magazine advertising spending. (B)</p> Signup and view all the answers

During the 1920s, approximately how many banks were operating in the USA?

<p>Nearly 30,000 banks (A)</p> Signup and view all the answers

What triggered the Babson Break in September 1929?

<p>A forecast predicting market decline (C)</p> Signup and view all the answers

Flashcards

Wealth Gap

Uneven distribution of wealth, with a large portion of the population living in poverty. This meant fewer people could afford to buy goods, leading to overproduction and falling prices.

Overproduction

US industries and farmers produced more goods and crops than people could buy, leading to a surplus and falling prices.

Saturated Market

When there are more goods available than consumers want or need, leading to falling prices and profits.

Assembly Line

Mass production technique that increased output but also contributed to overproduction.

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Taylorism

Management technique that focused on efficiency and productivity, leading to more goods being produced.

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Tariffs

Taxes on imported goods that made US goods more expensive for foreign buyers, reducing exports and hurting American businesses.

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Hawley-Smoot Tariff

A high tariff on imports that backfired, causing other countries to retaliate with their own tariffs, further reducing trade.

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Why did farmers go bankrupt?

Farmers overproduced crops due to new technology, faced tariffs and competition, couldn't sell their products, and were unable to repay loans.

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Speculation on the Stock Market

Buying and selling shares with the aim of making a quick profit by riding the wave of rising share prices.

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Buying on Margin

Borrowing money from banks to buy shares, using only a small percentage of your own funds.

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What happened in October 1929?

Speculators, facing a loss of confidence in the stock market, rushed to sell their shares, causing share prices to plummet rapidly.

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Impact of Stock Market Crash on Speculators

Many speculators found their shares worth less than what they had borrowed to buy them, leaving them bankrupt and unable to repay their bank loans.

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Role of Banks in Speculation

Banks played a significant role by readily lending money to speculators, fueling the speculation boom.

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Signs of a Weakening Economy

Before the Wall Street Crash, several indicators already pointed to a downturn in the economy, including declining car sales and industrial output.

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Confidence in the Stock Market

The belief that share prices would continue to rise, driving speculators to buy more shares.

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Impact of Speculation on the Economy

The widespread speculation on the stock market created an unstable economic bubble, ultimately leading to the crash and its devastating consequences.

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Laissez-faire economics

A policy where the government does not interfere much in the economy, letting businesses operate freely with minimal regulations.

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Liquidity in banking

A bank's ability to have enough cash on hand to cover customer withdrawals and loan repayments.

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What caused the decline in farming in the 1920s?

Overproduction of crops led to lower prices, decreasing farmers' profits.

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Signs of economic slowdown in 1929

Decreased factory production, slowing car sales, and lower magazine advertising spending indicated a drop in consumer demand.

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The Babson Break

A prediction by Roger Babson in September 1929, warning of an impending stock market crash.

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Black Thursday

The day on October 24th, 1929, when massive sell-offs caused share prices to plummet, marking the beginning of the Wall Street Crash.

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October 25th Intervention

Six major banks stepped in to purchase shares on October 25th, 1929, to halt the panic selling and stabilize the market.

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Panic Selling

When investors rush to sell their shares, often due to fear or lack of confidence in the market, driving prices down rapidly.

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Speculation

The act of buying and selling stocks, often with borrowed money, in hopes of making a quick profit by riding an upward trend in prices.

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Impact of Banks on Speculation

Banks fuelled the speculation boom in the 1920s by readily lending money to speculators, contributing to the unstable economic bubble that eventually burst.

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How Did the Stock Market Crash Impact Banks?

Banks loaned money to speculators who bought stock on margin. When the market crashed, speculators couldn't repay their loans, causing banks to lose a lot of money and some even went bankrupt.

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What Role Did the 6 Major Banks Play in the Crash?

They were the biggest and most influential banks in the US. They decided not to intervene to support stock prices during the crash, which worsened the situation.

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What were the early signs of a weakening economy?

Lower industrial production, declining car sales, and struggling construction industry all indicated that the economy was slowing down before the crash.

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Why did speculators get nervous?

They began to realize that the economy wasn't growing as fast as it had been. This led them to worry that stock prices would fall, causing them to lose money and eventually leading to panic selling.

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What caused the panic on October 29th?

It became clear that the major banks were not going to help keep share prices up, so investors rushed to sell their shares, creating a massive sell-off and causing prices to plummet.

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Study Notes

Underlying Economic Weaknesses of the 1920s

  • Wealth gap: In 1925, 42% of the population had incomes below the poverty line, lacking sufficient funds to purchase necessities.
  • Unsaturated market: Consumer goods became readily available, creating an oversupply, leading to reduced company sales, profits, and stock prices.
  • Overproduction in industry: Mass production and new management techniques increased output dramatically, exceeding consumer demand in the late 1920s.
  • Agricultural overproduction: Farmers used new technologies, resulting in surplus crops. They faced reduced ability to sell their produce due to international tariffs, causing significant economic hardship.
  • Reduced export markets: Tariffs imposed by other countries limited US exports, resulting in a decrease in sales and profit for US companies.

Speculation in the Stock Market

  • Speculators: Individuals buying shares with borrowed money (margin), hoping for price increases and quick profits.
  • Buying on margin: Investors borrowing 90% of a share's cost.
  • Economic downturn: As the economy slowed in the late 1920s, speculators became nervous and began to sell their shares.
  • Panic selling: The prospect of lower share prices triggered widespread panic selling, causing a rapid and drastic drop in share prices.
  • Bank failures: Many speculators were unable to repay their loans, pushing banks to failure. This resulted in insufficient liquidity to cover depositors' needs.
  • 6 Major Banks: On October 25th , 6 major banks met to attempt to prevent further declines in the market. Unfortunately, this action proved unsuccessful and further exacerbated the problems.

Role of the Banking System

  • Outdated system: Pre-1913 banking system lacked sufficient regulation and uniformity.
  • Local banks: Many smaller state banks lacked the resources to withstand economic downturns.
  • Lack of government regulation: The Republican government policy of minimal intervention meant inadequate safeguards for banks to maintain financial stability.
  • Bankruptcies: Widespread bank failures left depositors without their savings.

Events of 1929 October

  • 500 banks went bankrupt each year from 1920–1929.
  • Economic indicators, such as construction, car sales, and industrial output, showed a downturn in the economy.
  • October 19th-29th: A series of events marked the descent into the Wall Street Crash, with escalating declines in share prices:
  • Rising panic selling pushed share prices down further
  • Ultimately, no buyers were available, resulting in massive losses for those invested in the market due to panicked selling efforts.

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Description

Explore the underlying economic weaknesses that plagued the 1920s, leading up to the Great Depression. This quiz highlights issues such as the wealth gap, overproduction in industries, and the impact of international tariffs. Assess your understanding of how these factors contributed to significant economic hardships during this period.

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