Year 10 Wall St Crash Q&A PDF

The Causes of the Wall Street Crash in October 1929 and the end of the economic boom in the USA 1.​ Explain what were the different weaknesses of the US economy throughout the 1920s a.​ Older industries such as coal mining, were not doing well – production was down, profits were...

The Causes of the Wall Street Crash in October 1929 and the end of the economic boom in the USA 1.​ Explain what were the different weaknesses of the US economy throughout the 1920s a.​ Older industries such as coal mining, were not doing well – production was down, profits were falling, and people lost their jobs. This contributed to rising unemployment in the 1920s and the growing wealth gap (over 42% of people were below the poverty line) b.​ Farming did not do well during the 1920s – nearly 60% of the population was involved in farming or in industries related to farming e.g. blacksmiths. Farmers used fertilisers and mechanised production using tractors and combine harvesters – this led them to over produce, which meant that prices of farm goods dropped which meant that farmers profits dropped. Some farmers went bankrupt. c.​ Republican policies of laissez faire meant that the government did not get involved in the economy to help farmers and older industries to survive. The Republican government also used tariffs to protect American goods from foreign competition but this led to a tariff war with Europe – countries in Europe put tariffs on US goods which made it difficult for farmers and industrialists to sell their goods abroad. This contributed to market saturation which affected business profits which by the late 1920s affected the value of shares. d.​ Overproduction led to market saturation of consumer goods. The wealth gap meant that many people could not afford to buy the consumer goods; this was apparent even in new industries such as construction by 1926, road building, and the car industry. e.​ The banking system was largely unregulated and unsupervised by the government. Many small banks were willing to lend money to people to speculate. People could not always pay back these loans and a lot of banks closed (went bankrupt) – over 500 each year before 1929. f.​ Too much faith/trust that the economy would continue to boom. There was too much belief that companies would continue to make profits and therefore even when signs of problems started to show from 1926 many people refused to see the signs and continued to borrow money and speculate on the stock market – this means people were borrowing too much money and many could not afford to pay back their loans if the economy did badly. 2.​ Which of the underlying weaknesses of the US economy was the most important to the collapse of share values and the Wall St Crash and why? 3.​ What were the problems in the economy in late 1928/early 1929? Blue book page 212 -​ Slowdown in car sales - shows that more people could not afford to buy consumer goods on credit (as they were not making enough money to pay back loans) -​ Fall in industrial output - first time in four years that fell, this meant some companies were making less, therefore selling less, therefore might have to sack some workers, therefore less money to spend, lower sales and therefore lower profits -​ Downturn in value of shares from 1928 e.g. Anaconda Copper and Westinghouse, saw share values fall. This weakened faith in the belief that the economy would continue to do well. -​ Falling farm profits and rising unemployment in the farming sector. Nearly half of the population still worked in farming or businesses related to farming. If this sector was not making money, that meant more people could not afford credit and/or unable to buy consumer goods. This contributed to problem of overproduction and market saturation -​ Wealth gap – over 42% and rising were under poverty line and couldn’t afford the consumer goods – this contributed to the problem of market saturation -​ Irresponsible bank lending. Banks lent to speculators who would not normally be able to afford to buy shares. Banks were not properly regulated by the government and they were lending to people who could not repay loans – this led to many bank closures throughout the decade. When banks closed farmers and businesses could not borrow money to stay in business and pay their workers. This contributed to the fall in profits. 500 small banks a year went bankrupt. -​ The amount spent on advertising in 1929 - $3billion – is a good indicator that there was a problem – Advertising was needed to encourage people to buy more (which they weren’t in 1929) in order to maintain company profits – which were falling. -​ 4.​ Speculators - Describe who speculators were, how they were able to buy shares, why they bought shares, when speculators became increasingly active on the stock market, how many speculators there were by 1929, and how speculators helped to drive up the value of share prices. (the videos will help with this one) Speculators were ordinary people who borrowed money from a bank to buy shares in companies. These people would not usually be able to buy shares so borrowed money ‘on margin’ – that is they used 10% of their own money and borrowed 90% of the share value from a bank. The aim was to wait for the shares to go up in value and then sell so that they could pay back the bank and keep what was left as profit. By 1929 there were 20 million speculators. Speculators helped drive up the value of shares because there were a large number of speculators buying. This led to confidence in the economy and the belief that the value of shares would continue to rise – which just encouraged more people to buy shares. 5.​ What was the Babson break and why did people generally ignore this? On 5th September 1929 Roger Babson, an economic forecaster, predicted a stock market crash. People ignored him because people still believed that the economy was doing well – see page 71 of the white book and the share prices of some of the major companies eg Westinghouse’s shares had tripled between 1928 and 5th September1929 6.​ Write a short summary of the events from 19th to 29th October 1929. You can draw it as a flow chart or diagram if you wish. On 19th October investors started selling shares in large quantities – nearly 3.5 million shares were bought and sold. Over the weekend it was clear share values were falling so on Monday 21 st October trading began but at least there were people buying as well as selling so that on Tuesday 22nd shares values even went up. There was no indication of a crash coming. However, on Wednesday 23rd there was heavy selling of shares. This was a problem for speculators who lost money when share values went down. They had to sell shares to pay back their bank loans – this led to share values falling even further. On Thursday 24th over 12.5 million shares were traded which led to investor fears and many started selling shares which led to share values falling even more quickly. The BIG 6 banks tried to stabilise the market by buying up shares and on 26th President Hoover made a statement to raise confidence in the market. However, on 28th October over 9 million shares were bought and sold, and it looked like confidence in the economy and the stock market was failing. On 29th October over 16 million shares were traded – there were not enough people buying and share values plummeted so that many speculators lost all their money – the shares were worth less than the price they had bought them for originally. 7.​ Why do you think people were so surprised by the events of 28/29th October - think about what had been happening in the economy, what President Hoover had been saying in 1928/29, In 1928 share prices were doubling/tripling and quick fortunes were to be made through speculation. Banks were willing to lend to speculators and investors and were even buying shares themselves. There was real confidence at the end of 1928/29 that the economy would continue to do well. Hoover’s speech on 26 October about the economy being sound, combined with the Big 6 intervention helped people believe that the situation would stabilise. People were so confident in the strength of the stock market and the economy that they ignored the warnings. 8.​ What actions did Hoover take to deal with the problems caused by the Wall St Crash after October 1929 and up to March 1933? Hoover was a Republican President (1929 to 1933). He believed in rugged individualism and self-help. He did not believe it was the government’s responsibility to provide economic and financial support to people who lost their jobs or their savings. He supported the idea of laissez faire and less government interference in the economy. Therefore, because of his own political and personal beliefs, his response to the events of the Wall St Crash were limited. He believed that the state government and charities should help people with getting food, shelter and access to medicines. Hoover did try to create new jobs for the unemployed through govt building schemes eg $423 million was spent on building projects such as the Hoover Dam. The Farmer’s Board bought up surplus farm produce to keep prices up. The 1930 Hawley Smoot tariffs on European food and manufactured items tried to protect US goods from cheaper imports. In 1932 the RFC (reconstruction finance corporation) gave out a total of $1500 million to help businesses stay in operation.