Year 10 Wall Street Crash (Oct 1929) PDF

Year 10: The Wall Street Crash October 1929 1. Underlying weaknesses of the US economy (that is - economic problems in the economy since the early 1920s) and how they contributed to the Wall Street Crash. Underlying economic How it helped to cause the Wall Street Crash weakness during t...

Year 10: The Wall Street Crash October 1929 1. Underlying weaknesses of the US economy (that is - economic problems in the economy since the early 1920s) and how they contributed to the Wall Street Crash. Underlying economic How it helped to cause the Wall Street Crash weakness during the 1920s Wealth gap – this was In 1925 almost 42% of population was below the poverty line the uneven meaning they did not have enough money to buy food, distribution of wealth clothing, housing, heating (they had an income of less than $2000 a year). There were not enough people with money to buy consumer products once the market was saturated (ie everyone had bought what consumer goods they needed). Company sales went down, profits fell, and then share prices fell. In industry – mass production technology (assembly line) and Overproduction by US new management techniques (Taylorism) led to huge increase industries and farmers in production of consumer goods. By late 1920s not enough people were buying products. The market place became saturated. Company profits began to fall, the share value of companies also fell. Companies had to lower the worker’s wages or make them redundant. As unemployment increased fewer people could buy the products being produced. This worsened company profits. In farming – farmers used new mass production technology such as combine harvesters, and new fertilisers. Therefore, producing much more wheat/other crops. Farmers could not sell products abroad because of tariffs on US goods (in retaliation for tariffs on European goods eg Hawley Smoot tariffs). US farmers also faced competition from cheap Canadian wheat imports. Farmers were already doing badly in 1920s, by 1929 profits were falling because of overproduction. Farmers went bankrupt, couldn’t pay their loans back to rural banks. These banks went bankrupt. Republican govt used tariffs on European imports to protect No export markets for American industries. European countries put tariffs on US goods. US products US companies could not sell their products aboard very easily. This meant that they saturated the US market with their products. This led to less sales and declining profits which meant a decline in the share values.  Speculators were people who could not usually afford to buy The actions of shares. Banks in the 1920s were willing to lend to people to buy speculators shares. Speculators borrowed 90% of the share value and used 10% of their own money to buy shares (this is called ‘Buying on Margin’) wait till they rose in value, then sell quickly to make a profit and pay back the bank loan. Speculators became nervous when economic growth started to slow down in the late 1920s. For example, by June 1929 industrial output fell, the construction industry had been suffering a slow down since 1926, by 1929 the car industry was not selling enough cars, during the 1920s 500 banks closed each year. All of this made speculators nervous and by September share holders began to sell shares. Speculators could not afford for their shares to lose their value and started to sell their shares. This led to panic selling. When it became clear that the big 6 banks were not going to help keep share prices up, there was a huge rush on 29 October to sell shares – almost 13 million shares were sold. This rapidly pushed the value of shares down. Many people lost their money. Speculators could not pay back the banks. People rushed to get their money out of the banks – this led banks to go bankrupt as they did not have enough liquidity. Decision by the 6 Top 6 banks met on 25 October to discuss what to do about the major banks to not panic selling on the stock market. They decided to buy shares to help keep share prices keep share values steady. But this did not really help – so big 6 stable (In October started to sell their shares again – this causes further panic on 1929) the markets and this led speculators to rush to sell shares pushing share prices down rapidly. Signs that the economy was not doing well at the end of the 1920s 1. from 1926 there was a downturn in construction 2. 500 banks a year was going bankrupt 3. By 1929 car sales were going down 4. By 1929 industrial output was down 5. By 1929 $3 billion spent on advertising 2. Speculation: how did it help cause the Wall Street Crash? In the 1920s the banks gave loans to individuals to gamble on the stock market. Speculators were people who bought shares on margin. That means they used 10% of their own money and borrowed the other 90% from a bank to buy shares. In 1929 the banks lent $9billion to speculators. The banks were contributing to the speculation boom. The aim was buy shares and then sell them when they went up in value, paying off the bank loan and keeping what was left as profit. This was seen as a way to get rich quick and many people including the poor borrowed money to speculate on the stock market. It was a form of gambling. In 1920 there were 4 million share owners, by 1929 there were 20 million share owners (out of a population of 120 million people). 18.5 million of these people were short term speculators. Share prices had risen steadily during the 1920s but in 1928 there was a rush by speculators to buy shares which pushed share prices up very rapidly thus encouraging more speculation. However, speculation was based on belief that share prices would continue to rise. If they began to fall then speculators would have to sell before prices fell too low and the shares could not be sold to pay off the bank loan. In 1929 (October) there was a loss of confidence in the stock market. Speculators rushed to sell their shares all at the same time. This pushed the price of shares down very quickly. No one was buying. Speculator’s found out that their shares were worth less than what they had paid for them. They were bankrupt and could not pay back the banks. Speculators bought shares because everyone believed that the economy was doing well and had faith/confidence that share prices would continue to rise during the 1920s. 3. How did the banking system help to cause the Wall Street Crash? The banking system of the USA was out of date by the 1920s even though the central banking system had only been created in 1913. While national banks had to join the centralized system, local state banks did not. During the 1920s the Republican Party was in power. It believed in a Laissez faire economic policy – that is that the government should not interfere too much in the running of the economy and this included what regulations should be placed on banks. Most ordinary people’s money, particularly in rural and semi-rural areas, was invested in small rural banks. In the 1920s, there were almost 30,000 banks in the USA. Most were very small and therefore unable to cope with financial problems. Many did not have enough liquidity (i.e. cash reserves to cover deposits which were then used to make loans to customers). If they collapsed their depositors would probably lose virtually all their savings. Banks were willing to give loans to speculators so they could buy on margin. This encouraged speculation especially from 1928.  4. The events of 19th to 29th October: How did the Wall Street Crash happen? Background 1920-29 500 banks went bankrupt each year 1920 – 1929 farming in trouble 1926 construction industry starts to slow down 1929 industry spending on magazine advertising was $3 billion (evidence that people not buying enough) 1929 By June car sales were slowing down, factory production was down for first time in four years September: Babson Break – crash was forecasted September to early October – recovery in share prices Between 1919 and 29th October problems that led to Wall Street Crash 19th October 3.5 million shares traded because share prices falling 20th October NY Times headline talks of massive sale of shares 21st October 6 million shares traded prices falling, but some people were buying 22nd October Slight rise in share prices 23rd October Share prices start to fall, speculators told to pay off some of their bank loan, they try to sell shares pushing prices down 24th October Black Thursday: Nearly 13 million shares sold, panic selling, prices pushed down further 25th October 6 Big Banks step in, buy shares to calm down the panic selling 26th October President Hoover makes speech saying market is ok 28th October Heavy selling, 9 million shares traded. Banks had stopped buying shares to stop panic selling 29th October Black Tuesday: 16.4 million shares traded, no buyers, panic, shares lost their value  Matching /memory game 3.5 million shares traded because share 19 October th prices falling 20th October NY Times headline talks of massive sale of shares 21st October 6 million shares traded prices falling, but some people were buying 22nd October Slight rise in share prices 23rd October Share prices start to fall, speculators told to pay off some of their bank loan, they try to sell shares pushing prices down 24th October Black Thursday: Nearly 13 million shares sold, panic selling, prices pushed down further 25th October 6 Big Banks step in, buy shares to calm down the panic selling 26th October President Hoover makes speech saying market is ok 28th October Heavy selling, 9 million shares traded. Banks had stopped buying shares to stop panic selling 29th October Black Tuesday: 16.4 million shares traded, no buyers, panic, shares lost their value