Chapter 4: The Causes Of The Wall Street Crash Of 1929 And Its Economic And Social Impact Flashcards
What were the reasons for the Wall Street Crash in 1929?
Fewer houses were slowing down
Motor vehicles sales were declining
Workers wages were not rising fast enough for them to be able to afford to buy all consumer goods that were being produced
Prices of food were dropping because American farmers were producing too much
In October 1929, the price of shares on the Wall Street Stock Exchange collapsed. This event was the trigger that led to the collapse of the American economy and the Great Depression
Buying and selling shares on a stock market
A company can sell shares in the ownership of their business in the stock exchange in order to raise money. The company uses the money from these shares to expand its business or to buy more factories or land in order to make higher profits.
If the company makes a profit, it gives its shareholders a dividend. The more profit a company makes, the larger the dividend
When a company is doing well, more people will buy shares in that company so that they can earn dividends. As more people buy shares in a company, the company increases in value. There is a greater demand for shares in the company and the price of the shares increases. In this way, both the company and the shareholders benefit
Buying shares “on the margin”
In the 1920s, the price of shares on the stock market increased rapidly. People believed that buying and selling shares and speculations in the stock market was an easy way to make money fast. Speculation is a form of gambling. Speculators buy shares but they do not intend to keep them for long. They buy shares which they believe will make a quick profit and sell them as soon as the price rises.
In the 1920s, speculation was widespread. Speculators often borrowed money to buy shares, or bought shares “on the margin”. This meant that they bought shares with money they did not have. It also meant that the value of the share was based on people’s willingness to buy that share rather than in the real value of the company
Buying shares in the margin meaning
They bought shares with money they did not have
Panic sets in
By 1928, share prices had risen far above their real value and this rise was not supported by real industrial expansion. Financial experts warned that this false prosperity would not last, but most speculators ignored them. People’s confidence in their ability to make money in the stock market lasted well into 1929. However, in September, share prices began to drop and panic set in
In many ways, the investors caused the collapse of the stock market. Confidence is vital for successful speculation. However, some investors began to lose confidence in the market. They believed that something must be wrong, so they decided to sell their shares while the price was still high. This caused share prices to drop. When people saw this, they began to sell their shares too and share prices dropped even further
On October 24 1929, shareholders dumped 13 million shares. In that week, the value of the New York stock market fell by 50%. Speculators who had bought shares in the margin were unable to repay the banks. Many speculators were forced to sell all their possessions to get out of debt
Other causes of the Great Depression
Although the Wall Street Crash triggered the Great Depression, there were many other long-term reasons for the depression. The underlying causes of the depression were over - production and under- consumption, the import tariffs placed on American goods by other countries and the unequal distribution of wealth
Overproduction
As a result of mass-production techniques, American companies were making more goods than people could buy. This led to a growing consumer crisis. Demand for goods began to fall as people had already bought all the goods they wanted, or could not afford to buy more
A stockpile of unsold goods began to build up and so factories began to produce less. This meant the factories needed fewer workers and many workers lost their jobs. There were more and more unemployed people and they bought fewer and fewer consumer goods, which caused the cycle to repeat itself
Import tariffs
When the US imposed tariffs on imported European products in the 1920s, European countries responded by introducing tariffs on imported American products. This made it difficult for the Americans to sell their surplus products in overseas market
Unequal distribution of wealth and under-consumption
Another way of looking at the depression is to see it as a crisis of under- consumption. In this view, the depression was not caused by too many goods being produced. Rather, it was caused by the fact that people were too poor. To afford them
While productivity increases by 43% and the industrial profits rose by 72% during the 1920s, wages only increased by 8%. If employers has increased wages and shared company profits with the workforce, then workers would have had the money to buy things
The idea of prosperity was a myth. American wealth was unevenly distributed. The majority of Americans could not afford to continue buying consumer goods
On the other hand, about 200 large trust or super- corporations dominated American industry. These trusts were controlled by individuals and each one had almost complete control of one vital sector of industry. For example, Andrew Carnegie controlled American steel manufacture through his US Steel Corporation and John D Rockerfler controlled American oil production. These captains of industry were enormously wealthy and made huge profits, largely at the expense of the ordinary people.
When there is a trust or a monopoly of a certain industry, there is no competition because one company controls a whole industry. Without competition , the captains of industry could charge high prices and pay low wages. This helped the rich get richer and the poor get poorer
buying and selling shares on a stock exchange
A company can sell shares in the ownership of their business on the stock exchange in order to raise money. The company uses the money from these shares to expand its business or to buy more factories or land in order to make higher profits
If the company makes a profit, it gives its shareholders a dividend. The more profit a company makes, the larger the dividend
When a company is doing well, more people will buy shares in that company so that they can earn dividends. As more people buy shares in a company, the company and the price of the shares increases. In this way, both the company and the shareholder’s benefit
what does buying shares “on the margin”
buying shares with money they don’t have also meaning that the value of the share was based on the people’s willingness to buy the share rather than on the real value of the company.
What was the economic impact of the Wall Street crash in the US?
The Wall Street crash sparked off the Great Depression. The American economy plunged into a crisis of bankruptcy, falling production and unemployment.
As the demand for goods plummeted:
- More and more factories closed down
- More and more people were unemployed
- Those who still had jobs had their wages reduced and experienced a drop in their standard of living
Millions of people faced bankruptcy and financial ruin because they had speculated on the stock market. Many people lost their homes because they could no longer afford to pay their mortgages
Banks were also in a insecure position. Many banks had lost their money because they had speculated with their customers money and were forced to close down. People who had not invested in the stock market, but put their savings in the banks, lost all their money
Economic effects of Wall Street crash
Famous firms went bankrupt
Brokers jumped to their deaths from the top of skyscrapers
People went down and out
Some put their house for sale, which was useless cuz no one was buying anything
An old couple who lived not far lost everything in the crash so they committed suicide
What were the social effects of the Wall Street crash
Rural areas
Farmers were hardest hit because the 1920s had not been kind to them anyway. It became more difficult to sell what they produced during the depression. Many went bankrupt, could not pay their mortgage and were evicted. Many migrated to the cities where they lived in poverty and misery. Others lived in the road.
To make matters worse, farmers in the central southern states faced another disaster. Over farming and drought in the 1930s turned millions of acres of land into a dust bowl forcing farmers to leave
What were the social effects of the Wall Street crash
Urban areas
The situation was not kick better in the towns. In the steel city of Cleveland, 50% of workers were unemployed. In Toledo, the figure was closer to 80%. At night, the pros were full of the homeless and unemployed
There were no social welfare or unemployment benefits to help people. The unemployed and the poor depended on bread queues and charity soup kitchens
Every town had a so-called Hooverville- a shanty town of ramshackle huts where migrants and the poor lived. They were named after president hoover, who seemed to be doing nothing to help
