Chapter 1

The Great Depression

The long bull market
Election of 1928
In the late 1920s, people believed the economy was doing
great, with the stock market going up and businesses making
a lot of money. Many thought this prosperity would last
forever.

In the 1928 election, Herbert Hoover ran for president and

promised a bright future. He said poverty was almost gone,
and people trusted him. Hoover's opponent, Alfred E. Smith,
faced challenges because some people didn’t like that he was
Catholic, which hurt his chances of winning
Hoover easily won the election, and during his
speech, he said the future looked great. However,
just months later, in 1929, the stock market crashed,
and the economy collapsed, starting the Great
Depression.

So, the economy became unstable because people

were too confident, made risky investments, and
thought the good times would never end. This
overconfidence led to big problems.
Stock market soars
In the late 1920s, people were very optimistic about the
economy, and this caused stock prices to rise a lot. A *bull
market* is when stock prices keep going up for a long time,
and that's what happened during this time. This made
many Americans want to invest in the stock market. By
1929, about 10% of American families owned stocks.

Before this, stock prices usually matched how well

companies were actually doing (their earnings and profits).
But in the late 1920s, people began buying stocks just
because they believed prices would keep going up. This is
called *speculation*—people were basically gambling that
they could buy stocks and sell them later for more money.
Many investors didn’t even pay the full price for the stocks
they bought. They used something called *buying on
margin*, where they only paid a small part (sometimes just
10%) of the stock's price and borrowed the rest from their
stockbroker. For example, with $1,000, they could buy
$10,000 worth of stock. The rest was borrowed money.

This was risky because if stock prices went down, the

broker could issue a *margin call*, demanding the investor
pay back the loan immediately. If investors couldn't pay,
they would lose everything, leading to big financial
problems. This created a very unstable situation that
contributed to the stock market crash.
The Great Crash
The stock market was doing great as long as people kept
putting money into it. In September 1929, prices reached
their highest point. But soon, prices started to drop. When
investors thought the good times were over, they began
selling their stocks, which made prices fall even more. Then,
in October 1929, things got worse.
On October 21, the comedian Groucho Marx got a call from
his broker, telling him he needed to quickly pay back money
he had borrowed to buy stocks.
The stock market had crashed, and the value of his stocks
dropped. He had to sell at a loss. This happened to many
people, causing a rush to sell stocks, making the market crash
even more.
On October 24, known as Black Thursday, the market
dropped even further, and Groucho lost almost all his money.

On October 29, 1929—known as Black Tuesday—the stock

market dropped even more sharply. Over 16 million shares
were sold in a single day, and the value of top industrial
companies fell by 10%. By mid-November, the value of stocks
had dropped by over one-third, and about $30 billion was
lost, which was as much as all the money Americans earned
that year.

While the crash wasn't the main reason for the Great
Depression, it made the economy weaker and unable to
handle other problems that followed.
Banks Begin To Close
The stock market crash hurt banks in two major ways:

1.Lending to speculators: Banks had loaned a lot of

money to people who were betting on the stock
market. When the market crashed, these borrowers
couldn't pay back the loans.
2.Banks investing in stocks: Many banks had used
customers' savings to invest in the stock market,
hoping for high profits. When stock prices fell, banks
lost that money too.
As a result, banks lost huge amounts of money and
stopped giving out loans, making it harder for people
and businesses to borrow money, which hurt the
economy even more.

Some banks couldn’t survive these losses and had to

close down. Since there was no government insurance
to protect people’s savings, if a bank failed, everyone
lost their money—even if they hadn’t invested in the
stock market.
Because more and more banks closed in 1929 and
1930, people started to panic. Many rushed to
withdraw their savings all at once, causing even
more banks to fail.

This is called a bank run. Since banks only keep a

small portion of depositors' money on hand (and
lend out the rest), they couldn't give everyone their
money, leading to more bank failures. By 1932,
about 25% of all U.S. banks had gone out of business.
The roots of the great depression
The stock market crash played a major role in putting
the economy into a recession. Yet the crash would not
have led to a long-lasting depression if other forces
had not been at work. The roots of the Great
Depression were deeply entangled in the economy of
the 1920s.
Uneven distribution of income
Overproduction was a significant factor leading to the Great
Depression because it created an imbalance between supply
and demand. Technological advancements allowed factories
and farms to produce more goods, but most Americans didn't
earn enough to buy them.

While production efficiency soared, workers' wages didn't

rise accordingly, leading to a widening income gap. The
wealthiest Americans held a large portion of the nation's
income, while the majority struggled with low wages and
little disposable income. Farmers, heavily in debt from World
War I expansions, were hit hard by falling prices, leading
many to bankruptcy.
The use of installment plans to buy expensive items,
such as cars and refrigerators, created a cycle of debt
for consumers. Once people could no longer afford to
make new purchases, manufacturers cut production
and laid off workers.

This decline in retail sales rippled through other

industries, leading to widespread job losses and
further decreases in consumer spending, worsening
the economic downturn.
The situation spiraled, with reduced consumer
demand causing businesses to fail and unemployment
to rise, deepening the economic crisis that marked the
onset of the Great Depression.

Many families had little or no savings. Lost jobs often

meant dire circumstances. In 1930 alone about 26000
businesses failed
The Loss of export sales
Many American jobs could have been saved if more goods
were sold abroad, but U.S. banks focused on giving loans to
speculators instead of foreign companies. In the past, loans
from U.S. banks helped foreign countries buy American
products.
Without these loans, foreign countries bought fewer goods
from the U.S. In 1929, President Hoover wanted to
promote trade by lowering tariffs (taxes on imported
goods). However, Congress raised tariffs with the
Hawley-Smoot Tariff to protect American businesses.
This backfired, as other countries responded by raising
their tariffs, reducing American exports. By 1932, U.S.
exports had dropped by more than half, hurting both
companies and farmers.
Mistakes by Federal Reserve
In the 1920s, easy access to credit fueled consumer
spending and stock market speculation. The Federal
Reserve kept interest rates low, leading to risky bank
loans and overproduction by businesses.

When the Great Depression hit, companies laid off

workers, and the Federal Reserve raised interest rates,
worsening the economic downturn by making
borrowing more difficult.
Questions
Who won the 1928 presidential election in the United States?
Herbert Hoover won the 1928 presidential election.
What promise did Herbert Hoover make during the 1928 election campaign?
Herbert Hoover promised a bright future and said that poverty was almost gone.
What challenge did Alfred E. Smith face in the election that hurt his chances
of winning?
Alfred E. Smith faced challenges because some people didn’t like that he was
Catholic, which hurt his chances of winning.
What major event happened in 1929 that caused the economy to collapse?
The stock market crashed in 1929, leading to the start of the Great Depression.
What is a "bull market"?
A bull market is when stock prices keep going up for a long period of time.
 In the late 1920s, why did many Americans want to invest in the stock
market?
Many Americans wanted to invest in the stock market because they believed
prices would keep going up and they could make a profit.
What does "buying on margin" mean?
Buying on margin means paying only a small part of the stock’s price and
borrowing the rest from a stockbroker.
What is "speculation" in the context of the stock market?
Speculation is when people buy stocks hoping to sell them later at a higher price,
without focusing on the actual value or performance of the companies.
Why was "buying on margin" risky for investors in the 1920s?
It was risky because if stock prices went down, the broker could demand
immediate repayment of the loan (a margin call), and if investors couldn’t pay,
they would lose everything.
What happened to investors when they couldn’t pay back the loans during a
margin call?
If investors couldn’t pay back the loans during a margin call, they lost everything,
leading to financial problems