How bad was the Great Depression?
The Great Depression was a period of economic hardship for much of the world, including the United States. Several things made it especially bad:
Many banks and other businesses were forced to close.
At times, about 1 in 4 workers in the United States were unemployed, or without a job.
Many people lost their homes or farms when they could not pay their bills.
To make matters worse, the Great Depression lasted for over 10 years!
In 1929, Herbert Hoover was the president of the United States. He was elected in 1928.
Before Herbert Hoover started working in politics, he became well known for his work in Europe. He was in charge of providing food for countries that were suffering after World War I. Hoover's success in that job helped him become Secretary of Commerce and then president.
Herbert Hoover was elected president of the United States in 1928. This was his campaign slogan:
A chicken in every pot, and a car in every garage.
His slogan meant that most Americans would be economically well off if Hoover became president.
The 1920s are sometimes called the Roaring Twenties.
During the Roaring Twenties, the American economy was growing quickly.
More people began to invest in the stock market. Many people had enough extra money to begin investing in the stock market. At the time, investing in the stock market looked easy. Stock prices kept going up. Some people even thought the stock values would never come down.
Many people had more money to spend than they did before. Jobs were easy to find, and banks were eager to lend money to people and businesses.
What did Americans do for fun in the 1920s?
Because the economy was strong in the 1920s, many Americans had extra money to spend on leisure and recreation.
Many people enjoyed attending sporting events, especially boxing matches and baseball games. One of the most popular and famous athletes of the era was Babe Ruth, who played outfield for the New York Yankees.
Movies were a popular form of entertainment in the 1920s. Greta Garbo was a famous movie star in the late 1920s and 1930s. She began her career in 1926, before movies had sound.
People also enjoyed listening to and dancing to jazz music, especially in cities like New Orleans and Chicago. One of the most popular jazz musicians of the time was Louis Armstrong.
Jazz music became so popular that the 1920s are sometimes called "The Jazz Age."
In the 1920s, many people bought goods on credit.
The passage below describes an example of buying goods on credit.
Warren wanted to buy a car for $20,000. But, he could not afford to pay the full price at once.
So, he bought the car on credit. In other words, he agreed to pay $350 every month for five years. He could afford these payments as long as he had a job.
It is risky for Warren to buy on credit because he might lose his job.
What happens when a person can't pay their bills?
When a person buys something on credit, he or she is promising to pay for it later. But sometimes a person can't keep this promise.
For example, if Warren lost his job, he would not be able to pay for the car he bought on credit. The car dealer might decide to take the car back from him. The dealer would also keep any payments Warren already made.
When the stock market crashed in 1929, millions of Americans lost their jobs. Suddenly, they were unable to pay their bills.
People can buy homes on credit too.
In the 1920s, many people used a kind of credit called a mortgage to buy their homes. When the Great Depression hit, they could not pay the mortgages anymore.
Many people became homeless. Sometimes, they had to live in shacks they built in the street. The shacks in this picture were in an alley in New York City.
It's bad for businesses when lots of people can't pay their bills at the same time because the businesses won't make enough money to stay open.
How is credit risky for businesses?
Businesses offer credit because they want to sell as much of their product as possible. If one customer cannot pay his bills on time, a business might make him give back whatever he bought. But if many customers cannot pay their bills, the business may be in trouble. The business was expecting to get paid later for the goods it sold on credit. Without those payments, the business may have to fire workers or close.
The stock market is a place where investors come together to buy and sell shares in a company. People who own shares of a company actually own a small part of that company. Shares are also sometimes called stocks.
A person would want to buy stock in a company to make money.
Buying stock is a way to invest money.
Investing means using money to try to earn a profit. You earn a profit when you end up with more money than you started with.
When people invest in a stock, they are hoping the price of the stock will go up. If it does, they can sell the stock to someone else for a profit. Stocks that go up are often said to be a good investment.
Investing always means taking a risk.
People do not buy stocks to keep their money safe. The price of a stock might go down. If a person sells a stock at a lower price than he bought it, the person will lose money.
In the 1920s, investors watched for changes in stock prices on stock tickers like this one. Tickers print the prices of stocks as they change throughout the day.
Stock tickers are still in use today. But they don't look like this anymore. Now they are all attached to computers.
In order to buy and sell a stock, people must first know the stock's value. Buyers and sellers know what a stock is worth because stock is worth the price that buyers and sellers agree on.
Stocks are worth the price that buyers and sellers agree on.
Sellers set a price they would be willing to accept. If a buyer is willing to pay that price, the seller will sell him the stock.
Buying and selling stocks is called stock trading.
How do people trade stocks?
In the 1920s, most stock trading took place on the floor of the New York Stock Exchange, on Wall Street in New York City. Buyers and sellers would make trades face to face.
Today, most stock trading is done over the phone or by computer.
Stock values usually change over time. The value of a stock may go up if people are willing to pay more money for it.
What makes someone want to buy or sell a particular stock?
Before someone buys stock in a company, he or she often tries to learn as much as possible about the company first. For example, he or she might want to know some of these facts:
if the company made money or lost money last year
if the company has been getting bigger or smaller over the last few years
what the company's stock price has been over the last few years
Facts like these can help buyers decide if a stock is a good investment or not.
But sometimes, buyers and sellers pay more attention to things other than facts. Maybe they've heard rumors that a company will go out of business soon. Or maybe they believe that the stock market will keep going up, just because it has gone up for the last several months. These beliefs can change quickly, leading a stock price to rise or fall rapidly.
When a company sells stock to an investor, it gets money from the sale. The company might use that money:
to hire new workers
to pay back loans from a bank
to produce more goods to sell
to buy and take over smaller companies
How much money can a company raise by selling stock?
The amount of money a company can raise by selling stock depends on its stock price. The higher the price, the more money a company can raise. When a company's stock price falls, it earns less money by selling new stock. It will not be able to grow and expand as easily.
During the Great Depression, many companies needed money to stay in business. Because the stock market was doing badly, they couldn't raise enough money by selling more stock.
Beth bought 10 shares of a computer company. The shares cost $10 each. A month later, she sold all her shares for $15 each.
Beth made a profit of $50.
Beth bought 10 shares of stock for $10 each. Use multiplication to find out how much she paid. 10 x $10 = $100
So, Beth paid a total of $100. Then she sold all 10 shares for $15 each. Use multiplication again to find out how much she got back. 10 x $15 = $150
Beth got $150 back.
Did Beth make a profit? To find out, subtract the price she paid for the stock ($100) from the price she sold the stock for ($150): $150 - $100 = $50
Beth ended up with $50 more than she started with. So, she made a profit of $50.
Before the Great Depression, many investors bought stocks and planned to sell them as soon as the price went up. This practice is called speculation.
Speculation is the practice of buying stocks and then selling them as soon as the price goes up. Investors who do this are often called speculators. Both words come from the word speculate, which means "to guess."
Speculators are not interested in buying a stock and holding on to it for a long time. They are betting the stock's price will go up in the near future. They want to make a quick profit by selling the stock.
Speculation was common during the 1920s. It may have helped cause the Great Depression.
Sometimes, speculators borrow money to buy stocks. They plan to pay back the loan when they sell the stock for a profit. This practice is called buying stocks on margin.
The passage below describes an example of buying stocks on margin.
A speculator takes out a loan for $100 to buy stocks. He buys 10 stocks at $10 a share. So, he starts out with $100 worth of stocks.
But then the stock price drops to $7. Suddenly, his 10 stocks are only worth $70. He decides to sell the stock, and he makes back $70.
Now the speculator has to find $30 more to pay his loan.
Buying on margin isn't only dangerous for speculators.
Remember what happens when people cannot repay their loans. The businesses or banks that depend on those loans may be forced to close. So, speculators put banks and businesses in danger by buying on margin. Many economists think buying on margin helped cause the Great Depression.
What happened on Black Tuesday?
How bad was the 1929 stock market crash?
October 29, 1929 is known as Black Tuesday. On that day, the stock market crashed for the third time in a week. Many stocks lost value very quickly.
Stock market crashes happen from time to time. But very few stock market crashes are as bad as Black Tuesday was. Together, the losses from the week's three crashes added up to more than $30 billion.
What caused the Great Depression?
Many people consider Black Tuesday to be the beginning of the Great Depression. But the Great Depression had many causes, and the stock market crash was only one of them. Historians and economists have many different ideas about what caused the Great Depression:
Prices for most goods and services had begun to fall, which made it harder for businesses to make enough money to stay open.
Businesses were making and selling fewer goods.
People were spending less money because they were less confident about the economy.
Many people were hoarding money, or keeping it out of the banks.
Bank failures were becoming common by 1929.
All of these probably played a role in causing the Great Depression.
How long did it take for the stock market to recover after Black Tuesday?
Between October 1929 and the middle of 1932, the stock market fell by 340 points. In other words, the stock market lost most of its value in just three years!
When did the stock market return to the value it had in 1929? That didn't happen until 25 years later, in 1954.
In the weeks before Black Tuesday, stocks were more valuable than they'd ever been before. However, people became more anxious about the future of the economy. Soon, everyone wanted to sell their stocks. It lead to a stock market crash as there were not enough buyers, so sellers had to keep lowering their prices.
When the Great Depression began, many American consumers were deep in debt. Debt means they owed a lot of money.
For most people, having a small amount of debt isn't a problem. Debt can become a problem when it grows too large or there is no way to earn money to pay it back.
In the 1920s, it was easy for many Americans to buy on credit or get loans from banks. Paying these debts was manageable for most Americans as long as the economy stayed strong and they could keep their jobs.
When the stock market crashed on Black Tuesday, many people who were in debt lost their jobs.
They could not pay their bills. The businesses who had given a lot of people credit were also in trouble. These people owed a lot of money that might never be paid back. Without that money, many of these businesses had to close.
After Black Tuesday, Americans were frightened. They wanted to make sure they didn't lose their life savings. Many of them tried to withdraw all their money from their bank accounts. But the banks couldn't give everyone their money back because the banks had loaned out most of their customers' money.
How could banks lose people's money?
When people put money in a bank, the bank invests that money. The bank lends the money to people and businesses as loans. When the Depression hit, many of those people and businesses couldn't repay their loans. In turn, when people came to the bank to get their money back, they couldn't. The money was gone.
What is a "bank run"?
A bank run is when many people try to take their money out of the bank at the same time. When people realized that the banks wouldn't have enough money to pay everyone back, they panicked. They tried to take their money out of the banks as fast as they could. Thousands of banks were forced to close because they had no money.