Causes Of The Great Depression:Part 2

People OVERSPECULATED on StocksBorrowing To Buy (Margin Buying)

Then Could Not Repay When Market Crashed

Another thing that happened during the 1920s to bring on the Great Depression was how people borrowed too much money to buy too much stock (part ownership of a company.

Stocks are ownership pieces of a company. The more shares of stock you have, the more of the company you own.

It works like this:1. A business owner needs to raise a LOT of money to make his business grow, and he cannot borrow enough from a bank, or from friends.

2. He decides to split ownership of his company up into small parts (shares of stock) and then sell them to other people. He still keeps enough so he is in charge, but he now shares some of the ownership by selling the shares of stock to others.

3. He gets the money he needs to help his company, and the people who buy the shares of stock get the chance to make even more money. You see, if the value of a share of stock goes up, and you sell it, the difference is your profit. You get to keep it.

Things were going so well in the selling and buying of shares of stock that MANY people felt they could get rich easily doing it.

MANY people, a lot who could not afford it, started buying stock so they could make that money and get rich quickly.

The people who had not saved the money, and could really not afford it, went to banks and borrowed money so that they could invest in the stock market.

There was a practice that made it easy to get a lot of stock for not much of your own cash. It was called BUYING ON MARGIN.

Buying on Margin meant that you only had to have a very small amount of the cash needed to buy all the stock you wanted. The rest you could borrow.

This was all OK, and people DID make a lot of money quickly. As long as the prices of the stock kept going UP, it was OK.

Over-speculation Questions:

Good or Bad idea? Why?

What could happen if the value of your stock ever started going down and did not stop until it was lower than how much you borrowed from the bank to buy it? (In other words, even when you sold the stock and gave the bank ALL of that money , you STILL owed them for the rest? ) What would the bank do?

Federal Reserve Failed To Prevent Collapse of Banking System

The Federal Reserve is a part of the U.S. government that is in charge of how banks do their business. They are supposed to make certain that all money safety laws are followed. (Money Safety in that they make certain the money you put in the bank stays safe.)

One of the things they are supposed to do is make certain that banks do not lend out too much of the money they take in as savings deposits from their customers. This is so that people can get their money back when they want it.

The second thing banks are supposed to do is make certain that there is enough money out and around being used so that people can continue buying and selling (If there is not enough cash around, you cannot sell stuff because people cannot get cash to pay you. This is not good for business.)

In the late 1920s the Federal Reserve did not do these two things. First they actually reduced the amount of cash people could get access to. This made it harder to buy and sell.

In fact from 1929 to 1933 the Federal Reserve allowed the amount of money available for use to shrink by 1/3.

With less cash around to be earned and spent, what do YOU think would happen to business???

Most importantly the Federal Reserve did not make sure that banks kept enough cash around.

This was a problem because when people wanted to get the money they had put into savings there was NOT enough there to satisfy them.

Banks allowed this to happen because they wanted to make money by lendingmoney to all the people that wanted to borrow money so they could buy STOCKS.

People in a bank lining up to get money that

WAS NOT there!!!

When these two things combined with the other problems we have been discussing, there was so much pressure on banks that many began to fail.

When enough banks failed they said that the banking system had collapsed .

This made people PANIC , because they began to wonder where they would live, and how they could afford to eat if all their money was gone with the bank falling apart ( collapsing).

High Tariffs Discouraged

International Trade

.

A tariff is when the government charges a tax on goods being brought into the country (imports ) from a foreign nation. Most often this happens when a country wants to protect the businesses of their own country.

The goal is to make the products made from a foreign nation more expensive in YOUR nation than those made by your own companies.

That way people in your country will buy products made in your country, helping the companies in your country.

This is what people in the U.S. Government wanted to do to help the people suffrering during the Great Depression. They thought it would help U.S. businesses, and U.S. people.

Automobile executive Henry Ford spent an evening at the White House trying to convince President Hoover to veto the bill, calling it "an economic stupidity".

For instance, If France sends pens made in France to be sold in the U.S. , the U.S. would put a tariff ( tax) on them so that French pens are more expensive than U.S. pens.

EXAMPLE: France sends pens to be sold in the U.S. at $4.00 each. The U.S. government decides to put a $6 tariff on each pen. This means that French pens now cost $10 each in the U.S.

If a French pen costs $10 and one just as good made in the U.S. costs only $4, which one are you going to buy?

The problem with this is that France will want to get even. They will put a tariff on U.S. made products being sold in France. This will make U.S. made goods more expensive in France than French made products. Each country looses out because they are not selling as much to each other as before.

Get Even!!!

Since companies are not selling as much, they start to shut down their factories, and people start to lose their jobs.

If they continued to make just as much stuff, and nobody wanted to buy it, they would be OVERPRODUCING by making things nobody wanted to buy.

When the Smoot–Hawley Tariff Act (Law) of 1930 was passed it raised U.S. tariffs on over 20,000 imported (coming into the U.S. from other countries) goods higher than they had EVER been before.

Soon other countries began to retaliate (get even) by putting tariffs on U..S. made products going into THEIR countries.

This benefitted NOBODY.

According to government statistics, imports from Europe into the U.S. decreased (went down) from a 1929 high of $1 Billion ,334 million to just $390 million during 1932. That means other countries were doing $1 Billion LESS $1 Billion LESS business with the U.S.

U.S. goods going to Europe decreased (went down) from $2 Billion,341 million in 1929 to $784 million in 1932.

That means U.S. Businesses were making MORE that 1 and ½ $BILLION LESS than BEFORE the tariff!!!!!

High Tariff Questions:

Think about what you learned about tariffs. You must do that to answer this question: If you were the one making the decision, would YOU put tariffs on products coming into the U.S. from other countries as a way to protect U.S. Businesses? Why/Why Not?