Speculators bought stocks with money they barrowed. Then they used those stocks as collateral to buy more stock.
So if that person could not repay the loan, they would forefit their stocks. The total amount of money given out by
loan brokers went from $5 Million in mid 1928 to $850 Million in September of 1929. The stockmarket was based on barrowed
money and the stocks values were not accurate.
|Henry Ford had to stop production of his Model T because of overproduction and under consumption
Many things contributed to the underconsumption of goods. The production line produced a lot more goods, but people
could not afford to buy them. The production lines kept producing while the people were not buying. This created
extra goods, inturn, lowering the prices of the goods. Now the companies were losing money on by making their products.
For example, it takes farmers $1 to harvest a head of lettuce. But since there is so much of it, they have to lower
their prices to 30 cents. Now it takes the sale of 3 heads of lettuce to pay for the harvest of one.
|People are at the bank trying to withdraw their money before they lose it
Many banks gave loans out to farmers who used the money to buy new machines. But when the crops of the farmers
were not being bought, the farmers had no money to pay back the banks. Then nervous depositors withdrew their money
from the banks. The bank is losing money from the withdraws and not recieving money from the loans it has given out.
The bank is then forced to close because it has no money to return to their depositors. By 1933, the money from 9 million
savings accounts had vanished.
Over production of goods
The efficiency of the production line and new farming technology both contributed to the over
production of goods. Ford was producing so many cars that he could lower his prices more than any other company.
But the amount of production he had gave him a lot of left over cars. This made him shut down his plants in 1931.
He still has cars to sell, even when he has shut down his plants
The new technology in farming made each harvest much more successful. More and more farmers
produced more goods. Since they produced so many crops, they had to lower the prices. The farmers ended up losing
money on the crops they harvested because there was an over supply.
Stock Market Crash
When the stock market crashed, lots of people lost their money. This lose in money meant
that people had less money to spend. If they have less money to spend and give to buisnesses, the companies will have
to slow down or stop production and lay off their workers. The Stock Market crashing has made many people lose their
Buying on Margin
This way of buying stocks attracted the less wealthy. It allowed investors to purchase a stock for only a fraction
of its price and barrow the rest. The brokers then charged high interest and could demand payment of the loan at any
time. But on the other hand, if the stock went up, you could pull your money out to pay off the loan and interest charges
and still make money. This contributed to the Great Depression because the majority of people were not wealthy.
So when the maket high, everyone pulls out to make money and pay off loans, it sends the market down.