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Financial Collapse - Coggle Diagram
Financial Collapse
The Stock Market Crashes
Question How did Margin buying contribute to the stock market crash?
Answer: Many investors who had traded on margin were forced to sell off their stocks to pay back their loans. when millions of people were trying to sell stocks at the same time with very few buyers, it caused the prices to fall even more, leading to a bigger stock market crash.
In 1929, New York City’s Wall Street was the financial capital of the world. Banks and investment companies lined its sidewalks. At Wall Street’s New York Stock Exchange, optimism about the booming U.S. economy showed in soaring prices for stocks.
To get in on the boom, many middle-income people began buying stocks on margin. This meant that they paid a small percentage of a stock’s price as a down payment and borrowed the rest from a stockbroker. The system worked well as long as stock prices were rising. However, if they fell, investors had no money to pay off the loan.
In September 1929, some investors began to think that stock prices were unnaturally high. They started selling their stocks, believing the prices would soon go down. By Thursday, October 24, the gradual lower-ing of stock prices had become an all-out slide downward.
A panic resulted. Everyone wanted to sell stocks, and no one wanted to buy. Prices plunged to a new low on Tuesday, October 29. A record 16 million shares of stock were sold. Then the market collapsed.
A flawed U.S Economy
Despite prosperity, several weaknesses in the
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of wealth, overproduction by business and agriculture, and the fact that
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By 1929, American factories were turning out nearly half of the world’s
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ever, this new wealth was not evenly distributed. The richest 5 percent of
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percent of all American families earned less than $2,000 per year. Thus,
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sell all their goods, store owners eventually cut back their orders from
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downward economic spiral began. As more workers lost their jobs, families
bought even fewer goods. In turn, factories made further cuts in produc-
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During the 1920s, overproduction affected American farmers as well.
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Meanwhile, they faced new competition from farmers in Australia, Latin
America, and Europe. As a result, a worldwide surplus of agricultural
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Unable to sell their crops at a profit, many farmers could not pay off
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