Borrowing on Margin Name ____________________________________________ Pd __________ Directions: Read the information below and study the chart. Then, referring also to your textbook, answer the questions that follow. The stock‐market crash of 1929 was largely the result of excessive speculation in the stock market. A very significant part of the money invested in stocks in 1929 was borrowed on margin. Margin is the amount a buyer uses as a down payment to purchase stock. In the 1920’s if the price of a share was one hundred dollars, the margin might have been ten or twenty dollars. Technically, the stockbroker who handled the transaction loaned the balance of the purchase price to the buyer. Actually, banks often provided the difference between the margin and actual cost because the interest rates on such loans were uniformly high. Interpreting Information 1.
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The big risk in all of this was that margin buying was done with what was termed call money, or demand notes. In this type of transaction, the stockbroker could legally demand immediate payment of all or part of the money loaned. The buyer was therefore safe only as long as the price of the stock remained stable or rose. 4.
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Many people believed that everybody was playing the market by 1929. The truth was that of 120 million Americans, only 1.5 million people were actually stock‐holders, and of that number, only 650,000 were true speculators, buying on margin. Warning signs of the impending crash were clear enough, but no one seemed to pay any attention to them. Then, on Thursday, October 24, 1929, a great panic swept the stock market. Nearly 12.9 million shares were traded, and although the five major New York City banks stepped in to support the market, five days later the bottom fell out. On Tuesday, October 29, 1929, a record 16.5 million shares were dumped on the stock exchange. The result was a chain reaction that wrecked the stock market, destroyed banks and lending institutions all over the country and ruined hundreds of thousands of investors. Price per Share of Select Stock on N.Y.S.E. Stock AT&T GE RCA U.S. Steel Mar. 3, 1928 $179.50 $128.75 $94.50 $138.12 ½ Sept. 3, 1928 $335.62 ½ $396.25 $505.00 $279.12 ½ 6.
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Explain how margin buying works. What risks are entailed by using call money, or a demand note, to buy on margin? What percentage of the total population in 1929 actually owned stock? What percentage of the stockholders were speculators, buying stock on margin? Why was October 24, 1929, referred to as Black Thursday? Why was October 29, 1929, referred to as Black Tuesday? Explain how speculation led to the great stock market crash of 1929. Forming Generalizations 8.
From the chart, develop a generalization about the effects of margin buying on stock prices. Understanding Cause and Effect 9.
How did the stock‐market crash cause a chain reaction that hurt even people who had not invested? Assume you have $10,000.00 in a savings account at a local bank; you have $10,000.00 invested in various stocks through your local broker; you still owe money on your house, your car, your Visa card, and a loan you took out to buy a snowmobile. You have been hearing rumors that the bank is going broke, your stocks are almost worthless, and you will have to pay cash immediately for all purchases made on credit. 1. What would you do? Imagine that you decided in 1929 to invest a little under $10,000.00. You decided to do the following at the height of the stock market: Buy 10 shares of RCA, buy 10 shares of U.S. Steel, by 10 shares of G.E., and buy 10 shares of Nation Cash Register. 2. Assuming that you sold all of your stocks at their lowest point in 1932, how much of your original investment would you have left in 1933? 3. How much would you have lost? Company Radio Corp. of America United States Steel General Electric National Cash Register Price Per Share in 1929 High Low $114.75 $26.00 $261.75 $150.00 $403.00 $168.12 $148.75 $59.00 Price Per Share in 1932 High Low $13.50 $2.50 $52.62 $21.25 $26.12 $8.50 $18.75 $6.25 The Nation’s Economy Crashes Directions: Review the chart. Then answer the questions that follow. You will then understand the major causes of the Great Depression. Uneven Distribution of Income  About half of all Americans were poor  Farms and factories were extremely productive, but most consumers lacked purchasing power due to low wages. Causes Easy Credit Imbalance in Foreign Trade  People had huge debts  To keep foreign products out because they purchased on of the United States, the installment plan. Congress passed the Hawley‐
Smoot Tariff Act in 1930,  People borrowed money to making tariffs the highest in speculate on the stock history market  Other nations unable to sell their goods in the United States due to high tariffs, could not afford to buy American products. Mechanization of American Industry  Now machines helped plants to turn out more goods with fewer workers.  Effects The Great Depression 
The national income – total payments to producers of the nation’s goods and services – dropped by half. 
Eighty‐five thousand businesses closed. 
400,000 farmers lost their land through foreclosures. 
Six thousand banks failed – one‐quarter of the country’s total – because people could not repay their loans. 
16 million people – one third of the work force – were out of work and so had no money to buy goods. 
Hunger, aimlessness, and mental depression increased dramatically. 
In 1931 three‐quarters of the nation’s cities banned married women from holding jobs as teachers. 
Children were forced to look for work. 
Farm foreclosures and bankruptcies were common. Many farm owners became tenants. By 1932 farmers began destroying their own crops. 1.
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List the four major causes of the Great Depression. In what two ways had people run up huge debts during the 1920’s? What effect did high tariffs have on the purchase of American products by other countries? What percentage of the nation’s banks failed during the depression? How were some children affected by the depression? Women? Farmers? Hard Times 1943
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Year Unemployment, 1929‐1943 Number of Percentage of Unemployed Work Force 1,550,000 3.2 4,340,000 8.7 8,020,000 15.9 12,060,000 23.6 12,830,00 24.9 11,340,000 21.7 10,610,000 20.1 9,030,000 16.9 7,700,000 14.3 10,390,000 19.0 9,480,000 17.2 8,120,000 14.6 5,560,000 9.9 2,660,000 4.7 1,070,000 1.9 Percentage of Workforce
Directions: The chart on this page shows the unemployment figures for the years 1929‐1943. Use it to construct a line graph of the unemployment rates for this period. Then use the graph and your textbook to answer the following questions. Explaining Graphic Information 1.
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During which years were more than 10 million Americans unemployed? During which year was the largest percentage of the work force unemployed? During which one‐year period did the greatest increase in the number of unemployed occur? During which one‐year period did the greatest decrease in the number of unemployed occur? What might have accounted for this? Predicting Outcomes 5.
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According to the graph, unemployment dipped after 1933 but then rose sharply in 1938. What might have caused this? What helped to bring the economic crisis to an end in the early 1940’s? Recommending a Course of Action 7.
Outline some steps you might have taken to deal with the plight of unemployed workers between 1929 and 1932.