netw rks

NAME _______________________________________ DATE _______________ CLASS _________

The Great Depression Begins, 1929–1932

Cop

yrig

ht ©

The

McG

raw

-Hill

Com

pani

es,

Inc.

Per

mis

sion

is g

rant

ed t

o re

prod

uce

for

clas

sroo

m u

se.

Economics of History Activity

Speculation and the 1929 Stock Market Crash

Before the Great Depression of the 1930s, the 1920s had been a time of economic optimism and growth. Specifically, in the late 1920s the prices of stocks rose dramatically. Usually a stock's price reflects investors’ perception of the company’s value. For example, if a company has strong sales and is expected to have good sales into the future, the company’s stock price may rise because investors have identified value in the company. When investors buy stocks simply because they hope the stock price will continue to increase, they are engaged in speculation. Speculation adds fuel to rising stock prices, but it is risky for investors. When the excitement about the rising stock price ends, prices can drop quickly.

The economic collapse that began in 1929 seemed unimaginable only a year earlier. In the 1928 presidential election, Herbert Hoover declared, “We are nearer to the final triumph over poverty than ever before in the history of any land.”

The optimism that swept Hoover into the White House also pushed stock prices to new highs. In the late 1920s, the stock market experienced a prolonged period of growth, which convinced many people to buy stocks. Some people even borrowed money to buy

Economics Terms to Know

stock a share of ownership in a corporation

speculation buying stocks at great risk, expecting the price to rise

stock market a system for buying and selling stocks in corporations

margin buying stocks with borrowed money

30

5

10

15

20

25

0

19201921

19231924

19261928

19291930

19311922

19251927

1932

S&P

500 A

vera

ge In

dex P

rice

YEAR

Stock Prices, 1920–1932

United States History and Geography: Modern Times

PDF Pass115_116_USHG_ESSG_Ch09_L1_663482.indd 115115_116_USHG_ESSG_Ch09_L1_663482.indd 115 08/02/12 4:35 PM08/02/12 4:35 PM

netw rks

NAME _______________________________________ DATE _______________ CLASS _________

The Great Depression Begins, 1929–1932

Copyright ©

The McG

raw-H

ill Com

panies, Inc. Permission is granted to reproduce for classroom

use.Economics of History Activity Cont.

stocks, which is known as buying on margin. Buying stocks on margin is especially risky because if prices decline, investors still owe the money they borrowed, but the stocks are worthless.

As long as stock prices kept rising, investors were happy and borrowed more. Hoping to get rich quick, buyers engaged in speculation—taking big risks and making big bets that the stock market would continue to climb—without regard to a company’s underlying profits or sales.

However, when the stock market crashed on October 29, 1929, many investors were left with stocks worth nothing. The crash led to a panic throughout the economy. The stock market crash of 1929 was one of the causes of the Great Depression.

Applying Economics to History

1. Using the graph as a reference, how could you describe the U.S. economy in the late 1920s?

2. What information should investors use to choose which stocks to buy?

3. Why do you think the stock market crash of 1929 was not predicted?

4. How did economic factors of the 1920s lead to political and social effects in the 1930s?

United States History and Geography: Modern Times

PDF Pass115_116_USHG_ESSG_Ch09_L1_663482.indd 116115_116_USHG_ESSG_Ch09_L1_663482.indd 116 2/6/12 4:55 PM2/6/12 4:55 PM