In the 1920's, the nation's economic expansion seemed to bring America to the forefront of the world, economically. What were the downsides?
Did any of these downsides lead to the Great Depression? Explain.
- RogerLv 76 months ago
Some of the expansion depended upon the booming stock market where prices were inflated by rampant buying on margin for stocks people considered attractive. (A person who buys on margin puts up only a fraction of the price of the stock and borrows the rest. Fine as long as the market keeps going up.) When stocks declined, many of these borrowers couldn't pay what they owed. They went bankrupt. That in turn caused further sell offs. The market collapsed. Thus the crash.
Mass production and production lines gave many people jobs, drawing worked from rural areas to better paying jobs in the city. However, there were social upheavals and poor conditions for factory workers. Some of these conditions seemed to fulfill Marx's predictions in Das Kapital, making the country ripe for a social revolution. When the stock market crashed and businesses went belly up the workers were left stranded, with no jobs. Franklin Roosevelt tried to stave that off and did some good through government created jobs, but only World War II really fixed that situation..
- ◄♦►Lv 56 months ago
The main downside was that money was too easy to get. After the previous bank failures came a new type of loan - the "margin loan". What this did was enable smaller banks to invest 10 times more money than they had on hand - the balance would be financed by the stockbroker.
This, unbeknownst to everyone, was a setup. It was a plan for the big banks to acquire the smaller banks. The big banks were making money hand-over-fist and the smaller banks and private investors could do the same thing using this new "margin loan".
But the "margin loans" came with a stipulation - if the loans were called in, they would be payable within 24 hours. And this is just what the big banks did - they quietly exited the market and then called in the margins. Since they had to be paid within 24 hours, it created a run on the banks by people trying to salvage as much of their investments as possible.
But it was to no avail - the stock market crashed and the Great Depression was born.