Great Depression
One of the most challenging times in United States history. Huge global ramifications and many historians believe this to be a significant contributor in allowing Adolf Hitler to rise to power in Germany.
Roaring 20's
The 1920s were years that were full of economic prosperity. This means that most people had good-paying jobs (low unemployment) and people were able to afford to pay for a lot of things.
Unemployment was 4.2% in 1928 but was 23.6% by 1932.
Stock Crisis 1920s
Since a lot of people had stable jobs in which they made a livable wage, a lot of families began to invest money into stocks. People were so confident that they were going to keep their jobs, they took out loans to pay for their stocks.
Then as you see in the video above, everyone in the world went into a trade war which meant that they no longer were buying goods from other countries. Basic principle:
Businesses make a profit when they sell their goods.
- Footlocker makes money by selling (primarily) shoes.
- Dunkin' makes (most of) their money off of coffee.
Countries make a profit when they trade with other countries. When there is a "trade war" or a reduction in trading amongst them, economies suffer greatly.
Stock Crisis 1920s
So after learning about all of this, 1929 began to spell disaster for the United States economy. The stock market began to appear to be less stable, so a significant amount of people began selling their stocks.
The Problem?!
PEOPLE SOLD STOCKS THAT THEY PURCHASED WITH LOAN MONEY.
This is bad. Like, VERY bad. Let me give you a scenario:
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You notice that there are no concessions offered during the home basketball games at school. Knowing that your fellow students would really enjoy candy and popcorn, you realize that you could make some money doing it.
Problem: You don't have enough money to purchase all of the candy and popcorn that you plan on selling. However, you are absolutely confident that you will make a lot of money if you do it.
Solution: So you approach the principal and tell him that you need to borrow money to purchase everything. The principal agrees.
You purchase everything you need and begin selling. Knowing that the profit that you make early would be used to pay back the principal. Why? Because you borrowed money with the intention of paying back. This is a basic understanding of what a loan is.
Problem: After a few games, you don't sell as much as you thought you were going to. Afraid you were going to actually lose money rather than make a profit, you begin to think about solutions so that you don't owe more than you already do.
Solution: While it's not a great solution, you need to get rid of the candy. You realize that the candy isn't worth as much as you thought because your classmates aren't buying it. Instead, you find someone to take your role in selling the candy instead.
That means you're giving someone the candy, but also giving them the debt. This is because the principal is not paid off yet.
To make matters worse? Other kids are going to the principal to borrow money for things they believe would eventually make more money. The principal borrows a lot of money from different people.
So what happens if everyone does what the concessions person did?
The Principal Goes Broke