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Zorluk: KolayCauses of the Great Depression

"The broker’s loan is the life blood of the speculative market. By paying only ten percent of the purchase price, the investor can control ten times as many shares, multiplying his profits as the market rises."
— Financial commentary, 1928

Which of the following best explains how the financial practice described in the excerpt contributed to the economic instability that led to the Great Depression?

  1. A
    It was mandated by New Deal regulations designed to help working-class families invest in corporate stocks.
  2. B
    It led the federal government to abandon all foreign trade and adopt a policy of absolute economic isolationism.
  3. It encouraged widespread speculation and created an unstable stock market that was highly vulnerable to a sudden panic and crash.Cevap
  4. D
    It forced the federal government to immediately take control of major industries to prevent corporate monopolies.

Cevap

The correct answer states that the practice of buying stocks on margin encouraged widespread speculation and created an unstable stock market that was highly vulnerable to a sudden panic and crash.
The correct answer is correct because the practice of buying stocks on margin allowed investors to purchase stock by putting down only a fraction of the price and borrowing the rest from brokers. This fueled rampant speculation and artificially inflated stock prices during the 1920s, making the financial market fragile and leading directly to the stock market crash of 1929 when the bubble burst.

Adım Adım Çözüm

1
Analyze the historical excerpt to identify the financial practice being described.
The text describes buying stock by paying only ten percent of the purchase price and borrowing the rest, which is the practice of buying stocks 'on margin.'
Identifying the target financial practice is necessary to connect it to its historical consequences.
2
Evaluate how buying on margin affected investor behavior in the 1920s.
It allowed investors to purchase more stock than they could afford, driving stock prices to artificial heights through rapid speculation.
This explains the growth of the speculative bubble in the late 1920s stock market.
3
Connect the speculative bubble to the onset of the Great Depression.
When stock prices began to fall, brokers demanded repayment of loans, forcing panic selling that crashed the market and destabilized the economy.
This establishes the direct link between margin buying, the stock market crash, and the subsequent economic downturn.

Anahtar Kavram

Buying Stocks on Margin and Stock Market Speculation
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Konular

Causes of the Great Depression

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