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How did buying stocks on the margin contribute to the Great Depression?I know it's not...

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legerdemain | (Level 1) Honors

Posted February 13, 2011 at 2:13 AM via web

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How did buying stocks on the margin contribute to the Great Depression?

I know it's not only the failure of the Stock Market that lead to the depression-- it was lots of different things and was years in the making.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted February 13, 2011 at 2:36 AM (Answer #1)

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As you say, the stock market crash did not cause the Depression all by itself.  But it did help, and the buying of stocks on margin was a major reason that it did so.

Buying of stocks on margin refers to the practice of borrowing money to buy stocks.  If the stock price goes up, you're fine because you can pay back what you borrowed.  If the stock price goes down, you have to pay back the debt and have no money with which to do so.

After the crash, the stock prices were way down.  So now all sorts of people owed money for their margin buying.  They couldn't pay the loans back.  This meant banks went broke as their loans all went bad.  When this happened, depositors (pre-FDIC) lost their money.  Businesses couldn't borrow either.  Between all of these things, the economy took a very hard hit because of the margin buying followed by the crash.

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