THE GREAT DEPRESSIONOr, how problems lead to more problems

Congrats! The economy is booming, and your night-life is the cat’s meow; your life couldn’t get much better. Things are so good, in fact, that you have decided to spend a little extra cash on something nice.Let’s look at your options....

A Prosperous Canada

Incomes for 1928

1. Under $5000 2. $10 0003. $20 0004. $50 0005. $75 0006. $100 000Take your wages and divide by 12. This will be your income

per month. Food will cost $100 a month (at least for this exercise)

What Will You Choose?

A Model T Ford A nice car, and surprisingly cheap

due to mass production and assembly line (also, clearly American)

Full price $290 Instalments: $30 a month

Cadillac Car of choice for Al Capone, biggest

mob boss of the era. Full price $4000 Instalments: $400 a month

What Will You Choose?

Seven Room Home

All modern A little land $5200

Apartment Two bedrooms $40 per month

Time to Consume...

Do you have some money to burn? Take five minutes and shop to your heart’s content. You may buy any goods you find in the 1920s scrapbooks. Clothes? Radios? Up to you.

Can’t buy the product? Don’t worry! You can pay in instalments of 10% of the product’s value every month.

Your friend has told you about the fantastic opportunities the Stock Market offers. Basically, you buy small parts of companies, called shares. If the company makes a profit, the value of the shares goes up.

An example: RCA, one of the first producers of radios, has had incredible success. In 1925, its stock was worth about $11 a share. Now, in 1929, it is worth $114 a share.

What does this mean? If you had bought 100 shares in 1925 for a total price of $1 100, you could sell them in 1929 for $11 400. That is enough to buy 2 new houses.

Now...who wants in?

Easy Money....

Can’t afford to buy stocks? Well, we have a solution for you.

You can buy stocks on margin. This means that you can claim a full share, and yet only give us 10% of its full value.

Here is an example:

Let’s imagine that you want to buy stock in the ACME company, at $100 a share., but you only have $500 dollars to use.

You COULD buy 5 shares ($100 each)

OR

You could buy on margin, give me $500, and control 50 shares

The best part? When the prices go up, you can still sell the stocks for the same profit per

stock.

But Wait...There’s More!

How Many Shares Will You Buy?

Time to buy your stocks! The value of each share of Stanfield, Crabb, Able, and Mumsford is:

$50Calculate how many shares you will buy, and, if you are a sucker, feel free to pay the full price.

Turns out that Stanfield, Crabbe, Able, and Mumsford, or SCAM, isn’t selling many products at the moment. Sure, things were great when the company produced those first toilets. Everyone needs a toilet, right?

Unfortunately, families with one bathroom only need one toilet. This means that since most urban families in North America now have a SCAM toilet, their sales have dropped off dramatically.

The value of your stock is dropping considerably. In fact, you stock is now worth only $10 a share.

The Bad News......

Those who bought the stocks for their full value ($50 a share) just lost $40 a share. Not good.

Those who bought on margin...

We have a problem. The company desperately needs cash. And, since you made a promise to pay the remaining 90% if necessary, you now owe us some money. In fact, you owe us the full value of the 90% when you originally bought the stock, minus the amount you paid per share.

That will be $40 per share, please. Please calculate how much you owe us.

Even Worse.....

Do you have to sell some of your belongings to pay us? Do what you have to do. Just remember that NO ONE is willing to buy...the stock market is crashing, after all. Anything you sell is worth half of its original value.

By the way, the stock market has crashed so badly that some companies have gone bankrupt. It turns out selling shares on margin isn’t a good idea; sure, YOU only had to put down 10%, but what about the 90%? Who had that money?

No one.

Things are so bad locally that ACME has gone out of business. All factory employees lose their jobs. Let’s see who else is impacted by this.

Worse still....

Toilets did not cause the Great Depression. However, diminishing returns from sales of radios and similar products was devastating to some investors. Buying on Margin allowed investors to “buy” more stocks than they could actually afford. This created a false sense of wealth and security in the investors and the companies.

Because nations are linked through trade and investment, the economic collapse in one country led to instability elsewhere.

A Quick Debriefing