Chapter 22-1: Critical Thinking # 4

Judging from the events of the late 1920s and early 1930s, how important do you think public confidence is to the health of the economy? Explain. Think About:

• what happened when overconfidence in the stock market led people to speculate and buy on margin
• how confidence affects consumer borrowing

Judging from the events of the late 1920s and early 1930s, the public confidence was very important and had an effect on the economy. People began to have great confidence in the stock market, leading to more and more investments. When the stock prices continued to rise, people took advantage of the situation. They rushed to buy stocks and bonds, having more confidence than usual. Over time the confidence in the stock market grew even more and people began to engage in speculation. This meant that they were buying stocks and bonds on the chance of a fast profit, ignoring the the risks they were taking. Many people began to buy on margin, leaving people most likely unable to pay off the loans if the value of the stocks declined. Eventually the stock hit its peak and then feel, which made the confidence of people very weak. Some people sold their stocks right away and pulled out. When the stock market finally hit the bottom, the nation's confidence fell with it as well. Everyone then panicked, which probably made the situation even worse. As a result, the confidence of the people in the late 1920s and early 1930s had a huge effect on the health of the economy because it factored into making the depression more severe.