CLEP US History II

Answer: A - Speculative investment in the stock market, in which investors could buy shares of stocks with large margins, caused the market to crash in 1929. A stock margin is like a mortgage; an investor could purchase shares with a fraction of its value actually paid and the rest on credit. Prior to the crash, even many economists believed there was no limit to how high stock value could go, meaning that as long as people kept buying stocks, thus driving stock values higher, it was safe to give people large margins (or credit) for a portion of the shares’ costs. When the value of a stock dropped, the investor had to pay a margin call, or the lost credited value. Many investors bought stock when they didn’t have real money in the bank to pay their margins if needed, and were driven into immediate bankruptcy and debt by a margin call. Once a dip in the market resulted in a few margin calls, the problem snowballed as investors and banks panicked.