The 1929 Crash: Speculation, Leverage & Banking Risk — Practice · Grade 11 Social Studies

Chapter: The 1920s, Depression & New Deal

What this practice covers

By the end of The 1929 Crash: Speculation, Leverage & Banking Risk you should be able to:

6 questions, written answer, each with a worked explanation.

Vocabulary used: context, evidence, interpretation, leverage, liquidity.

Problem 1

Why can a small percentage decline in assets produce a much larger percentage decline in equity?
Answer and explanation

Equity is the remaining asset value after debt. With $100 in assets and $80 owed, equity is $20; a fall to $90 in assets leaves $10 in equity if debt stays $80. The asset decline is 10 percent, while equity falls 50 percent. Borrowing magnifies the effect on the smaller equity base.

Problem 2

What makes a feedback loop different from simply listing two events?
Answer and explanation

A feedback loop explains how one change produces another that reinforces the initial change. Falling asset prices may trigger forced sales, which put further pressure on prices. Merely listing a decline followed by selling omits the mechanism and whether the selling intensified the decline.

Problem 3

Why does a bank run not by itself prove the bank’s assets were worthless?
Answer and explanation

A bank may lack immediately available cash even when some longer-term assets retain value. That liquidity problem differs from assets being insufficient to cover obligations, a solvency problem. They can interact, but a withdrawal rush alone cannot establish the value or quality of every asset.

Problem 4

Why is a stock-price chart insufficient evidence for the whole Depression?
Answer and explanation

Stock prices document one market’s movement. The Depression also involved banking, credit, production, employment, trade, and household spending, with developments before and after the October crash. Test causal links using those records rather than making one chart represent the entire economy.

Problem 5

Invented balance sheet: an investor owns shares worth 100 units, owes 80, and has equity of 20. Shares fall to 90 while the debt remains 80. Calculate the asset decline and equity decline, then state a limitation.
Answer and explanation

A 10 percent asset decline produces a 50 percent equity decline because debt remains fixed in this simplified example. The mechanism explains leverage, but the invented figures do not describe every 1929 investor. Interest, collateral terms, timing, and other assets would affect a fuller account.

Assets decline by 10/100 = 10 percent.

Equity falls from 20 to 10, a 50 percent decline.

Keep the unchanged debt and initial equity denominator explicit.

Response criteria

  • Describe the historical context and institutions accurately.
  • Connect relevant evidence to an explained conclusion.
  • Represent particular perspectives without stereotypes or invented testimony.
  • Identify an evidentiary limitation or a distinction that qualifies the claim.

Problem 6

Would a bank receiving emergency cash necessarily become solvent?
Answer and explanation

No. Cash can address the timing of withdrawals, but solvency depends on the value of assets relative to obligations. Compare the balance sheet and loss exposure separately. The distinction prevents treating every bank closure or intervention as the same institutional problem.

Response criteria

  • Describe the historical context and institutions accurately.
  • Connect relevant evidence to an explained conclusion.
  • Represent particular perspectives without stereotypes or invented testimony.
  • Identify an evidentiary limitation or a distinction that qualifies the claim.

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