Factors in the Stock Factors in the Stock Market Crash and the Market Crash and the Causes of the Great Causes of the Great

Depression LectureDepression Lecture

1920’s Prosperity1920’s Prosperity The years following WWI are known as the “The years following WWI are known as the “Roaring Roaring

TwentiesTwenties”. During the 1920’s, many Americans ”. During the 1920’s, many Americans believed that the United States was a place of believed that the United States was a place of unlimited growth, opportunity, and achievement. unlimited growth, opportunity, and achievement. Americans were earning more money then ever. Americans were earning more money then ever. Between 1922 and 1929 the national income rose Between 1922 and 1929 the national income rose from from $61 billion$61 billion to to $87 billion$87 billion, a leap of nearly 43 , a leap of nearly 43 %. Due to their increased earnings, many Americans %. Due to their increased earnings, many Americans had more money to spend on luxury goods such as had more money to spend on luxury goods such as radios, refrigerators, and automobiles. In addition, by radios, refrigerators, and automobiles. In addition, by 1929 the US Stock market was at an all time high. By 1929 the US Stock market was at an all time high. By the end of 1929 Americans had traded the end of 1929 Americans had traded 1.1 billion1.1 billion shares of stock on the New York Stock Exchange. shares of stock on the New York Stock Exchange. Many argued that the American economic prosperity Many argued that the American economic prosperity would last foreverwould last forever

The Great Depression The Great Depression Foreshowed Foreshowed

By late 1929 cracks were beginning By late 1929 cracks were beginning to show in the US economy. to show in the US economy. UnemploymentUnemployment was on the rise, was on the rise, farmers were losing their land and farmers were losing their land and stock prices were dropping. While stock prices were dropping. While many historians debate the exact many historians debate the exact cause of the Great Depression, they cause of the Great Depression, they generally agree on generally agree on fivefive key factors: key factors:

1. Republican domestic and 1. Republican domestic and international policiesinternational policies

The administration of President Calvin The administration of President Calvin CoolidgeCoolidge, , from 1923 to 1929, and his Republican successor, from 1923 to 1929, and his Republican successor, Herbert Herbert HooverHoover, implemented many pro-business , implemented many pro-business policies based on the doctrine of trickle-down policies based on the doctrine of trickle-down economics and a conservative approach to economics and a conservative approach to international economics. Their belief was that if the international economics. Their belief was that if the government provided business and the wealthy government provided business and the wealthy individuals with significant individuals with significant tax cutstax cuts, they in turn , they in turn would reinvest in the US economy. To make up for would reinvest in the US economy. To make up for lost revenue the Government cut government lost revenue the Government cut government expenditures and raised taxes on the middle and expenditures and raised taxes on the middle and lower classes. Yet wealth did not lower classes. Yet wealth did not trickle downtrickle down, , instead corporations devoted their profits to expand instead corporations devoted their profits to expand their factories, increase the production of goods and their factories, increase the production of goods and lining their lining their own pocketsown pockets. Furthermore, owners kept . Furthermore, owners kept workers wages low, thus increasing the gap between workers wages low, thus increasing the gap between the rich and the poor.the rich and the poor.

1. Republican domestic and 1. Republican domestic and international policiesinternational policies

After WWI most European nations were broke After WWI most European nations were broke and could not pay pack the and could not pay pack the $11 billion$11 billion loans loans they owed the US. In Response, the US began to they owed the US. In Response, the US began to reschedule the loan payments and began lending reschedule the loan payments and began lending European nations even more European nations even more moneymoney in an in an attempt to help them repay the original loan attempt to help them repay the original loan debt. In addition, Republican in Congress debt. In addition, Republican in Congress imposed high tariffs on imports to promote imposed high tariffs on imports to promote consumer spending on American made products. consumer spending on American made products. As a result, without substantial markets for their As a result, without substantial markets for their goods, goods, EuropeanEuropean nations had no hope of nations had no hope of repaying loans.repaying loans.

2. 2. Unchecked Stock Unchecked Stock Speculation Speculation

Investor speculated which company’s stock would Investor speculated which company’s stock would rise and then bought large quantities of stock, rise and then bought large quantities of stock, which they then resold at a higher price for a which they then resold at a higher price for a quick quick profitprofit. Some rich investors would . Some rich investors would poolpool their money their money together and buy large amount of stock at a cheap together and buy large amount of stock at a cheap price. Smaller investors would conclude that the price. Smaller investors would conclude that the company was profitable and would begin a buying company was profitable and would begin a buying frenzy. When the stock price peaked the investor frenzy. When the stock price peaked the investor pool operators would quickly sell off. Since the pool operators would quickly sell off. Since the price of the stock was artificially inflated the value price of the stock was artificially inflated the value of the stock plummeted when the investor pool of the stock plummeted when the investor pool pulled out of the company stock. This practice drove pulled out of the company stock. This practice drove stock value stock value artificially artificially higher and higher causing higher and higher causing some some economisteconomist to fear that the market would to fear that the market would soon head for a big fall.soon head for a big fall.

3. 3. Weak and unregulated Weak and unregulated Banking Banking The banking industry had grown increasingly The banking industry had grown increasingly

unstable over the course of the 1920’s because of unstable over the course of the 1920’s because of the banks’ over-extension of the banks’ over-extension of credit credit to stock to stock investors. During the period, Banks permitted investors. During the period, Banks permitted investors to buy stock on large margins of credit, investors to buy stock on large margins of credit, called buying on called buying on marginmargin. Investor put 10 % cash . Investor put 10 % cash down on stock purchases, and then the bank lent down on stock purchases, and then the bank lent the rest of the money to buy the stock using the the rest of the money to buy the stock using the stock as stock as collateralcollateral. So if a person wanted $20,000 . So if a person wanted $20,000 in stock they had to invest $2,000 with the bank in stock they had to invest $2,000 with the bank loaning $18,000. The Federal government did loaning $18,000. The Federal government did nothing to prevent the banks from loaning their nothing to prevent the banks from loaning their depositors’ money on high risk ventures, to require depositors’ money on high risk ventures, to require keep a certain part of the deposits in keep a certain part of the deposits in reservereserve, or to , or to insure the insure the depositorsdepositors money. money.

3. 3. Weak and unregulated Weak and unregulated BankingBanking

So when the Stock market collapses in 1929 So when the Stock market collapses in 1929 investor who had bought on margin could not investor who had bought on margin could not pay back the loans. Banks in turn could not pay back the loans. Banks in turn could not replace their depositors’ money which they had replace their depositors’ money which they had used to fund the high risk loans. Therefore, not used to fund the high risk loans. Therefore, not only did investor and banks lose money and only did investor and banks lose money and closeclose, but even families who had not played the , but even families who had not played the stock market lost all their money. By 1932 almost stock market lost all their money. By 1932 almost 6,0006,000 Banks had closed. Banks had closed.

4. 4. Overproductions of Overproductions of goods goods

Before 1929 American production of goods parallel Before 1929 American production of goods parallel the course of the stock market. the course of the stock market. ConsumerConsumer demand demand for goods was high and new inventions allowed for goods was high and new inventions allowed companies to produce more goods in companies to produce more goods in less timeless time. As . As a result companies continued to expand their a result companies continued to expand their factories, increase their production and flooded the factories, increase their production and flooded the market with market with endlessendless supply of goods. But by 1929 supply of goods. But by 1929 companies had more plants than they needed and companies had more plants than they needed and the market place was saturated with goods few the market place was saturated with goods few Americans could Americans could affordafford. In addition, Farmers . In addition, Farmers began to take advantage of the same technological began to take advantage of the same technological advancements to increase agricultural production. advancements to increase agricultural production. To buy this new technology farmer borrowed To buy this new technology farmer borrowed heavily from heavily from banksbanks believing he market for their believing he market for their goods would continue to grow. goods would continue to grow.

4. 4. Overproductions of Overproductions of goodsgoods

However, competition with farmers in other parts of However, competition with farmers in other parts of the world, particularly a recovering Europe, caused the world, particularly a recovering Europe, caused the demand for US agricultural products to drop the demand for US agricultural products to drop sharplysharply. Farmers were often stuck with crops they . Farmers were often stuck with crops they could not sell or only sell at a very low price. As a could not sell or only sell at a very low price. As a result, many farmers defaulted on loan payments and result, many farmers defaulted on loan payments and lost their farms to lost their farms to bank foreclosurebank foreclosure. To make . To make matters worse the mid- and southwest were hit with matters worse the mid- and southwest were hit with droughts so severe that it cause the top soil to turn to droughts so severe that it cause the top soil to turn to powered and blow away, causing the area to be called powered and blow away, causing the area to be called the the Dust BowlDust Bowl. Between 1930 – 1934, due to drought . Between 1930 – 1934, due to drought and defaulted loans, and defaulted loans, 1 million1 million families lost their families lost their farms.farms.

5. 5. Unequal Distribution of Unequal Distribution of Wealth Wealth

By 1929 By 1929 1%1% of the population possessed of the population possessed over over 60%60% of the country’s wealth. From of the country’s wealth. From 1920 – 1929, the average American saw his 1920 – 1929, the average American saw his net income increase by net income increase by 9%.9%. I comparison, I comparison, the income of the rich Americans rose by the income of the rich Americans rose by 75%.75%. In short the rich were getting richer In short the rich were getting richer and the poor were getting poorer. This and the poor were getting poorer. This distribution of wealth had a significant distribution of wealth had a significant impact on the stability of the US economy.impact on the stability of the US economy.

Stock Market Crashes – Stock Market Crashes – October 1929 October 1929

Economist warned that the bull market, a market in Economist warned that the bull market, a market in which prices are constantly rising, could not continue which prices are constantly rising, could not continue indefinitely made investors nervous. In 1929 many indefinitely made investors nervous. In 1929 many investor began selling their stocks while they could investor began selling their stocks while they could still get a still get a high pricehigh price for them. As a result stock for them. As a result stock prices fell, companies slowed down production prices fell, companies slowed down production because of this decline, which in turn led to because of this decline, which in turn led to additional additional price dropsprice drops. By October 1929 stock prices . By October 1929 stock prices were on a devastating downward spiral. On October were on a devastating downward spiral. On October 29, 1929, known as 29, 1929, known as “Black Tuesday”“Black Tuesday”, orders to sell , orders to sell at any price swamped the stock market in New York. at any price swamped the stock market in New York. In a matter of hours people lost fortunes it had taken In a matter of hours people lost fortunes it had taken a decade to make. By the end of the Black Tuesday, a decade to make. By the end of the Black Tuesday, investors had lost investors had lost $16 billion$16 billion, the Great Depression , the Great Depression had begun.had begun.