[Type the document title]

Wall Street Stock Market Crash of 1929An Indian perspective Economic and Legal

Table of Contents

1.Abbreviations..................................................Pg.32.Research Methodology...................................Pg.4-53.Introduction....................................................Pg.6-74.Micro-Economics Aspect...............................Pg.8-125.Relationship between Economics and Law....Pg.13-156.Comparitive Study..........................................Pg.16-197.Conclusion......................................................Pg.20-218.Suggestions /Recommendations.....................Pg.229. References /Bibliography...............................Pg.23

Abbreviations

esp. : Especiallyetc. : Et ceterai.e. : That isapprox. : approximatelyedn. : Editionpg. : Pagepara : paragraphwww : World Wide Webhttp. : Hyper Text Transfer Protocol.com : commercial.org : organization

Chapter 1: Research Methodology

Relevance of the Topic

The Stock Market Crash of 1929 devastated the economy and was a key factor of causing The Great Depression. TheWall Street Crash of 1929, also known asBlack Tuesday[footnoteRef:2]or theStock Market Crash of 1929 began in late October 1929 and was the most devastatingstock market crashin thehistory of the United States, when taking into consideration the full extent and duration of its fallout.[footnoteRef:3]The crash signaled the beginning of the 10-yearGreat Depressionthat affected all Western industrialized countries.[footnoteRef:4] [2: "Depression & WWII (19291945)". Americaslibrary.gov. Retrieved August 12, 2013.] [3: Bone, James."The beginner's guide to stock markets".The Times(London). Archived fromthe originalon May 25, 2010. Retrieved January 29, 2012. "The most savage bear market of all time was the Wall Street Crash of 19291932, in which share prices fell by 89 per cent."] [4: "Stock Market Crash of 1929".Encyclopdia Britannica. Retrieved January 29, 2012.]

Objective of Study

The objective of the study is to explain the Wall Street Stock Exchange crash that occured in 1929. The study tries to contemplate about and explain the main causes of the crash as well as other contributing factors. It also covers the subsequent relation of the crash with other events in the American history and more importantly it lists out the effects suffered by the people and other countries in the aftermath of the crash.

Research Questions What was the Wall Street Crash 1929 and what caused the sudden crash? What were the major effects of the crash on the U.S. economy and also its subsequent effects on other western countries? Was the crash of 1929 the single most affecting factor to cause the Great Depression of 1930?

Limitation of Research

The research is restricted to secondary research. There may be biases in the data as they are second hand.

Chapter 2: Introduction

Origin of the Wall Street Stock Exchange

The history of theNew York Stock Exchangestarts with the signing of the Buttonwood Agreement by twenty-four stockbrokers and merchants of New York City on May 17, 1792. The signing of the agreement took place outside at 68 Wall Street under a Buttonwood tree. Initially there were five securities traded in New York City with the first listed company on the NYSE being the Bank of New York.

On April 4, 2007, the NYSE Group, Inc. combined with Euronext N.V. forming the holding company NYSE Euronext. NYSE Euronext (NYSE/New York and Euronext Paris: NYX) describes itself as "the worlds largest and most liquid exchange group ... [comprised of] six cash equities exchanges in five countries and six derivatives exchanges."[footnoteRef:5] [5: http://www.nyse.com/about/1088808971270.html]

Historical Perspective: Importance in U.S. economy

The end ofWorld War I heralded a new era in the United States. It was an era of enthusiasm, confidence, and optimism. A time when inventions such as the airplane and radio made anything seem possible. A time when 19th century morals were set aside andflappersbecame the model of the new woman. A time when Prohibition[footnoteRef:6]renewed confidence in the productivity of the common man. It is in such times of optimism that people take their savings out from under their mattresses and out of banks and invest it. In the 1920s, many invested in the stock market. [6: http://history1900s.about.com/od/1920s/p/prohibition.htm]

The exchange was closed shortly after the beginning of World War I (July 31, 1914), but it partially re-opened on November 28 of that year in order to help the war effort by tradingbonds.[footnoteRef:7] [7: Weeks, Linton."History's Advice During A Panic? Don't Panic". NPR. Retrieved 2008-10-01.]

Contemporary position of the Wall Street Stock Exchange

TheNew York Stock Exchange(NYSE), also known as the "Wall Street Stock Exchange",is astock exchangelocated at 11Wall Street ,Lower Manhattan,New York City,New York,United States. It is currently theworld's largest stock exchangebymarket capitalizationof its listed companies at US$16.613trillion as of May 2013.[footnoteRef:8]Average daily trading value was estimated at approx.US$169billion in 2013. [8: "NYSE Composite Index". Retrieved 9 June 2014.]

The NYSEtrading flooris located at 11 Wall Street and is composed of four rooms used for the facilitation of trading. A fifth trading room, located at 30Broad Street, was closed in February 2007. The main building, located at 18 Broad Street, between the corners of Wall Street and Exchange Place, was designated aNational Historic Landmarkin 1978,[footnoteRef:9]as was the 11 Wall Street building [9: National Park Service,National Historic Landmarks Survey, New York, Retrieved May 31, 2007]

The NYSE is owned byIntercontinental Exchange, a holding company it also lists (NYSE:ICE). Previously, it was part of NYSE Euronext (NYX), which was formed by the NYSE's 2007 merger with the fully electronic stock exchangeEuronext.[footnoteRef:10]NYSE and Euronext now operate as divisions of Intercontinental Exchange. The NYSE has been the subject of several lawsuits regarding fraud or breach of duty [footnoteRef:11]and was sued by its former CEO for breach of contract and defamation[footnoteRef:12] [10: Rothwell, Steve (December 20, 2012),"For the New York Stock Exchange, a sell order",San Jose Mercury News,Associated Press] [11: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUUw5xkA1kkg http://www.reuters.com/article/2012/12/24/us-nyseeuronext-sale-lawsuit-idUSBRE8BN0KW20121224] [12: http://www.washingtonpost.com/wp-dyn/articles/A63674-2004Jul20.html]

Chapter 3: Micro Economics Aspect

Micro- Economic Analysis of the Crash

The 1929 Stock Market crash was a result of various economic imbalances and structural failings. These are some of the most significant economic factors behind the stock market crash of 1929.

1. Credit Boom2. Buying on the Margin3. Irrational Exuberance4. Mismatch between production and consumption5. Agricultural Recession6. Weaknesses in the Banking System

The above mentioned factors and the theories related to them are mentioned below.

1. Credit Boom

In the 1920s, there was a rapid growth in bank credit and loans. Encouraged by the strength of the economy people felt the stock market was a one way bet. Some consumers borrowed to buy shares. Firms took out more loans for expansion. Because people became highly indebted, it meant they became more susceptible to a change in confidence. When that change of confidence came in 1929, those who had borrowed were particularly exposed and joined the rush to sell shares and try and redeem their debts.

The above graph shows all the loans given out in the U.S. between 1918-40. The shaded areas indicate recession periods.

2. Buying on the Margin

Related to buying on credit was the practise of buying shares on the margin. This meant you only had to pay 10 or 20% of the value of the shares; it meant you were borrowing 80-90% of the value of the shares. This enabled more money to be put into shares, increasing their value. It is said there were many margin millionaire investors. They had made huge profits by buying on the margin and watching share prices rise. But, it left investors very exposed when prices fell. These margin millionaires got wiped out when the stock market fall came. It also affected those banks and investors who had lent money to those buying on the margin.By 1929, 2 out of every 5 dollars a bank loaned were used to purchase stocks.

3. Irrational Exuberance

The graph shows the difference between price and the earning per share where earning per share indicate the net profits earned in the previous twelve months.A lot of the Stock Market crash can be blamed on over exuberance and false expectations. In the years leading up to 1929, the stock market offered the potential for making huge gains in wealth. It was the new gold rush. People bought shares with the expectations of making more money. As share prices rose, people started to borrow money to invest in the stock market. The market got caught up in a speculative bubble. Shares kept rising and people felt they would continue to do so. The problem was that stock prices became divorced from the real potential earnings of the share prices. Prices were not being driven by economic fundamentals but the optimism / exuberance of investors. The average earning per share rose by 400% between 1923 and 1929. Yet, those who questioned the value of shares were often labelled doom-mongers.

This was not the first investment bubble, nor was it the last. Most recently we saw a similar phenomenon in the dot com bubble.In March 1929, the stock market saw its first major reverse, but this mini-panic was overcome leading to a strong rebound in the summer of 1929. By October 1929, shares were grossly overvalued. When some companies posted disappointing results on October 24 (Black Thursday), some investors started to feel this would be a good time to cash in on their profits; share prices began to fall and panic selling caused prices to fall sharply. Financiers, such as JP Morgan tried to restore confidence by buying shares to prop up prices. But, this failed to alter the rapid change in market sentiment.On October 29(Black Tuesday) share prices fell by $40 billion in a single day. By 1930 the value of shares had fallen by 90%. The bull market had been replaced by a bear market.4. Mismatch between Production and ConsumptionThe 1920s saw great strides in production techniques, especially in industries like automobiles. The production line enables economies of scale and great increases in production. However, demand for buying expensive cars and consumer goods were struggling to keep up. Therefore, towards the end of the 1920s many firms were struggling to sell all their production. This caused some of the disappointing profit results which precipitated falls in share prices.In 1929, there were already warning signs from the economy with falling car sales, lower steel production and a slowdown in housing construction. However, despite these warning signs, people still kept buying shares.

The above graph clearly shows that Rapid growth in Real GDP during the 1920s, couldnt be maintained5. Agricultural RecessionEven before 1929, the American agricultural sector was struggling to maintain profitability. Many small farmers were driven out of business because they could not compete in the new economic climate. Better technology was increasing supply, but demand for food was not increasing at same rate. Therefore, prices fell and farmers incomes dropped. There was occupational and geographical immobility in this sector, and it was difficult for unemployed farmers to get jobs elsewhere in the economy.6. Weaknesses in the Banking SystemBefore the Great Depression, the American banking system was characterised by having many small to medium sized firms. America had over 30,000 banks. The effect of this was that they were prone to going bankrupt if there was a run on deposits. In particular, many banks in rural areas went bankrupt due to the agricultural recession. This had a negative impact on the rest of the financial industry. Between 1923 and 1930 5,000 banks collapsed.

Chapter 4: Relationship between Economics and Law

Linkage of the Crash to the Great Depression

In 1928 the new Republican presidentHerbert Hooverconfidently stated, 'We in America today are nearer to the final triumph over poverty than ever before in the history of any land.' Within a year, all the confidence had ended and America was plunged into theDepression.The 1920s was often referred to as the "Roaring Twenties", or the "Jazz age". This related to the booming period of quick economic expansion, but also varying social attitudes. Society was becoming less restricted and discovering new found freedoms; suddenly people's outlook was changing, and this was fueled by new technologies and a booming economy. However, hidden behind the optimistic views and a booming economy, there were major structural problems, which is said to have caused the notorious stock market crash of 1929 and the Great Depression of the 1930s.

The Great Depression is said to have begun with the Wall Street Crash of October, 1929, and quickly spread globally. The market crash marked the start of a decade of high unemployment, poverty, low profits, deflation, reducing farm incomes, and lost opportunities for economic growth and personal development. Although its causes are still uncertain and controversial, the net effect was a abrupt and universal loss of confidence in the economic future. The usual explanations include numerous factors, especially high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, the lack of high-growth new industries, all interacting to generate a downward economic spiral of reduced spending, falling confidence, and reduced production.

Legal Reforms Introduced after the Crash

The government as such, under President Herbert Hoovers Rule did not take very strict actions to deal with the aftermaths of the crash. The president was a Republican and believed in the principles of Rugged Individualism. Hoover did not believe that the depression would last - "Prosperity is just around the corner" is what he said to businessmen in 1932 when things were just about at their worst. However, Hoover did do some good. Money was used to create jobs to build things such as the Hoover Dam. In 1932 he gave $300 million to the states to help the unemployed (Emergency Relief and Reconstruction Act) but it had little impact as states run by the Republicans believed in "rugged individualism" more than Hoover did and they used only $30 million of the money offered to them.In 1932, thePecora Commissionwas established by theU.S. Senateto study the causes of the crash. The following year, the U.S. Congress passed theGlassSteagall Act mandating a separation betweencommercial banks, which take deposits and extendloans, andinvestment banks, whichunderwrite, issue, and distributestocks,bonds, and other securities.After the experience of the 1929 crash, stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. However, the one-day crash ofBlack Monday, October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, was worse in percentage terms than any single day of the 1929 crash.

Role of Economic Factors in the Crash

The aftermath of the Crash of 1929 was such that the American economy could not completely recover until the USA entered the Second World War in December 1941.However, we can look at the various factors related to economics that were responsible for triggering the crash in the first place and the Great Depression that followed.

1. As early as 1926, there were signs that the boom was under threat - this was seen in thecollapse of land pricesin Florida.2. Eventually, there weretoo many goodsbeing made and not enough people to buy them.3. Farmers had producedtoo much foodin the 1920s, so prices for their produce became steadily lower.4. There weretoo many small banks- these banks did not have enough funds to cope with the sudden rush to take out savings, which happened in the autumn of 1929.5. Too muchspeculation on the stock market- the middle class had a lot to lose and they had spent a lot on what amounted to pieces of paper.6. TheWall Street Crashof October 1929 was a massive psychological blow.7. America hadlent huge sums of moneyto European countries. When the stock market collapsed, they suddenly recalled those loans. This had a devastating impact on the European economy.8. Thecollapse of European bankscaused a general world financial crisis.

Chapter 5: Comparative Study

Comparison between different Economic Fundamentals

Introduction

Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events.The Economistargued in a 1998 article that the Depression did not start with the stock market crash.[footnoteRef:13]Nor was it clear at the time of the crash that a depression was starting. They asked, "Can a very serious Stock Exchange collapse produce a serious setback to industry when industrial production is for the most part in a healthy and balanced condition?" They argued that there must be some setback, but there was not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression. [13: "Economics focus: The Great Depression",The Economist(Sept. 17, 1998)]

ButThe Economistalso cautioned that some bank failures are also to be expected and some banks may not have any reserves left for financing commercial and industrial enterprises. They concluded that the position of the banks is the key to the situation, but what was going to happen could not have been foreseen."[footnoteRef:14] [14: "Reactions of the Wall Street slump",The Economist(Nov. 23, 1929)]

Academics see the Wall Street Crash of 1929 as part of a historical process that was a part of the new theories ofboom and bust. According to economists such asJoseph SchumpeterandNikolai KondratievandCharles E. Mitchellthe crash was merely a historical event in the continuing process known aseconomic cycles. The impact of the crash was merely to increase the speed at which the cycle proceeded to its next level.Milton Friedman'sA Monetary History of the United States, co-written withAnna Schwartz, advances the argument that what made the "great contraction" so severe was not the downturn in the business cycle,protectionism, or the 1929 stock market crash in themselves - but instead, according to Friedman, what plunged the country into a deep depression was the collapse of the banking system during three waves of panics over the 193033 period.[footnoteRef:15] [15: "Panic control"The Washington Times]

Economic Fundamentals of the Crash

The crash followed aspeculativeboom that had taken hold in the late 1920s. During the latter half of the 1920s, steel production, building construction, retail turnover, automobiles registered, even railway receipts advanced from record to record. The combined net profits of 536 manufacturing and trading companies showed an increase, in fact for the first six months of 1929, of 36.6% over 1928, itself a record half-year. Iron and steel led the way with doubled gains.[footnoteRef:16]Such figures set up a crescendo of stock-exchange speculation which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them wereborrowing moneyto buy more stocks. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan,[footnoteRef:17]more than the entire amount of currency circulating in the U.S. at the time.[footnoteRef:18] [16: "Broad Facts of, Ilsa Crisis".The Daily News(Perth, Western Australia:National Library of Australia). 1 November 1929. p.6 (Edition: Home Final Edition). Retrieved 22 November 2012.] [17: Lambert, Richard (July 19, 2008)."Crashes, Bangs & Wallops".Financial Times.] [18: Facing the facts: an economic diagnosis. Retrieved 2008-09-30.]

The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fuelled further rises and created aneconomic bubble. Because ofmargin buying, investors stood to lose large sums of money if the market turned downor even failed to advance quickly enough. The averageP/E(price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929,[footnoteRef:19]clearly above historical norms. [19: Shiller, Robert (2005-03-17)."Irrational Exuberance, Second Edition".Princeton University Press. Retrieved 2007-02-03.]

Good harvests had built up a mass of 250,000,000 bushels of wheat to be 'carried over' when 1929 opened. By May there was also a winter-wheat crop of 560,000,000 bushels ready for harvest in the Mississippi Valley. This oversupply caused a drop in wheat prices so heavy that the net incomes of the farming population from wheat were threatened with extinction. Stock markets are always sensitive to the future state of commodity markets and the slump in Wall-street predicted for May bySir George Paish, arrived on time. In June 1929 the position was saved by a severe drought in the Dakotas and the Canadian West, plus unfavorable seed times in Argentina and Eastern Australia. The oversupply would now be wanted to fill the big gaps in the 1929 world wheat production. From 97c per bushel in May wheat rose to $1.49 in July. When it was seen that at this figure the American farmers would get rather more for their smaller crop than for that of 1928, up went stocks again and from far and wide orders came to buy shares for the profits to come.Then in August the wheat price fell when France and Italy were bragging of a magnificent harvest and the situation in Australia improved. This sent a shiver through Wall Street and stock prices quickly dropped, but word of cheap stocks brought a fresh rush of 'stags,' amateur speculators and investors. Congress had also voted for a 100 million dollar relief package for the farmers, hoping to stabilize wheat prices. By October though, the price had fallen to $1.31 per bushel.[footnoteRef:20]The falling commodity markets in other countries told upon even American self-confidence, and the stock market started to falter. [20: "Grain Plunges".The Courier-Mail(Brisbane, Qld: National Library of Australia). 26 October 1929. p.19. Retrieved 22 November 2012.]

On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market finally turned down, andpanic sellingstarted.[footnoteRef:21] [21: "Wild Selling. New York Panic.".The Sydney Morning Herald(Sydney, NSW: National Library of Australia). 26 October 1929. p.17. Retrieved 22 November 2012.]

The president of the Chase National Bank said at the time "We are reaping the natural fruit of the orgy of speculation in which millions of people have indulged. It was inevitable, because of the tremendous increase in the number of stockholders in recent years, that the number of sellers would be greater than ever when the boom ended and selling took the place of buying."[footnoteRef:22] [22: "Second Crash".The Sydney Morning Herald(Sydney, NSW: National Library of Australia). 30 October 1929. p.17. Retrieved 20 November 2012.]

Comparison : Effects of the Crash in India as compared to the U.S.

The aftermaths of the crash of 1929 were not just restricted to America but the tremors resulting from it and the further effects of The Great Depression were felt in India and other countries as well.

The Great Depression of 1929 had a very severe impact onIndia, which was then under the rule of theBritish Raj. TheGovernment of British Indiaadopted a protective trade policy which, though beneficial to theUnited Kingdom, caused great damage to the Indian economy. During the period 19291937,exportsandimportsfell drastically crippling seaborne international trade. Therailwaysand the agriculturalsector were the most affected.The international financial crisis combined with detrimental policies adopted by the Government of India resulted in soaring prices of commodities. High prices along with the stringent taxes prevalent in British India had a dreadful impact on most Indians. The discontent of farmers manifested itself in rebellions and riots. TheSalt Satyagrahaof 1930 was one of the measures undertaken as a response to heavy taxation during the Great Depression.The Great Depression and the economic policies of the Government of British India worsened already deteriorating Indo-British relations. When the first general elections were held according to theGovernment of India Act 1935, anti-British feelings resulted in the pro-independenceIndian National Congresswinning in most provinces with a very high percentage of the vote share.India suffered badly due to the Great Depression. The price decline from late 1929 to October 1931 was 36 percent compared to 27 percent in the United Kingdom and 26 percent in the United States.[footnoteRef:23] [23: Manikumar, Pg 9]

Chapter 6: Conclusion

The Stock Market Crash of 1929 is one of the most profound and notable events of World History. The facts and of the incident, the events leading upto it and the aftermath that followed can be summed up in the following manner.

During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in August 1929, after a period of wild speculation. By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the eventual market collapse were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated.

Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24, Black Thursday, a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday (October 29), in which stock prices collapsed completely and 16,410,030 shares were traded on theNew YorkStock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading.

On October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors. In the aftermath of Black Tuesday, America and the rest of the industrialized world spiraled downward into the Great Depression (1929-39), the deepest and longest-lasting economic downturn in the history of the Western industrialized world up to that time.

After October 29, 1929, stock prices had nowhere to go but up, so there was considerable recovery during succeeding weeks. Overall, however, prices continued to drop as the United States slumped into the Great Depression, and by 1932 stocks were worth only about 20 percent of their value in the summer of 1929. The stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom. By 1933, nearly half of Americas banks had failed, and unemployment was approaching 15 million people, or 30 percent of the workforce.

Chapter 7: Suggestions /Recommendations

After going through all the facts and the events that led to the crash and the after effects that were caused by it, the best solution that comes to mind would be to keep a check on such speculative trading in large volumes by the amateur speculators or Stags. This step would help to prevent such events like the Wall Street Crash in the future and could play a major role in preventing another economic meltdown.

Separation ofcommercial banks, which take deposits and extendloans, andinvestment banks, whichunderwrite, issue, and distributestocks,bonds, and other securities. Suspend trading activities in the event of rapid decline of the market. The issuing of loans to general public for buying of equities should be done on Credit Worthiness basis and there should be a strict kept on it.

Bibliography / References

BOOKS REFERRED:

Britannica Encyclopaedia "History's Advice During A Panic? Don't Panic" - NPR. "For the New York Stock Exchange, a sell order" - Steve Rothwell

NEWSPAPERS:

The Courier Mail The Sydney Morning Herald The Washington Times Financial Times The Economist

Websites Used

http://www.washingtonpost.com http://www.reuters.com http://www.bloomberg.com http://americaslibrary.gov

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