In early 1928 the Dow Jones Average went from a low of 191 early in the year, to a high of 300 in December of 1928 and peaked at 381 in September of 1929. (1929…) It was anticipated that the increases in earnings and dividends would continue. (1929…) The price to earnings ratings rose from 10 to 12 to 20 and higher for the market’s favorite stocks. (1929…) Observers believed that stock market prices in the first 6 months of 1929 were high, while others saw them to be cheap. (1929…) On October 3rd, the Dow Jones Average began to drop, declining through the week of October 14th. (1929…)
On the night of Monday, October 21st, 1929, margin calls were heavy and Dutch and German calls came in from overseas to sell overnight for the Tuesday morning opening. (1929…) On Tuesday morning, out-of-town banks and corporations sent in $150 million of call loans, and Wall Street was in a panic before the New York Stock Exchange opened. (1929…)
On Thursday, October 24th, 1929, people began to sell their stocks as fast as they could. Sell orders flooded the market exchanges. (1929…) This day became known as Black Thursday. (Black Thursday…) On a normal day, only 750-800 members of the New York Stock Exchange started the exchange. (1929…) There were 1100 members on the floor for the morning opening. (1929…) Furthermore, the exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight. Extra telephone staff was also arranged at the member’s boxes around the floor. (1929…) The Dow Jones Average closed at 299 that day. (1929…)
On Tuesday, October 29th, 1929, the crash began. (1929…) Within the first few hours, the price fell so far as to wipe out all gains that had been made the entire previous year. (1929…) This day the Dow Jones Average would close at 230. (1929…) Between October 29th, and November 13 over 30 billion dollars disappeared from the American economy. (1929…) It took nearly 25 years for many of the stocks to recover. (1929…)
By mid November, the value of the New York Stock Exchange listings had dropped over 40%, a loss of $26 billion. (1929-1931) At one point in the crash tickers were 68 minutes behind. (1929-1931) An average of about $50,000,000 a minute was wiped out on the exchange. (1929-1931) A few investors that lost all of their money jumped to their deaths from office buildings. Others gathered in the streets outside the Stock Exchange to learn how much they had lost. (Black Thursday…)
There are five proposed reasons as to why the stock market crashed. One of the reasons was that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price to Earning ratios and Price to Dividend ratios, argue that the share prices were not too high. Another reason is that there were massive frauds and illegal activity in the 1920’s stock market. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. (1929…)
Margin buying is another reason why people believed that the crash happened. Though it is not the main reason, there was very little margin relative to the value of the market. The new President of the Federal Reserve Board, Adolph Miller, tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, in the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporations that financed brokers and dealers. Lastly, many public officials commented that the stock price was too high. Herbert Hoover publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover’s statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the crash. (1929…)
The Crash and The Depression
After the crash, production fell nearly 50% from the business cycle peak in August 1929 to March 1933. Meanwhile, the overall price level of stocks dropped by about 1/3. Many people blamed the crash for the economic collapse. Some people held responsible, fairly or not, were President Hoover, brokers, bankers, and businesspersons. The cause of the depression cannot be linked to one individual or even a group of people. It is also unlikely that the crash of the market would have been large enough to lead the US economy into the depression by itself and to sustain the downward spiral in business activity. (1929…)
Why People Invested in the Stock Market
During 1929, people invested in the stock market for five major reasons. The first was that the market was considered an easy way to get rich quick. Although about four million Americans, a small amount, invested in the stock market at one time, the constant influx of new investors coming in and old investors moving out ensured that new money was always flowing around. (1929…)
Another reason was the higher wages of the ordinary workers. This meant that everyone in America had extra money to put into savings or invest in the market. The third reason was that at this time, money was made more readily available from banks, at a lower interest rate, to more people. Some economist debated that this influenced the stock market, and it is conceivable that people took loans to buy more stock. (1929…)
The fourth reason is that industry was over-producing products, in anticipation of selling the surplus. Profits were put right back into the industry, by investing in factories, new machinery, and more people. This led to even more surplus. An aura of financial soundness was created by this, and Americans were encouraged to buy more stock. (1929…)
Lastly, there were no guidelines or laws concerning the market. Investors began buying on ‘margin’ or buying stock on credit. Investors had high expectations that they would receive large returns in a few months, so they could pay the balance and have money left over in return. In reality, most of the money that was being invested in the market was not actually being put into the market. (1929…)
After the crash there was criticism of the Federal Reserve policy. Between October 1929 and February 1930 the interest rate was lowered from 6% to 4%, and the money supply increased immediately after the crash. Commercial banks in New York made loans to security brokers and dealers, which in turn provided liquidity to the non-financial and other corporations that financed brokers and dealers prior to the crash. (1929…)
Monetary policy became ambiguous between February 1930 and 1932. Government security purchases in the open market continued to decline until 1932. This reduced liquidity by lowering non-borrowed reserves. Although the interest rate was reduced between March 1930 and September 1931, it was raised twice in late 1931. This made loans more expensive and deterred people and corporations from borrowing. (1929…)
Government Regulations After the Crash
Before the crash, investors were not protected at all from fraud, hype and shoddy stocks. Investors did not know if a company actually doing as well as it was said to be doing and if the financial reports were reliable. After the crash, the Securities and Exchange Commission (SEC) was established to lay down the law and to punish those who violated the law. (1929…)
Also during the crash 4,000 banks failed, for the simple reason that the banks ran out of money. Four years later, Congress passed the Glass-Steagall Act, which essentially banned any connection between commercial banks and investment banking, to ensure that this would never happen again. The Federal Reserve and other banking regulators have softened some of the Act’s separation of securities and banking functions by letting banks sell certain securities through affiliated companies. (1929…)
1. Black Thursday: The 1929 Stock Market Crash. www.letsfindout.com.
2. 1929 Stock Market Crash. www.arts.unimelb.edu.
3. 1929-1931. Annals of America. Encyclopaedia Britannica Inc. Volume 15: 32-39
1. Background of the Great Depression
2. Economic Impact of the Great Depression
i. Failure of the stock market
ii. “Small scale farmers disadvantaged”
iii. Business and industry failure
vi. Human suffering
vii. Increase of government’s economy regulation
viii. Growth of macroeconomic strategies
ix. Homelessness, discrimination and racism
xi. Creation of dust bowls
xii. Illness and starvation
3. Overview of Stock Market Crash
4. How people bought products on margin
5. How trouble came up
6. Causes of the Great Depression
i. World-wide and domestic factors
6. Summary of the effects of Great Depression
8. Works Cited
The Great Depression
The great depression is an immense tragedy that took millions of people in the United States from work. It marked the beginning of involvement from the government to the country’s economy and also the society as a whole. After almost a decade of prosperity and optimism, the US was now exposed to a period of despair. The day when this happened is referred to as Black Tuesday, and it is the day when the stock market crashed. That was the official date when the Great Depression started. The stock market prices crashed to an extent that there was no hope for them to rise again. A long period of panic struck, and there was darkness in terms of stock market prices. Many people tried as they could to sell their stock, but, unfortunately, no one was ready to buy. The stock market that had for long been viewed as a path to wealth and richness was now a sure path to bankruptcy (Martin 106).
Economic Impact of the Great Depression
Failure of the stock market. The stock market was not the only one that was affected; actually, that was just but the beginning of the Great Depression. In effect, it was unfavorable for the clients whose money was already in the markets for investment: many banks had done that and that meant a huge loss to the clients. It was also a double loss in that though the clients lost their money, the banks were forced to close down. This is because they directly depended on the stock market. When this happened, it caused much panic even to other people, and this is what made them go to the other banks that were open to withdraw their money. This kind of massive withdrawal had a major effect in that it caused the banks to close too. What is more, it was a disadvantage to those who did not withdraw their money because of not reaching the bank on time. After the banks closed, people went bankrupt and could not claim anything whosoever.
Business and industry failure. Industries and businesses were highly affected too. This is because they were also working hand in hand with the stock market. Since the stock market had closed down, this meant that their savings and capital were lost. This affected the labor in the businesses since they had to cut on the number of workers who worked in the corresponding companies. Employees’ wages were also affected because any business could not pay them again as required. The stock market issue also affected the customers in that they stopped buying and spending on luxurious goods. This influenced greatly the companies that produced these commodities in terms of sales and also getting profit. The companies too had to close down (Martin 98).
Farmers. The Great Depression affected the farmers in a very adverse way. Though they always survived other depressions that they encountered, this one was a big challenge to them. Most of the farmers were situated at the Great Plains before the Great Depression took place. The territory was affected so badly by drought and dust storms which were horrendous in nature. They created a situation that was referred to as the Dust Bowl. The farmers were used to overgrazing, and now this had to combine with the effects of drought leading to a blow to the farmers. The latter were even left without food and crops for their animals. This is because the grass that the animals could feed on had already dried up and disappeared in the long run. The loose dirt was picked by the whirled wind, and topsoil got exposed. The farmers were left without crops as the wind picked up everything on its way (Martin 200).
Small scale farmers disadvantaged. Small scale farmers were more disadvantaged than the large scale farmers. They turned out to have a small piece of land on which they had to get their daily bread. Some of these farmers asked for tractors from their respective governments, and thus, they were made to pay some amount to cater for those. The hit that the farmers went through could not enable them to pay their debts. They could also not make it to feed their families, not mentioning themselves. Some of the farmers had also capitalized on the stock market and bank. Since the stock market was affected, and as a result, the banks too, the farmers suffered as well. Losing their investments and crops influenced greatly the way they related with each other and had an impact on their contribution to the economy of the land. The country lost a lot of laborers and this led to the deterioration of the country’s economy.
Unemployment. Many people lost their jobs during this time of the Great Depression. Having lost their jobs, it was very difficult for people to bring food on the table. Families were even forced to sell their houses and move to apartments. Others were made to move in together since the standard of living was going down day by day. Paying rent was now a very hard thing to achieve. It was even complicated for people to separate or divorce. This was the time when the rate of separation and divorce went down. This is because everyone needed the other to contribute, especially in paying the rent. Due to ego, men who had already lost their jobs felt ashamed even to walk in the cities, and, therefore, they were forced to stay in their homes. If at all the wives and the children were working, they felt that their status was challenged. Even in this situation, the two categories aforementioned were forced to go looking for jobs. This time, women were even accused of taking the man’s place after getting a job.
As a matter of fact, it was hard to get jobs locally because every part of the country had been affected. Many people were seen on the roads looking for jobs. Many people could not afford luxurious goods like cars, and thus, very few cars were seen on the roads. A lot of the cars were on sale since maintenance costs were unaffordable. The majority of teenagers were affected as they were the people who were seen on the roads walking up and down looking to get some job (Martin 187).
Older men, women, and families at large were on the rails too. They would be seen boarding trains just to cross and see whether they could get some occupation. Every time there was a job opening, many people applied for the position and chances for employment at such. Those who could not get the job would end up living in shanty towns which were outside the town. The houses in such places were made of affordable cheap materials like newspapers, wood, mud, cardboard, and iron sheets. Farmers who could no longer afford their previous lives would be found in western California. This is because of the agricultural opportunity rumors that came from that area. It is true that there were periods of agricultural opportunities. The farmers were nicknamed as Okies and Arkies.
The Great Depression took place during the reign of President Herbert Hoover. The citizens always blamed the governing President, though he always talked about optimism. Some of the shanty towns which were far from big cities were named after him – for instance, Hoovervilles. Interestingly, newspapers used to cover people sleeping in the streets were called Hoover Blankets. What is more, even bad looking broken cars were referred to as Hoover Wagons (Martin 134).
Human suffering. The Great Depression had a huge impact in that it caused human suffering. It took a very short time, and the levels of living went down drastically. People started borrowing from each other just to survive. Unemployment increased since industries could not take employees anymore. They could not afford to pay the people what they deserved. Research shows that at least a fourth of the labor force in all the industrialized countries could not work anymore (Martin 145). The industries could not satisfy them in terms of wages. This was noticed in 1930, and the total recovery was only realized by the end of that decade.
End of international gold standard. The Great Depression is seen as a cause of international gold standard. There was no money to invest anymore, and it was evident that the interest rates went down too. There was also the introduction of floating rates, and people stopped using the fixed exchange rates. On the other hand, there was an expansion of the welfare state and labor unions in 1930. Union membership went to an extent of doubling between that year and 1940. This was a result of extreme unemployment and the National Labor Relations Act which was passed in 1935. All this led to collective bargaining. The US took an extra mile of coming up with unemployment compensation. This also included the survivors’ and old age insurance. This was incorporated in the Social Security Act the same year. Its aim was to cater for the hardships that the citizens were going through in 1930.
Increase of government’s economy regulation. The rate at which the government regulated the economy increased substantially. The focus was mostly on the financial markets. Different bodies to carry out this function were established. These included the Securities and Exchange Commission which was established in 1934. The main role of these institutions was to control and regulate stock issues in the stock market, especially with regard to the new products. The Banking Act went ahead to come up with deposit insurance, whose role was to work with the banks by prohibiting them from underwriting. Deposit insurance was not so popular in the world up to the Second World War. This time it was able to work effectively, hence achieving its mission and objectives.
Growth of macroeconomic strategies. The aim of the latter was to fight the economic upturns and downturns. As a matter of fact, different strategies were established to fight the Great Depression. An increased focus on how the government spend, tax cuts, and expansion of the monetary fund were some of the ways to fight the the phenomenon under consideration. The government was also trying to work to its best so as to fight unemployment. The banks were also working against recessions.
Homelessness, discrimination and racism. Many people had lost their jobs and it became even hard to get rent for their houses. They had to move to shanty areas which also were not very affordable. Others could not afford anything to cover their heads. This led to building the Hoovervilles. Since so many people were unemployed, there was a huge competition in the job market. Very few could get jobs, and those who did were not paid according to what they delivered. Under the circumstances, discrimination grew and African Americans could rarely get a job. Racism was an issue at that time. Americans were more aggressive as they noticed that there were shrinking opportunities to get a position. The African Americans, Asian Americans, and Hispanics were the people who suffered the most. This is because of the discrimination and racism that were going on. Again, the whites were claiming the jobs which were paying poorly, hence occupying the opportunities that these minorities had before Hoovervilles.
It is evident that in any country there are different levels of people as far as their income is concerned. Where people live is different depending on what one eats. The lifestyle generally depends on what the person earns…
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