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

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Factors in the Stock Market Crash and the Causes
of the Great Depression Lecture
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1920s Prosperity

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

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The Great Depression Foreshowed

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

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1. Republican domestic and international policies

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

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1. Republican domestic and international policies

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

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2. Unchecked Stock Speculation

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

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3. Weak and unregulated Banking

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

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3. Weak and unregulated Banking

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

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4. Overproductions of goods

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

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4. Overproductions of goods

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

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5. Unequal Distribution of Wealth

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

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Stock Market Crashes October 1929

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

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