THE STOCK MARKET

THE STOCK MARKET CRASH, 1929

Many economists believe that the stock market crash was a major factor which plummeted the United States in the great depression. There are many factors that help to prove this idea. Five years before the stock market crash the market was known as a bull market, which is market with mainly rising prices. There are six major reasons why people decided to invest in the stock market which helped create this bull market. The first reason was because of the rising stock dividends. New investors began to invest more and more money into the market in hopes of getting rich quick. This inflated stock prices. The second reason was the overwhelming increase in personal savings among the citizens of the United States. This was a result of a time period of higher wages which allowed people to save and invest more. The third reason was the relatively easy money policy that was enforced during the 1920’s. This means that interest rates were lower so it allowed people to obtain loans much easier. The fourth reason was that many large companies invested their over-production profits back in the production of new products. These companies would invest their surplus into new machinery and factories which would enhance future production. They also used some of this surplus money to hire new employees which encouraged people to buy more stocks. The fifth reason is the lack of stock regulation by the government. At this time there were no effective legal laws on buying or selling stocks. Companies began to print more and more common stock. The final reason why people invested in the stock market during the early twenties was the psychology of consumption; many people had a large amount of faith in the economy and stock market which caused them to invest more money.

On September 3^rd 1929 the stock market peaked, and by September 5^th an economist named Roger Babson was already predicting a recession in the near future. Later in the month of September the stock market began to fluctuate, but many shrugged this off and explained that it was just temporary. Analysts failed to realize the stock prices were out of proportion to the real profits of the economy. During the twenties most people still believed in the “self-adjusting economy” which was a very popular economic theory in the twenties. This theory stated that the economy was self-adjusting, meaning that an economy would fix itself in a time of recession. On October 24^th, 1929, “Black Thursday”, people started selling stock as quickly as they could. Selling stock became prevalent and quickly turned the stock market into a Bear market which is a market that consists of mainly falling prices. J.P. Morgan and other large business owners bought stock to stop panic and keep the market from falling into a recession. By September 25^th Morgan’s plan seemed to be working and the panic seemed to be over. That weekend stock holders decided that they would sell their stock,

just to be safe. When the stock market opened Monday October 28^th 1929, more selling continued, and this helped to set up the tragedy of the next day. Tuesday October 29^th, 1929 is known as “Black Tuesday” because it marks the true beginning of the Great Stock Market crash. “Black Tuesday” was the single most devastating day in the history of the New York Exchange. Within the first few hours, stocks had dropped and wiped out all the financial gains for the previous year. The crash shattered public confidence for years to come. Between Oct. 29^th and Nov. 13^th stock prices reached their lowest, and nearly 30 billion dollars disappeared. This amount is nearly equal to the amount of money that the government spent during WW1.

Economists have a few main theories as to why the stock market crash occurred. The most prevalent reason was because many investors bought stock on margin with borrowed money, using stock as collateral, and were liable for interest rates, loan repayment, and margin cells. When the stock prices started to decline, the number of margin cells increased greatly. Many were forced to sell their shares because of this. Firms were swamped and reporting actual prices became impossible. Shortly after, panic selling began to occur and caused the decline of the stock market. Another explanation for the stock market crash was that banks could not collect the loans that were made to stock market investors. These holdings were worth nothing because real profits did not match actual production. What made it worse is the fact that most banks invested deposited money into the stock market. Once people had heard that the bank’s assets and funds where worthless and made up of large unobtainable loans, they began to rush into the banks and withdraw all their savings. Because of this investing and withdrawing of money, many banks began to fail and attributed it to the falling of the stock market. Also, on October 28^th the Smoot-Hawley tariff was activated, and many economists at the time believed that this was the major cause behind the stock market crash. But in reality the Smooth-Hawley tariff was activated after the first few downfalls of the stock market, and was later thought to be just another contributing factor that lead to the great depression. The final economist theory was that the very strict monetary policy helped to create the recession. The gold outflow from the United States to France had decreased. The government also raised the discount rate from 3% to 6%, which caused the prices to fall, and real interest rates were much higher than nominal interest rates.