The year of 1929 is marked by the Stock Market Crash in which most consider to be the beginning of the Great Depression. This was not the sole cause of the Great Depression, though. The Stock Market Crash was caused by an economy that was not stable enough to handle the high stock prices. The Stock Market Crash helped bring on the Great Depression which forced the United States government to make changes in the regulation of stock exchanges, providing much greater protection for investors.
The United States was a young nation and was not always as powerful as it is now or was in 1929. The United States was formed from European citizens who wanted to start their lives over. So the United States had relatively little money compared to the financial status of the rest of the world. London at the time was considered the center of finance. The United States borrowed money from England and other countries to spur its industry. By 1960 it seemed that the United States would inevitably be the world’s most important business and financial power. The Civil War provided a boost for industry, which jump-started the gradual shift of financial power from London to New York. The United States had a valuable asset in the form of land.
“The United States was forced to develop itself before it could worry about competing with the world. Hence, the amount of capital was far greater once available to be spent outside the United States. The year of 1914 can be considered the point at which the United States would never be second in the world again.” (Axon, 32) Europe was stricken with war and the United States was turned to for supplies. The “wealthy European countries were ravaged by war because of casualties, economic losses, and expensed of war over four years.” (Axon, 33) The United States only was in the war for a year and did not have its country damaged by the war. The United
States emerged from World War I being owed billions of dollars for having financed most of the war and was acknowledged to be the leader of the Western world. The early 1920s were a time of booming industry, of soaring hope and confidence. The ups and downs of the stock market were hardly noticed by the average American. The average American was more concerned with their daily life than the state of the stock market.
The economy was such that many new products and services were available to almost everyone, including the automobile, radios, and other products for the home. The stock market was controlled by professionals that worked for large firms who had good financial backing which made it easier to use the market advantageously. Small investors were never shut out of Wall Street but the professionals paid for stock tips and also rigged the market so that certain stocks would rise and fall.
This gave small investors a much harder time in making money through the stock market. As the market began to grow more small investors entered the game and were really just gambling their money. Most were not successful but some got lucky or got a good stock tip and rode the rising market until they lost their money too with the Stock Market Crash.
At this time nobody had any reason to believe that the stock market would not keep rising. “Throughout the 1920s a long boom took stock prices to peaks never before seen. From 1920 to 1929 stocks more than quadrupled in value. Many investors became convinced that stocks were a sure thing and borrowed heavily to invest more money in the market.” (PBS) As the market grew, the stock market became a way of life and was a highly discussed topic among common Americans who were eager to get a piece of the pie. Americans no longer were connected by the common bond of making a life for themselves like at the birth of the nation. The 1920s were an era of revolution in ideas, beliefs, inventions, and ways of living.
“The nation was totally different after World War I than before. The United States experimented with Prohibition. The Jazz age rose from the streets of Harlem, NY. Women got the right to vote. The whole of society was convinced that anything was possible, not only in the stock market and finances, but also in every facet of life.” (Sherrow, 12) Most of this is taken for granted now because what was considered a new idea seems commonplace and because the Stock Market Crash of 1929 overshadowed the great improvements in society.
Society’s attitude affected Wall Street, though. The large investing firms thought that the government should not be allowed to interfere with the speculation of finances. This is a common feeling when the economy is booming, that the government is always trying to oppress. The exact opposite is seen when the economy is in a depression and everyone turns to the government for help. The federal government was very limited in its control of the market and could not impose new control efforts at the time because the nation would not agree.
As we know now, the stock market would have been better off if the government would have stepped in when the stock market became dangerously high. One of the main causes for the stock market to become dangerous was because large firms or groups of individuals practiced unfair techniques when buying and selling stocks. This was known as “rigging” the market. The stock market flows more smoothly through normal buying and selling activity but when certain groups tried to make money in an unfair way they hurt others in the process which concentrated capital. Large pools could control prices more than was healthy for the stock market.
Some made fortunes others lost everything. An example was “a cigar stock at the time was selling for $115 a share. The market collapsed. I got a call from the company president. Could I loan him $200 million?” (Blaszczyk and Scranton, 337) To the public, the stock market seemed as though it would surely make them money, and were buying. The craze was a “frenzied finance that made Ponzi look like an amateur. (Blaszczyk and Scranton, 337) The insiders were controlling the market though, setting the stage for the greatest crash of all time. The booming economy in the United States was not typical of the whole world. England had its share of problems concerning currency. The people wanted gold to again be used as it was before the war.
They felt that it was a valuable metal and provided a solid backing for currency. The British government finally agreed, after a lot of pressure, to re-instate the gold standard but it was a new version where gold would be used to back up paper money and gold would be used to handle international debts. The pound was put into use, which created a problem. The pound was overvalued in terms of other currencies meaning that people had to pay more to by British goods. Naturally, people bought goods elsewhere to avoid the currency exchange rate of the pound. Instead of realizing what was happening, the British tried to lower the price, which in turn lowered wages and caused strikes to break out in England around 1926.
German’s were not better off. Of course their country was destroyed physically by war, but the financial system was very poor at this time in Germany. Germany was forced to pay reparations according to the Treaty of Versailles plus the inflation was so bad that German currency was absolutely worthless. The German public was enraged about this and the fact that they lost a lot of what they considered their land because of the war. The new government installed in Germany after the war called the Weimar republic was a democracy. The German public could not adjust to this making governmental intervention a difficult task. France and the rest of Europe faced the same effects. Inflation was uncontrolled and the political systems were thrown into upheaval.
Since the United States was so financially secure at this time, countries like Britain and France naturally asked for assistance. They appealed to the Federal Reserve Board to make cuts in interest rates in the United States. This would make the United States less attractive to investors and would maybe cause investment in Europe instead. By increasing the money supply in the United States, the dollar would be worth less and make American goods more expensive while lowering the price of foreign goods.
At this time the United States thought that this would not benefit it at this time. After all, the economy was booming, nearly everyone was working, people were making money from the stock market, and life was generally pleasant. Taking actions that would have hurt the United States would not have been appreciated by businessmen and normal citizens as well. The United States paid little attention to these pleas. There has always been talk that if the Federal Reserve Board would have stepped in that there would have been no boom in speculation, greatly reducing the risk of a crash.
The argument against this is the fact that the Federal Reserve Banking system has little control of the economy, but can only make changes spurring growth or decline. Other theories put the blame on foreign countries too. One allegation states that stock speculation and “gambling” the market was a trait the United States adopted from Europe. However, the get rich quick attitude of Americans is just as great as the Europeans. The California Gold Rush and the Florida Real Estate Boom prove this. The United States Government can still consume most of the blame. At that day and age, it was hard to expect economists to predict exactly what would happen with the stock market rising so rapidly.
They could have realized that it was a dangerous situation. The government felt too threatened by business. When the government stepped in businessmen, bankers, and society in general criticized them for trying to take action when none was deemed necessary. By 1928 the stock market had reached the point of no return. The stock market fluctuated greatly and the risk of the stock market became greater. The rigging of stocks became so common that people of great esteem thought nothing wrong of manipulating stocks in way that actually defrauded the public. By” the inevitability of a market collapse was upon the United States but nobody expected that a full-fledged business depression was to come about because of it.” (Axon, 47)
At this time three million shares were traded each day. Slowly it rose to four and five million shares per day. By November 1928 a daily volume of six million shares was reached. It must be realized that industrial stocks rose at a normal rate at this time, approximately growing by a third. The individual stocks are what marked disaster. For example, the Radio Corporation of America (RCA) grew an unheard of 400 percent in 1928. In 1929 the stock market continued to grow at a dangerous pace. People borrowed money at high interest rates figuring to make enough in the stock market to cover the interest and still profit greatly.
With people concentrating so much energy in the stock market, few realized that production could not keep up with the stock market. The automobile and construction industries had a small decline but people disregarded it as normal. Few Americans decided to sell-out for a profit. Most refused to believe the boom was coming to a halt. Stock market prices were now driven up by the sheer power of speculative demand. In other words, there was nothing concrete to back up the stock prices.
By mid-October, the stock market was in a bad state. No major boom could revive the quality stocks that took a sharp dive. Fear began to take the place of greed in Wall Street. The word “sell” was now heard more than the word “buy”. Brokers asked for more margins or more cash from the customer to be paid into their accounts. The customers, of course, could not afford it and the brokers sold the stock. This pushed stock prices even lower. Everyone began banking the large operators on Wall Street would step in because they had much more to lose than the small investor.
The problem was that they could not afford to because they were already in trouble because of the sharp decline in their stocks. October 24, 1929 was called Black Thursday because this hope was squashed and stock prices plummeted. Even after this there was still some hope. That same day, bankers moved in trying to restore some of the mess. They were trying to restore some of the optimism in the market. This was not the case as the following Monday, October 28, 1929, the market was flooded with selling orders. The big bankers were no longer there because they were in their own trouble.
The people that were hurt the most are those that put their whole lives into the stock market and now walked the streets, stunned about their losses. “Some of the more badly declining stocks from 1929 to 1933 are as follows: Consolidated Cigar common stock fell from $115 to $3. General Foods dropped from $82 to less than $20. General Motors fell from $91 to less than $8. US Steel dropped drastically from $261 to just over $21. The railroad stocks were hit the hardest. The New York Central Railroad alone fell to $9 from $256.” (Klingaman, 111) The Stock Market Crash of 1929 marked a new era that was not immediately realized. Just as the rising stock market had provided industry with the capital to expand, the falling market caused industry to move into recession.
Courtney from Study Moose