It’s Causes and Effects By Jeanine Brotherston Dr. Volpert: Mathematics of Finance The Stock Market Crash of 1929
Some Basic Background on the Stocks and the Economic Market
What are Securities?
Securities can be either stocks or bonds which are sold and bought on the stock market.
What is the New York Stock Exchange?
World’s largest market place for securities
Currently membership limited to 1,366 members.
Seat obtained by purchasing from existing member
Interesting Fact: How did Stock Exchange begin?
The Exchange evolved from a group of men who used to meet under a buttonwood tree on what is now Wall Street in 1792 to discuss securities
Before The Crash
The Great Bull Market
Great American stock exchange boom of 1928-1929
Huge bubble where there were high speculations
People made many investments to make big money
Bull Market sparked by?
Growth in American industries
Increase in productivity
Rise in national income from 33,200 million to 79,200 million from 1914 to 1925
Expectation for great future and un-boundless optimism for the market
What Sparked This Growth in Industry?
The Electrification of the production process
This expanded the ability to transform raw materials into finished products
Ex. Ford Motors
Wages did not raise even though the production did and prices of products failed to decrease.
There was not an excess demand for labor
Leaving unemployment rate steady
Stock Exchange Average Rise in Share Prices 1924-1928
Political Promises Spark Market Speculation
Herbert Hoover was the most promising candidate for president because of his ideas which promised increased economic growth in America.
Proposed a Tariff bill which Senator Smoot presented called the Smoot-Hawley Tariff
Promised increased tariffs on imports
Planned to allow more productivity for US manufacturers
Help ease unemployment
Investors marvel at This Proposal
Investors believed profits from stocks would increase if the tariff bill was passed
Sparked intense speculation
Dow Jones Industrial Average increased by almost 35% because expected election of Hoover and his bill
This Bubble was bound to Burst!
The Crash of 1929
“American economic disaster that precipitated the Great Depression which was approximately a 10 year economic slump affecting all the western industrialized countries.” –Encyclopedia Britannica
General Causes of the Crash
Rampant over speculation in market
People holding companies and investment trusts (which by nature creates debt)
Bursting of Bull Market economic bubble in August 1929
Large bank loans could not be liquidated
Direct Cause of Crash of Stock Market
After Hoovers election certain people began to doubt if the tariff bill would help the US Economy
Farmers, America’s trading partners, Democrats, and some Republican’s opposed the passage of new tariffs.
On October 21, 1929 Senate announces plans to limit tariff revisions
October 22, 1929 more limits set on tariff bill
Investors Realize Tariff Bill is DOOMED!!!!!!!!!!!!!
PANIC! PANIC! PANIC!
On October 18, 1929 prices began to fall
Panic stuck out on October 24 “BLACK THURSDAY” after the announcements from the Senate
Record of 12,894,650 shares were traded
Black Thursday (Continued)
Major banks and investment companies bought up great blocks of stocks to stop the panic but….
THERE ATTEMPTS FAILED!!!!!!!!!
Black Monday and Tuesday
The Panic continued and 16,000,000 shares were traded
Prices on the stock market collapsed completely!!!!
Hoover’s Plan to combat Crash
Extracted promises from manufacturers to maintain production.
Signed legislation providing generous additional funds to pubic works
Smoot-Hawley Tariff 1930 (finally passed): to raise duties 50%
ALL THESE FAILED TO EASE CRISIS AND DEPRESSION FOLLOWED!!!!
Causes of Great Depression
Agriculture had crashed in 1919 and was a continuing source of weakness.
Wages had not kept up with profits
In 1920’s consumers were reaching limits of ability to borrow and spend
Cause’s of Depression (continued)
Production was declining and unemployment increasing EVEN before the crash!
Destroyed confidence in the economy
Down sizing of industry causing unemployment
The Great Depression
The stock prices in the next three years continued to fall
By 1932 prices had dropped to only about 20% of there original value
Effects of Depression on Individual
Thousands of individual investors ruined
Loss of savings
Poverty and panic
Less spending and demand
Decline in Production
little out put means less jobs
Manufacturing output fallen to 54% of its 1929 output
25-30% of work force unemployed
12 -15 Million jobless
Effects of Depression on Economy
Stock prices drop
Value of assets decline
11,000 of 25,000 banks fail
Because of tariffs international trade market decreases
Causes a world wide depression
World Wide Depression
America’s intimate relationship with Europe causes serious economic troubles overseas and contributes to a world wide depression
Reasons America’s Depression Effects World
World War I left Europe with large war debts
America was a major financer and creditor of post war Europe. Once US slumped American investments to Europe dried up
Germany hurt because of large war reparations
Nations attempt to protect domestic production with tariffs and having quotas on imports
This only reduced international trade and damaged market even more
In 1930 there is a slight rise in production and it seems depression might ease however: Spring 1931 the weakening of western European economy causes the major bank in Vienna to crash and Germany defaults on its war reparation payments
Hoover’s last Attempts
Hoover proposes one year moratorium on war debt payments
Too little too late
Financial panic: European Government goes off their gold standard and devalues currencies, destroying exchange system (hurts trade)
Europe withdraws gold from US banks
With draw of European gold from US banks causes
Banks to call their loans on US businesses
Bank customers go into ruin
Eventually banks in ruin
Hoover’s last Attempts (continued)
Reconstruction Finance Corp- to lend funds to banks, railroads, etc
Glass-Steagall Act- Gold to meet w/ foreign withdraws
THESE AND OTHER ACTS FAILED TO PROMOTE RECOVERY!!!!
The American People lose fail in Hoover.
Franklin D. Roosevelt Wins Presidency
Political and revolutionary thinker
Introduced major changes in structure of economy
FDR’s New Deal
Opposite of Laissez-Faire
Increased government regulation
Massive public works projects for relief of poverty
Aid for the unemployed and unfortunate
Some of FDR’s Programs
Civilian Conservation Corp
National Recovery Administration
Federal Deposit Insurance Corporation
Securities and Exchange Commission
1935 Wagner Act (authority of Federal government in industrial relations)
National Labor Relations Board
Social Security, unemployment compensation, disability insurance
End to Depression
Outbreak of World War II causes
US factories flooded with orders form armaments and munitions
Unemployment decreases and production increase
Depression ends completely by the time the US enters the war in 1941
What did we learn from the 1929 Crash?
Market can be very unpredictable
Investors must not get caught up in market bubble illusions
Market forces alone may be unable to achieve recovery from economic slump
Changes were needed in US economic structure
Government Action Taken now to Ensure Economic Stability
Social programs (social security, pensions, welfare, others)
Food for Thought
Currently our economy is prosperous because of new technology and advancements (especially in computers)
Its Important not to over speculate or jump the gun when it comes to investments
Important to know stock market crashes are still possible (Crash of 1987 and 1997)