Stock market crash
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Stock market crash Stock market crash Presentation Transcript

  • 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
    • Technological progress
    • 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
  • HOWEVER??????
    • 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.
  • Hoover’s Plan
    • 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!!!!!!!!!!!!!
  • Black Thursday
    • 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….
  • 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%
  • Causes of Great Depression
    • Agriculture had crashed in 1919 and was a continuing source of weakness.
    • Banks over-extended
    • 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
    • Unemployment
    • Wages decrease
  • 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
    • Industry declines
    • 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
  • Reasons (continued)
    • Nations attempt to protect domestic production with tariffs and having quotas on imports
      • This only reduced international trade and damaged market even more
  • Hope Shattered
    • 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
  • Gold Crisis
    • With draw of European gold from US banks causes
      • Banks to call their loans on US businesses
      • Bankruptcies
      • 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
    • The American People lose fail in Hoover.
  • Franklin D. Roosevelt Wins Presidency
    • Political and revolutionary thinker
    • Elected 1932
    • Introduced major changes in structure of economy
    • New Deal
  • 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
  • More Programs
    • 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
    • Taxation
    • Industrial regulation
    • Social programs (social security, pensions, welfare, others)
    • Public programs
    • Deficit spending
  • 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)
  • Thank You for Your Attention