Stock market crash

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Stock market crash

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

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