2. Roaring 1920s (economy) Annual income increase: more than 15% (1923-1929) Real income rose: 10.5% per year from 1921 to 1923 3.4% from 1923 to 1929 1919-1929, total factor productivity increased by 5.3% 1928-1929, GNP increased about 6.6% Technological developments: radio, telephone, automobile, air-condition, refrigerator, washing machine.
3. Welcome to the Stock Market Eight straight years rise in stock values: 218.7% Mid 1920s’ real growth and prosperity Boundless hope and Optimism New American Characteristic (get rich quickly with a minimum of physical effort) Consumer Credit: $2.6billion (1920) $7.1billion (1929) Buying on Margin
4. Black Thursday(Oct 24th, 1929) Major Panic The nation’s most powerful financiers met to stop the panic Thomas Lamont: “There has been a little distress selling on the Stock Exchange due to a technical condition of the market” 12.8 million shares had been sold DJI: 21 percent decline from the high of 381.2 (Sept 3rd,1929) to 299.5. Drop of 9% from Oct 23rd President Herbert Hoover said that the economy was fine on Friday, Oct 25th
5. Black Tuesday(Oct 29th, 1929) The most notorious day in American financial history 16.4 million shares were sold Dow Jones lost another 12 percent Nearly $16 billion in market value (about $121 billion in 2007) evaporated Twenty-nine public utilities lost $5.1 billion in the month The market closed down 12.8 percent on Monday, Oct 28th
6. Allied Chemical & Dye General Electric Montgomery Ward Radio Corp. of America U.S. Steel
7. A Catalogue of NINE Causes Stock market value was too high Real downturn in business activity The subsequent raising of interest rates in London and liquidation of English investments in the United States Actions of the Federal Reserve Media and government figures Buying on margin and margin-call Excessive leverage used in utility sector Setback in the public utility market Overreaction by the market
8. Federal Reserve Actions Before the crash Raised interest rate (loan to brokers and buy on margin) During the week of the crash (final week of October) Expand credit and bolster shaky financial positions Added almost $300 million to the reserves of the banks Doubled its holdings of government securities: - adding over $150 million to reserves Discounted about $200 million more for member banks Lowered its rediscount rate from 6 to 4.5% (by mid-Nov)
13. The Great Depression Companies’ bankruptcy Stockbrokers were ruined Bank Crisis The confidence in the nation’s economy was lost. National unemployment rate – 25 percent Average weekly wage: had fallen from $25 to $17 About two out of every three children in NYC were sick Homeless and hungry Revenue Act of 1932 - increased taxes: personal income, estate, sales, postal rates - surtaxes: from 25 % to 63 % on the highest incomes
14.
15. From 1929 to 1932, stocks lost 73 percent of their values.
The 1920s were period of real growth and prosperity.From 1923 to 1929, the average annual earning of American workers increased by more than 15%.Real income rose 10.5 % per year from 1921 to 1923 and 3.4 % from 1923 to 1929.During the period 1919-1929 total productivity increased at an annual rate of 5.3 % for the manufacturing sectorThe gross national product (GNP) increased about 6.6%Consumer revolution
From 1922 to 1929 stocks rose in value by 218.7%American prosperityfrommid 1920s made consumers and investors very optimistic about the future of America and American stock market.Hence, the majority of the people believed that everything was going to be great.People were start getting tangled with inordinate desire to get rich quickly with a minimum of physical effort. Since the stock value had always been increased in recent years, buying stock seemed like an unbounded opportunity to make a fortune that couldn’t go wrong. Credit purchasing planswere introduced in the 1920s. Under these plans, buy now pay later became a way of life. Consumer credit went up from $2.6 billion in 1920 to $7.1 billion in 1929, the largest jump in the country’s history.
By Oct 24th, the value of most stocks had been falling for more than six weeks. So, investors rush to sell their shares in order to cut their losses which caused the stock market to drop even faster. Thenation’s most powerful financiers tried tostop the panic by bidding on a number of high-profile stock. Thomas Lamont, the senior partner of Morgan’s: “There has been a little distress selling on the Stock Exchange due to a technical condition of the market”rather than any fundamental cause.They hoped that when investors saw that they were willing to buy stocks, the investors would follow their example. But the panicked sell-off continued, and when the day’s trading finally ended, more than 12.8 million shares had been sold. President Herbert Hoover addressed the nation on the following Friday, Oct 25th. He tries to reassure Americans, saying that the economy was fine. The selling, however, still continued on Black Monday. On black Monday the market lost 12.8 percent of its value, far worse than on the previous Thursday.
October 29th. It remains the single most notorious day in American financial history. Its closing had surpassed 16.4 million shares. Stocks lost nearly $16 billion in market value-about $121 billion in 2007 dollars. 29 public utilities lost 5.1 billion in the month, by far the largest loss of any of the industries listed by the Times. It was the day that brought the world’s greatest economic superpower to its knees. The stock market crash destroyed hundreds of corporations across America and blew away the life savings of hundreds and thousands of investors.
The stocks that went up the most were in industries where the economic fundamentals indicated there was cause for large amount of optimism. They included airplanes, agricultural implement, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio.The best representatives of industries that had expectations of growth. On September 3rd, 1929, the Dow Jones Industrial Average reached a record high of 381.2
2. American industries were soon producing far more goods than they could sell. They were still selling shares to eager investors, who believed the stock would increase in value. If the companies weren’t selling all of their goods, however, they weren’t making profits. The shares, therefore, weren’t worth as much as people thought. Sooner or later, that fact would cause a serious problem.3. On September 26, the Bank of England raised its discount rate from 5.5 to 6.5%. England was losing gold as a result of investment in the New York Stock Exchange and wanted to decrease this investments. The Hatry Case also happened in September and created uneasiness in England regarding stocks in general. Both the collapse of the Hatry industrial empire and the increase in the investment returns available in England resulted in shrinkage of English investment in the United States, adding to the market instability in the beginning of October. 4. Federal Reserve5. If the media say something often enough, a large percentage of the public may come to believe in it. By 1929, there were many who felt the market price of equity securities had increased too much, and this feeling was reinforced daily by the media and statements by influential government officials.6. Federal Reserve Fund invested in common stocks and helped finance the purchase of common stocks by others. Buying on margin. Many people who invested in the stock market did not have enough money to buy shares of stock, so they paid a little bit and borrowed the remaining money from the brokers who were selling them the stock. At that time, people could buy $10000 worth of stock by $1000, which means that its down payment was 10%. From day of people buying on margin, the situation got completely out of control. Buying on margin worked well as long as stock prices continued to rise. Margin Call. If a stock suddenly lost its value, there would be a chain of debtwith just some worthless stock at the end of it. During September brokers’ loans increased by nearly $670 million, by far the largest increase of any month on date.7. The amount of leverage used in the utility sector was enormous. Public utility holding companies also added their leverage to the already levered utility sector.8. In 1929, public utility stock prices were in excess of three times their book values. The rule applied by regulatory authorities is to allow utilities to earn a “fair return” on an allowed rate base. The fair return is defined to be equal to a utility’s weighted average cost of capital. The deluge of bad news regarding public utility regulation by commissions in Massachusetts and New York truly upset the market.
Federal Reserve Board was an official group that kept an eye on the nation’s banks and was alarmed by enormous amount of money that banks had loaned to brokers so people could buy on margin. Members of the Federal Reserve Board feared that any drop in stock value would make investors unable to repay brokers. Brokers then would not be able to repay banks, and the nation’s banking system would be at risk.Raising Interest Rates. This rise would make it more expensive for people to borrow money and the board hoped the cycle of borrowing and buying would then slow down. But American investors went on buying stocks with little or no understanding of their value. The stock market continued to rise throughout the summer of 1929. Due to the tragic incident in the stock market, Federal Reserve stepped in immediately to expand credit and bolster shaky financial positions. During the week of the crash – the final week of October – it added almost $300 million to the reserves of the nation’s banks. During that week, Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. The Federal Reserve also promptly and sharply lowered its rediscount rate, from 6 % to 4.5% by mid-November.
The market that was falsely stimulated by artificial credit, and began to move upward again.
There are three main problems that a theory of depression must explain. 1. First is errors in forecasting. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses. They are suddenly revealed to have made terrible errors in forecasting.2. Another common feature of the business cycle is price change in capital-goods industries. Capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries- especially the industries supplying raw materials, construction, and equipment to other industries- expand much further in the boom, and are hit far more severely in the depression.3. A third feature of every boom that needs explaining is the increase in the quantity of money in the economy.An increase in the supply of money, the demand for money remaining the same, will cause a fall in the purchasing power of each dollar.Central bank printed money and lend it to business. The new money pours on the loan market and it lowers the loan rate of interest.“lower” – near the consumer“higher” – furthest from the consumer
Laissez-faire was, roughly, the traditional policy in American depressions before 1929. It means leave the economy alone. So the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. “Hoover New Deal” is an anti-depressionprogram marked by extensive governmental economic planning and intervention.It includes bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending. As his admiring biographers declared that “President Hoover was the first President in our history to offer Federal leadership in mobilizing the economic resources of the people.” Due to the economic struggle, President Hoover held a series of White House conferences with the leading financiers and industrialists of the country to induce them to maintain wage rates and expand their investments. Such artificially induced expansion could only bring losses to business and thereby aggravate the depression. The most important White House conference was held on November 21. All the great industrial leaders were there and asked Hoover to stimulate the cooperation of government and industry. Hoover pointed out to them that unemployment had already reached two to three million, that a long depression might follow, and the wages must be kept up! From an economic viewpoint such action would deepen the depression by suddenly reducing purchasing power. In a result of the conference, the nation’s leading industrial leaders agreed to maintain wage rates and expand their investments. Industry should try to keep everyone employed, and any necessary reduction in work should be spread over all employees by reducing the work-week.
Gross National ProductGross Private Product
The cause of the depression was not a failure of the free market, yet it rather caused by government planning. After the crash, the worth of companies vanished. Stockbrokers were ruined when investors couldn’t pay back the money they owed from buying on margin. Many investors lost everything they had. Large and small companies began to lay off workers and close factories when sales of their goods dropped. The Great Depression has begun. Banks, too, were hurt by the rapidly worsening economy. Those banks that had loaned money to brokers and investors found themselves short of funds. By the end of 1930, more than 7000 banks had failed. It was one of the most costly errors committed by banking system in the last 82 years. And the confidence in the nation’s economy was lost. During President Hoover’s term, the average weekly wage of workers had fallen from $25 to $17. One million families lost their farms. About one in every four workers in the Unites States was without a job (25% national unemployment). About two out of every three children in the NYC were sick because they didn’t have enough food to eat. Millions of people were homeless and hungry. By 1932, the U.S faced the worst economic crisis in its history. With a $2 billion deficit during annual year 1931, Hoover felt that he had to do something in the next year to combat it. To reduce expenditure and balance the budget, he raised taxes. Revenue Act of 1932 is one of the greatest increases in taxation ever enacted in the United States in peace time. This drastic increases of taxes included personal income taxes, estate taxes, sales taxes, and postal rates. And surtaxes increased were raised enormously, from 25% to 63 % on the highest incomes. Although the tax rates increased significantly, total Federal revenue for 1932 declined because of the deepened depression- which itself partly caused by the increase in tax rates.
The crash helped bring on the depression of the thirties and the depression helped to extend the period of low stock pricesOn July 8th 1932, the huge tragedy in the stock market hit its bottom which was 79.4From 1929 to 1932, stocks lost 73 percent of their value. And 1932 was a worldwide depression.
