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The Stock Market Crash of 1929 In early 1928 the Dow Jones Average went from a low of 191 to a high of 300
in December of 1928 and peaked at 381 in September of 1929. 1929…) It was
anticipated that the increases in earnings and dividends would continue. (1929…)
Price to earnings ratio’s rose from 10 to 12 to 20 and higher for the market’s
favorite stocks. (1929…) Observers believed that stock market prices in the
first 6 months of 1929 were high, while others saw them to be cheap. (1929…) On
October 3rd, the Dow Jones Average began to drop, declining through out the week
of October 14th. (1929…) On the night of Monday, October 21st, 1929, margin
calls were heavy and Dutch and German calls came in to sell overnight for the
Tuesday morning opening. (1929…) On Tuesday morning, out of town banks and
corporations called in $150 million of call loans, and Wall Street was in a
panic before the New York Stock Exchange opened. (1929…) On Thursday, October
24th, 1929, people began to sell their stocks as fast as they could., sell
orders flooded market exchanges. (1929…) This day became known as Black
Thursday. (Black Thursday…) On a normal day, only 750-800 members of the New
York Stock Exchange started the exchange. (1929…) There were 1100 members on the
floor for the morning opening. (1929…) Furthermore, the exchange directed all
employees to be on the floor since there were numerous margin calls and sell
orders placed overnight, extra telephone staff was arranged at the member’s
boxes around the floor. (1929…) The Dow Jones Average closed at 299 that day.
(1929…) On Tuesday, October 29th, 1929, the crash began. (1929…) Within the
first few hours , the price fell so far as to wipe out all gains that had been
made the entire previous year. (1929…) This day the Dow Jones Average would
close at 230. (1929…) Between October 29th, and November 13 over 30 billion
dollars disappeared from the American economy. (1929…) It took nearly 25 years
for many of the stocks to recover. (1929…) By mid November, the value of the New
York Stock Exchange listings had dropped over 40%, a loss of $26 billion.
(1929-1931) At one point in the crash tickers were 68 minutes behind.
(1929-1931) An average of about $50,000,000 was wiped out in a minute on the
exchange. (1929-1931) A few investors that lost all of their money jumped to
their deaths from office buildings. Others gathered in the streets outside the
Stock Exchange to learn how much they lost.( Black Thursday…) The Cause There
are five proposed reason’s why the stock market crashed. On of the reasons was
that stocks were overpriced and the crash brought the share prices back to a
normal level. Some studies using standard measures of stock value, such as
Price/Earning ratios and Price/Dividend ratios, argue that the share prices
weren’t too high. Another reason is that there was massive frauds and illegal
activity. However, evidence revealed that there was probably very little actual
insider trading or illegal manipulation. (1929…) Margin buying is another reason
that people believed that the crash happened. Though it is not the main reason,
there was very little margin outstanding relative to the value of the market.
The new President of the Federal Reserve Board, Adolph Miller, tightened the
monetary policy and set out to lower the stock prices since he perceived that
speculation led stocks to be overpriced, causing damage to the economy. Also, in
the beginning of 1929, the interest rate charged on broker loans rose
tremendously. This policy reduced the amount of broker loans that originated
from banks and lowered the liquidity of non-financial and other corporations
that financed brokers and dealers. Lastly, many public officials commented that
the stock price was too high. Herbert Hoover publicly stated that stocks were
overvalued and that speculation hurt the economy. Hoover’s statement suggested
to the public the lengths he was willing to go to control the stock market.
These kinds of statements encouraged investors to believe that the market would
continue to be strong, which could be one of the causes of the crash. (1929…)
The Crash and The Depression After the crash, production fell nearly 50% from
the business cycle peak in August 1929 to March 1933. Meanwhile, the overall
price level dropped by about 1/3. Many people blamed the crash for the
economical collapse. Some people held responsible were President Hoover,
brokers, bankers, and businessmen. The cause of the depression cannot be linked
to one individual or even a group of people. It is also unlikely that the crash
of the market would have been large enough to lead the US economy into the
depression and to sustain the downward spiral in business activity. (1929…) Why
People Invested in the Stock Market During 1929, people invested in the stock
market for 5 major reasons. The first was that the market was considered an easy
way to get rich, quick. Although, about 4 million Americans, a small amount,
invested in the stock market at one time. The constant influx of new investors
coming in and old investors moving out ensured that new money was always flowing
around. (1929…) Another reason was higher wages. This meant that everyone in
America had extra money to put into savings or invest in the market. The 3rd
reason was that at this time, money was made more readily available, from banks,
at a lower interest rate to more people. Some economist debated that this
influenced the stock market, it is conceivable that people took loans to buy
more stock. (1929…) The fourth reason is that industry was over-producing, in
anticipation of selling the surplus. Profits were put right back into the
industry, by investing in factories, new machinery, and more people. This led to
even more surplus. An aura of financial soundness was created by this, and
Americans were encouraged to buy more stock. (1929…) Lastly, there were no
guidelines or laws concerning the market. Investors began buying on ‘margin’ or
buying stock on credit. Investors has high expectations that they would receive
large returns in a few months, so they could pay the balance and have money left
over in return. In reality, most of the money that was being invested in the
market wasn’t really there. (1929…) Government Reaction After the crash there
was criticism of the Federal Reserve policy. Between October 1929 and February
1930 the interest rate was lowered from 6% to 4%, and the money supply increased
immediately after the crash. Commercial banks in New York made loans to security
brokers and dealers, which in turn provided liquidity to the non-financial and
other corporations that financed brokers and dealers prior to the crash. (1929…)
Momentary policy became ambiguous during February 1930 and 1932. Government
security purchases in the open market continued to decline until 1932. This
reduced liquidity by lowering non-borrowed reserves. Although, the interest rate
was reduced between March 1930 and September 1931, it was raised twice in late
1931. This made loans more expensive and deterred people and corporations from
borrowing. (1929…) Government Regulations After the Crash Before the crash
investors were not protected at all from fraud, hype and shoddy stocks.
Investors didn’t know if a company actually doing as well as it was said to be
doing and if the financial reports were reliable. After the crash, the
Securities and Exchange Commission (SEC) was established to law down the law and
to punish those who violated. (1929…) Also during the crash 4,000 banks failed,
for the simple fact that the banks ran out of money. Four years later, congress
passed the Glass-Steagall Act, which essentially banned any connection between
commercial banks and investment banking, to ensure that is would never happen
again. The Federal Reserve and other banking regulators have softened some of
the Act’s separation of securities and banking functions by letting banks sell
certain securities through affiliated companies. (1929…)
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1.
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