Lecture- The Day the Stock Market Crashed 1929

The Great Stock Market Crash of 1929

Overview of the Crash and Its Impact

• The stock market crash of 1929 was a pivotal event that altered history, leading to a decade-long depression in the U.S. and a worldwide economic downturn.

• Approximately 25% of the American workforce was immediately affected, resulting in widespread unemployment and suffering for millions. This situation raised fears of social revolution.

• The aftermath included significant political changes, such as Adolf Hitler's rise in Germany and Franklin Roosevelt's election in the U.S., highlighting contrasting responses to economic crises.

• The Great Depression prompted the establishment of social security, welfare benefits, and various social entitlements that persist today. It serves as a reminder that while history may not repeat itself, human behavior often does.

Personal Narratives from October 29, 1929

• A hypothetical scenario is presented where an engineer returns home to share with his wife their financial ruin due to the stock market crash, emphasizing personal stakes involved in economic events.

• The conversation reveals confusion about the stock market among ordinary citizens who were previously unaware of its volatility but had invested due to societal pressure.

• Neighbors provide reassurances based on past experiences where banks intervened during market drops, illustrating public sentiment and hope amidst panic.

Historical Context Leading Up to the Crash

• The narrative shifts back to earlier years when individuals graduated from college during World War I; they were influenced by nationalistic sentiments urging them to enlist for military service after being promised job security upon return.

• Experiences from war shaped their perspectives on life post-conflict; returning veterans sought stability through employment and family life amid disillusionment with European politics following the Versailles Treaty negotiations.

• Economic prosperity followed post-war efforts as many began accumulating wealth through jobs created during this period before facing unforeseen challenges like the stock market crash just over a decade later.

The Rise of Consumer Credit in the 1920s

The Mortgage Experience

• In the 1920s, mortgage officers were more lenient, allowing individuals to purchase homes even if their salaries were not sufficient.

• A personal connection between the mortgage officer and the borrower influenced lending decisions, showcasing a community-oriented banking approach.

The Installment Plan Revolution

• The installment plan emerged as a significant financial innovation, enabling consumers to make purchases without upfront full payments.

• This method allowed families to buy essential items like refrigerators and cars by paying small amounts over time rather than large sums upfront.

Economic Optimism and Consumerism

• Henry Ford's business model demonstrated that paying workers well could lead to increased consumer spending on products like cars.

• Families began purchasing luxury items such as radios, reflecting a shift towards consumerism and an improved standard of living post-war.

Financial Advice and Market Trends

• Conversations about investments shifted from traditional savings bonds to stock market speculation among peers.

• Friends encouraged each other to invest in stocks instead of saving, highlighting a growing trend toward riskier financial behaviors.

Stock Market Speculation

• The allure of high returns from stock investments led many individuals to consider investing substantial savings into the market.

• Margin buying became popular; investors could leverage borrowed money for potentially higher profits, increasing both risk and reward.

Economic Boom Before the Crash

• By summer 1929, optimism was rampant with soaring stock prices; however, this set the stage for future economic instability.

• President Calvin Coolidge's assertion that "the business of America is business" encapsulated the era's focus on profit-making over caution.

The Great Market Crash: A Historical Perspective

The Prelude to the Crash

• The market is described as having reached a new plateau, with expectations that business slumps would not occur again. Investors are encouraged to keep investing despite fluctuations in September.

• Panic selling begins on October 24th, leading to an unprecedented volume of shares traded, marking one of the largest trading days until October 29th.

• Major banking institutions, including JP Morgan, intervene to stabilize the market by purchasing large quantities of stocks at inflated prices.

The Collapse and Its Aftermath

• Richard Whitney, vice president of the New York Stock Exchange, orders purchases at higher prices than current market values to instill confidence among investors.

• Despite initial attempts at stabilization, the market collapses on October 29th; many investors realize their financial ruin only after delays in ticker tape reporting.

• The crash leads to widespread devastation; individuals who once felt secure now face unemployment and loss of savings.

Economic Consequences

• Promises from leaders like President Hoover about economic recovery prove hollow as businesses fail and layoffs become rampant.

• Personal stories illustrate the dire consequences for families; goods pile up unsold while farmers struggle with crop sales due to lack of buyers.

• Individuals face mounting debts and foreclosures as banks demand payment amidst a collapsing economy.

Social Impact and Desperation

• Families are torn apart due to financial strain; children are sent away as parents can no longer provide for them.

• Local charity systems fail under pressure; communities cannot support those in need during this crisis.

• Many Americans resort to traveling in search of work or sustenance, facing humiliation and despair along the way.

Speculation vs. Investment

• The narrative shifts towards understanding stock speculation versus investment; stocks are seen as mere paper without intrinsic value unless someone is willing to buy them.

• Speculative behavior was rampant during the 1920s due to weak federal regulations and easy credit policies that encouraged risky investments.

• The era's belief in free-market principles led many into financial peril when speculative bubbles burst without adequate oversight or regulation.

Regulatory Failures

• Calls for stronger federal regulation emerge post-crash; discussions focus on controlling margin buying practices that contributed significantly to market instability.

The Financial Collapse: Causes and Consequences

The Role of Margin Calls and Investment Trusts

• Many Americans faced bankruptcy when brokerage firms called in their margins, forcing them to sell stocks at significant losses due to market declines.

• Investment trusts emerged as a popular financial instrument during the 1920s, appealing to those who lacked knowledge about stocks or sufficient capital for direct investments.

• These trusts allowed investors to pool resources, giving access to diversified portfolios managed by financial experts, although investors did not own individual stocks directly.

• The allure of investment trusts was bolstered by claims of high returns (10-20% annually), with promises that expert managers would handle all investment decisions.

• The complexity of these financial instruments led many individuals to rely on perceived expertise rather than understanding the risks involved.

Public Sentiment and Economic Indicators

• Influential figures like Professor Fisher promoted the idea that society had reached a new era of wealth, encouraging people to invest small amounts regularly for future riches.

• Widespread use of leverage characterized this period; both banks and individuals borrowed heavily against their investments, increasing risk exposure significantly.

• A cultural obsession with the stock market became evident as discussions dominated social gatherings, signaling potential overconfidence among investors.

• Joseph Kennedy's anecdote illustrates a critical moment where he recognized the irrational exuberance in the market and decided to sell all his holdings before the crash.

Scandals and Global Impact

• High-profile corporate scandals revealed corruption among respected CEOs, undermining trust in financial institutions and contributing to market instability.

• The interconnectedness of global economies meant that once panic set in due to collapsing markets, it affected countries worldwide rapidly.

• John Kenneth Galbraith noted that historical lessons could be forgotten over time; younger generations may lack awareness of past economic disasters like the 1929 collapse.