One Cause of the Great DepressionThe Stock Market Crash of 1929
...t everyone during that time would not forget. On this day, known as Black Thursday, the stock market began to crash showing its correction in a drastic manor. Early that day stock prices started falling drastically raising the eye browse of many weary investors. People began to sell off what they could in attempts to salvage any value left in their shares of stock. At the end of the day when trading closed, the Dow Jones Industrial Average fell 9%. (Noble) The panic started to make its presence felt. A record volume number of shares had traded hands that day smashing previous records by an exceedingly wide margin. Regardless of the crash, a decent level of optimism remained. New York banks, with efforts to keep the market in a stable position, purchased an estimated $30 million worth of stocks. And in an attempt to keep the public from further panic an announcement from President Hoover came across the airways and stated that a recovery was predicted. These attempts at keeping some stability in the market seemed to have little value as the situation became even worse during the next week. On October 29th the number of shares being traded broke records again and the market dropped another 17%. (Noble) This drop in the market value had indications that the crash would remain permanent. The nation was now faced with a major problem that was ominous to near future solutions. The market crash had presented itself with devastating effects to the economy. Investing came to a virtual halt and companies with heavy investments watched horridly as their assets devalued rapidly, forcing many into bankruptcy. Import spending dropped from roughly $4 billion in 1929 to only $1 billion by 1932. The Gross National Product dropped from $104 billion 1929 to $59 billion in 1932. (Noble) This drop in output caused the unemployment rate to rise dramatically, making unemployment one of the leading problems of the Great Depression. “Unemployment grew to five million in 1930, and up to thirteen million in 1932.” Foreigners stopped buying American goods; countless jobs were lost; numerous stores were closed; banks were facing panics; and factories went bankrupt. (Hicks 229) The U.S. economy quickly spiraled out of control and the great depression had begun. Causes of the Crash Explanations leading to the crash have been relatively similar throughout history. Wild speculation in the stock market is one theory that many economists can attribute to the crash. This wild speculation inflated stock prices to the point where they became extremely overvalued. Once traders started to feel a correction, worry and panic flooded the air. The selling became furious, providing further dismantling to the stock market each day. Early in the 1920’s future stock speculation became the norm. Investors would buy stocks on loans from banks, which turned out to create a major problem for the banking industry. Banks at the time were confident in the market and had no regulations at that time preventing banks from loaning money for stock purchases. Oblivious to the complications this might have, banks were making loans to investors up to three quarters of the stock purchase price. “By mid 1929 the total of outstanding brokers’ loans was over $7 billion; in the next three months that number would reach $8.5 billion.” (McElvaine 45) “During 1928 interest rates for brokers’ loans were 12%, by March of 1929 these interest rates were going as high as 20%.” (Hicks 227) Once the crash finally hit, borrowing investors were unable to repay their debts, and banks could not collect on their loans. In effect, this so called “buying on margin” led to new regulations following the crash. “Because investment banking activities of the commercial banks were blamed for many bank failures, provisions in the banking legislation in 1933 (also known as the Glass-Steagall Act) prohibited commercial banks from underwriting or dealing in corporate securities and limited banks to the purchase of debt securities approved by the bank regulatory agencies.” (Mishkin 231) “In effect, the Glass-Steagall Act separated the activities of commercial banks from those of the securities industry.” (Mishkin 231) Bank failures during this time also led to the establishment of the Federal Deposit Insurance Corporation. “ To prevent future depositor losses from such failures, banking legislation in 1933 established the FDIC, which provided federal insurance on bank deposits.” (Mishkin 231) The evidence of market speculation as a primary cause of the crash is strongly supported by the extreme increase in the markets total value in such a short period of time. The stock market went from a value of $27 billion to $87 billion in a four-year span up to 1929. During that period the Dow grew by 218% followed by a drop of 73% between 1929 and 1932. (Noble) An example of the effects that this overvaluation would have on stocks would be that of utility stocks that represented 18% of all shares on the New York Stock Exchange. According to Economist Harold Bierman, small corrections in utility stock prices would have enormous effects on the stock market at large. This suggests that the crash represented a market correction made necessary by inflation of stock prices due to speculation. (Noble) Another cause cited by economists is that of the liquidation of British and other foreign investments in the U.S. market. This liquidation resulted from market anxiety and tighter market controls over seas, particularly in the British markets where scandalous business activities were being discovered. “ The crash of 1929 was not without its Enrons and World.com’s. Clarence Hatry and his associates admitted to forging the accounts of their investment group to show a fake net worth of $24 million British pounds- rather than the true picture of $19 billion in liabilities.” (Vaknin) This led British government to consider more regulations on investments. Subsequently, Lord Montagu Norman, governor of the Bank of England from 1920-1944, sharply increased the British bank rate making the foreign market a little uptight. This created anxiety that may have played a role in causing British investors to liquidate foreign holdings, most of which were in the U.S. market. Another point worth mentioning was that of the mentality of investors during the 20’s. It didn’t take much thought for the public to realize where quick profitable gains could be made. Just from hearsay people were drawn to the market without knowing much about it. “Major bull and bear markets were driven by shifts in assessments of fundamentals: investors had little knowledge of crucial factors, in particular the long run dividend growth rate, and their changing expectations of average dividend growth plausibly lie behind the major swings of this century.” (Barsky, DeLong) Finally, one of the more convincing theories that lead to the cause of the crash is that of the U.S. government and the Federal Reserve Board in their attempts to stop speculation. These attempts seemed to have eventually led investors to an overreaction in the market causing the selling panic. “The only thing we have to fear is fear itself.” This, one of the more famous quotes from President Hoover referred to the problems that arose from the massive bank panics that eventually occurred after the crash. During 1928 and 1929, President Hoover and other high officials felt that over speculation was occurring and that it was leading the way for stocks to become overvalued. With the perception of this and the awareness of over production in industry, President Hoover ...