Megan Kuhle
Mr. Williams
U.S. History
7 April 2006
Every day more and more people invest their money into the largest financial market in the world, The New York Stock Exchange (NYSE). Containing over 3,600 different companies, the NYSE boasts a capital valuation of over 12 trillion dollars. While the NYSE continues to experience the economic ups and downs from investor speculation, these fluctuations are minor compared to the disaster it encountered in October of 1929. What came to be known as The Great Stock Market Crash of 1929 (or just “The Great Crash”) occurred in such a short span of time, that many were left penniless and searching for answers. Why did this happen? Or more importantly, how? Stock market analysts for years examined the practices and methods of common investors during the day in pursuit of a sound reason. Out of an extensive list they came up with, greed and speculation of the 1920’s proved to be the two main causes of the 1929 Stock Market Crash.
The 1920’s was a decade of economic opportunity, economic prosperity, decreased social inhibitions, and innovative ideas. Life was good for the common man, and they wouldn’t have had it any other way. Economically, businesses were booming: entrepreneurs were sprouting up everywhere, advances in science and technology made the unthinkable possible, and stock market success was at it’s peak. Everyone found encouragement, either by wealthy businessmen, the government, or even a neighbor, to
invest in this booming market. News within the market came through to almost every home with the invention of the radio. With the radio, families were able to sit down, enjoy a nice meal, and learn about the amazing benefits of short-term investing. With the new concept of margin buying, where one could buy stocks with as low as a 10% down payment, the common man was able to invest his money, in hopes of quickly gaining triple or even quadruple his investment (The History Channel). The stock market was not always about making a quick buck, however, as it was formed for a much different reason.
In the late 1700’s, with the American Revolution just starting to unfold into a full conflict, the Colonial Government realized they would need an additional source of funds, since they no longer had ties with the British Government. They turned to the issuing of bonds: certificates that guaranteed citizens payment of their original investment, plus interest. The use of bonds led to the selling of parts, or shares, of the banks’ own companies. Anyone who could afford owning shares of these banks, could buy, building the essential elements of a modern-day stock exchange (“Stock Market History”). In 1792, New York stockbrokers gathered to form the New York Stock and Exchange Board (known today as the New York Stock Exchange). The corner of Broad and Wall Street became their home on April 22nd, 1903, about 100 years later (Galbraith 22).
As the market continued to prosper in number of companies, it also grew in number of investors. The early 1900’s held some of the first shares for familiar companies such as AT&T, Kodak, Procter and Gamble, Pillsbury, Sears, and Kellogg, The presidents of the day (Wilson, Harding, Coolidge) encouraged people to invest their money and keep the economy up. Wealthier businessmen of the day preferred the safer route of liberty bonds, but nonetheless became involved in this growing economic instrument (History Channel). The stock market, however, was not the “goose that laid the golden egg,” as it seemed. Without any government regulation, there were many unknown and deceitful practices within the market; some that would later prove to be nearly fatal to the economic life of the country.
The stock market was on the infusion of capital from the general public. Brokers in the market were responsible for raising capital, selling corporate stocks, and taking a healthy profit for their efforts. Businessmen were not the only greedy investors circling the market, however, with the general public slowing becoming more and more eager for a short-term investment. In the winter months of 1928, broker’s loans reached four billion dollars (Galbraith 21). These loans were the same ones used on margin buying. Early on businessmen realized this market was an opportunity for total freedom from government regulation, and they took full advantage of this opportunity. Without this greed for more money they possessed, the stock market crash could have been prevented. Many wealthy investors collaborated within the stock market to form stock trading pools (the equivalent of mutual funds today), where they fixed the prices of stocks (either high or low) to benefit themselves (History Channel). There were more than 100 of these investment pools that openly manipulated investors, but were never once frowned upon or looked at as illegal, but rather were praised and thought of as glamorous. Another way wealthy businessmen earned quick profits was by stimulating interest in their company’s common stock. This was done by combining funds together and buying many shares of one company. They would drive up the value of this stock by creating newspaper and magazine articles of interest, allowing enthusiasm to trickle down to the public. Once the price sky rocketed, the businessmen would all agree on a day to sell their shares, causing the value of the shares to come crashing down (History Channel). Because of this practice, the stock market of the 1920’s came to be known as a “rigged market,” with no laws against these deceitful and unjust thieves. The methods of these greedy businessmen caused the formation of an institution, where the wealthy were the leaders, and speculation was the order of the day (History Channel).
Speculation is the engaging in risky business transactions with the chance of quick and/or considerable profit. The general mind set of the day was that if values are increasing, they will increase more, and if the geniuses of the market bought, you should buy, but if they sold, sell (Galbraith 8). Given this mind set, many investors truly believed they would succeed in the market, and that the market in general would continue to go up in value. Banks did not stop investors from this positive thinking either, as they began heavily lending money to fund this speculative boom. Speculative conditions in themselves are at the very root of the Great Crash (Galbraith 8). If the market at the time continued rising, no one gave any thought to analyze it in order to uncover unscrupulous practices. On February 14th, 1929, the New York Federal Reserve asked that the rediscount rate, which was used to check speculation, be raised from 5 to 6 percent (Galbraith 31). This however, proved to be not enough. Because president Herbert Hoover was voted into office based on his theory of leaving American Business alone, not too many investigations that were proposed were carried out (Galbraith 31). Hoover, at the time around the crash, however, did have some obscure tension about all of the large amounts of speculation going on among investors. Five days before the crash, President Hoover wrote to Thomas Lamont, CEO of “The House of Morgan”, the largest financial firm at the time, inquiring about the stock market’s current progress. Lamont returned the letter with a long note of strong reassurance, concluding, “The future appears brilliant” (History Channel).
Perhaps it was the overall optimism of this letter, or the statistics of the market, or the gleaming faces of prosperous investors that gave Hoover the confidence needed at the time. Whichever one, it was false and short-lived. On Thursday October 24th, 1929, the Great Stock Market Crash began. With it the country lost it’s confidence in it’s institutions, many of it’s jobs, and the sense of optimism that marked the 1920’s (Simkin). Once the down-spiraling numbers for the day were put up, investors rushed to sell all they had left. They were unsuccessful in their attempts, however, as prices and stock demands were at an all time low (The History Channel). Panic, devastation, and an ensuing nation-wide catastrophe had hit the United States in less than two hours (Galbraith 99). By the time all was said and done, the stock market crash precipitated one of the worst downturns in American history. The total value of American corporations went from approximately $100 billion shortly before the crash to a little over 30 billion by 1936 (McGratten 6).
The Great Stock Market Crash of 1929 was the beginning of an entirely new era of social, economic, and political depression within the United States. Because of the huge number of participants within the stock market, many people of all classes, backgrounds, and jobs were left unemployed and searching for their disappearing money. Nearly 23% of the population faced unemployment, causing the majority of workers to be more accepting of government regulation when it came to jobs and their lives (Simkin). Many new government regulatory institutions sprang up as a result. A Federal Trade Commission was formed to supervise the stock market and enforce the publication of stock prospectuses and of exchange practices (Simkin).
The economic consequences of the Great Crash were many. Following the election of Franklin D. Roosevelt, major changes were made and significant regulations were passed to prevent unscrupulous business practices. The decade of the Great Depression saw the formation of the Securities and Exchange Commission that now oversees the regulation of all stock and bond makets today. During the depression, most of the small investors got out of the market and stayed out of the market for many years to come. This changed the way small investor now invest, with many choosing mutual funds as the investment vehicle of choice for retirement accounts today (Wall Street Crash).
The Great Crash also ushered in a new mind set with regards to the political landscape of the country. Because of the huge impact the stock market proved to have on society, in 1931, the United States Senate Banking and Currency Committee formed the Pecora Commission to officially investiage and study possible causes of the crash (Wall Street Crash). Investment pools, speculation, and margin buying were found to be some of the few main causes by this commission headed by Republican Senator Peter Norbeck. The findings of this commission brought about two very important economic laws, still followed today. The first was the Securities Act of 1933 which prohibited deceit, misrepresentations, and other fraud in the stock market. Second came the Securites Exchange Act of 1934 which regulated financial markets and their participants. The United States Securities and Exchange Commission was formed to legally enforce these two acts (Wall Street Crash).
In conclusion, the stock market crash led the way to the Great Depression of the 1930’s. Although there is no sound method to avoid another stock market crash, the public has come a long way from the unregulated speculation of the 1920’s market. The stock market continues to operate successfully today, but still has substantial risk as a result of speculation and greed on the behalf of investors. Investigations and findings of the causes of the Crash of 1929 have helped all brokers, investors, and even politicians become smarter and more efficient in their practices.