Economics: The Stock Market Crash of 1929
Can we learn from our past?
America’s Stock Market Crash of 1929 was a powerful market crash that started in October of 1929 after the Roaring Twenties economic “bubble boom” finally popped.
America experienced an era of great peace and prosperity
during the 1920s. After World War I, the so-called “Roaring Twenties”
economic and cultural boom was fueled by industrialization and the
popularization of new technologies such as radio and the automobile. Air
flight was becoming common as well.
The
Dow stock average soared throughout the Roaring Twenties and many
investors aggressively purchased shares, comforted by the fact that
stocks were thought to be extremely safe by most economists due to the
country’s powerful economic boom. Investors soon purchased stocks on
margin, which is the borrowing of stock for the purpose of gaining
financial leverage. For every dollar invested, a margin user would
borrow nine dollars worth of stock. The use of leverage meant that if a
stock went up 1%, the investor would make 10%. Unfortunately, leverage
also works the other way around and amplifies even minor losses. If a
stock drops too much, a margin holder could lose all of their investment
and possibly owe money to their broker as well.
From 1921 to 1929, the Dow Jones rocketed from 60 to 400,
creating many new millionaires. Very soon, stock trading became
America’s favorite pastime as investors jockeyed to make a quick
killing. Investors mortgaged their homes and foolishly invested their
life savings into hot stocks such as Ford and RCA. To the average
investor, stocks were practically a sure thing. Few people actually
studied the finances and underlying businesses of the companies that
they invested in. Thousands of fraudulent companies were formed to
hoodwink unsavvy investors. Most investors never even thought a crash
was possible – in their minds, the stock market “always went up.”
In 1929, the Federal Reserve raised interest rates
several times in an attempt to cool the overheated economy and stock
market. By October, a powerful bear market had commenced. On Thursday,
October 24th 1929, a spate of panic selling occurred as
investors
began to realize that the stock boom was actually an over-inflated
speculative bubble. Margin investors were being decimated as large
numbers of stock investors tried to liquidate their shares to no avail.
Millionaire margin investors went bankrupt almost instantly when the
stock market crashed on October 28th and 29th. During November of 1929,
the Dow sank from 400 to 145. In just three days, over $5 billion worth
of market capitalization had been erased from stocks that were trading
on the New York Stock Exchange. By the end of the 1929 stock market
crash, a staggering $16 billion worth of market capitalization had been
lost from NYSE stocks.
To make matters worse, many banks had invested their
deposits in the stock market, causing these banks to lose their
depositors’ savings as stocks plunged. Bank runs soon occurred when bank
patrons tried to withdraw their savings from banks all at the same
time. Major banks and brokerage firms became insolvent, adding more fuel
to the stock market crash. The financial system was in
shambles. Many
bankrupt speculators, some who were
once very affluent, committed suicide by jumping out of buildings. Even
bank patrons who had not invested in shares became broke as $140
billion of depositor money disappeared and 10,000 banks failed.
The 1929 stock market crash was beneficial for some
speculators, however. Jesse Livermore correctly predicted the crash and
shorted stocks to profit from the decline, earning him over 100 million
dollars. Joseph Kennedy, President John F. Kennedy’s father, sold his
stocks before the 1929 stock market crash and kept millions of dollars
of profit. Kennedy decided to sell his stocks because he overheard
shoeshine boys and other novices speculating on stocks, leading him to
believe that the stock market had been experiencing a speculative
bubble.
The
stock market crash of 1929 led to a major economic crisis known as the
Great Depression. The Depression lasted from approximately October 1929
until the late-1930’s. Mass poverty became common and many workers lost
their jobs and were forced to live in shanty towns. Former millionaire
businessmen were reduced to selling apples and pencils on street
corners. One-third of Americans were living below the poverty line
during the Great Depression. The Dow Jones finally surpassed its 1929
high, a full 26 years later in 1955.
The Roaring Twenties and the stock market crash of 1929 was similar
to any other speculative bubble and subsequent crash. The classic
pattern of extreme euphoria and irrational expectations will always lead
to devastating financial crashes.Other Stock Market Crash of 1929 Resources: The 1929 Stock Market Crash (On Stock-Market-Crash.net)
Stock Market Crash of 1929 – 20th Century History – About.com
The 1929 Stock Market Crash
Wikipedia: Roaring Twenties
Wikipedia: Great Depression
The Great Depression – About.com
