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STOCK MARKET CRASH OF 1929.
Term Paper ID:21475
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Essay Subject:
National & global causes, WWI, Federal reserve, banks, leaders, post-crash reforms.... More...
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6 Pages / 1350 Words
5 sources, 15 Citations,
MLA Format
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Paper Abstract:
National & global causes, WWI, Federal reserve, banks, leaders, post-crash reforms.
Paper Introduction:
During the 1920s, the stock market became the focus of popular interest. Along with Prohibition and baseball, it was the subject of conversation at private meetings throughout the nation. To many, it seemed a perfect reflection of a new industrial America--especially to investors who spent much of their spare time following the market and who were able to buy stock on margin, or credit, for as little as 10 percent in cash. About one-third of the nation's more than three million stockholders were playing the market on margin, and people at dinner parties kept telling stories about average working class people who had kept a close watch on the market, bought on margin, and became millionaires (Friedrich 54).
To others in the country, the stock market was a symbol of the dangerous frivolity of the time. Neither was true. Instead,
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Brokers were obliged to accept a code ofconduct which was promulgated in the spring of 193 . One of them was the devaluation of the British pound sterling, andthe problems the British had in maintaining their status as bankingleaders. New York: W.W. Instead, the greatbull market, the increased public interest, and the use of credit andleverage, appeared to fit the people's demands for a larger share in theprogress made during the decade. It should be remembered, however, that allof this can be seen only in retrospect. The 1929crash changed all this. Andrew Mellon was called the greatest Secretary of theTreasury since Hamilton--until 193 . "A Tale of Two Crashes." Forbes, 2 Mar. The Great Crash was preceded by stock prices plunging followingmonths of frenzied purchases. World War I was tremendously costly and destructive, and afterwardthe voters in most European countries refused to accept that it had leftthem too poor to return quickly to their prewar standard of living. The run on sterling forced Britain to gooff gold and let the pound sink--but also to go out of the internationalbailout business. Before the first world war,people, businesses, and governments borrowed mainly to finance theproductive facilities that provided their own means of repayment througheconomic growth. Both countries forestalledruns on their banks by freezing foreign assets. What many people did not notice before the crash was that while theleading stocks kept climbing, many others did not. The devaluation of theBritish pound was the last straw that turned the slump of 1929-1931 intothe Great Depression (Bladen 357). In May of that year, a run on the AustrianKredit-Anstaltbank, which had weakened itself by taking over otherinsolvent banks, forced the creditors of both countries to face the factthat neither one could repay its foreign debts. The list of lost opportunities and mistakes of the period could beextended almost indefinitely. In conclusion, the stock market crash of 1929 was the result of manycauses. By September Britain's foreign creditors realized that Britain nolonger could get its deposits out of Central Europe and wondered if theycould get theirs out of London. During the 192 s, the stock market became the focus of popularinterest. Before the war, Great Britain had been the richest country in theworld, and its people saved considerably more than could be profitablyinvested at home. Benjamin Strong remains one of thegreat central bankers in American history--although his reputation mighthave suffered had he not died in 1928. Neither was true. Norton & CompanyInc., 1968.----------------------- 6 That there were abuses and distortionscannot be denied, but neither can one conclude that the bull market shouldnot have taken place, or that investor enthusiasm was unjustified (Sobel155). Leadership now would have to come from anotherquarter--the government. Calvin Coolidge was guilty of manyerrors of omission, but a too-often maligned Herbert Hoover receives muchof the blame for the events of 1929-1932. From their beginnings, the securities markets had been self-regulating. Moreover, the voters in countries that had gained markets whenEurope stopped working and started fighting refused to give them up whenthe fighting stopped. The huge buying of stock on margin was another cause. Sotheir governments borrowed and spent for the new purpose of maintainingincomes. For example, by 1931, 4 percent of the bank deposits inGermany were foreign-owned. If George Harrison's brave and intelligent use of Federal Reserveresources had been followed by effective action from the Exchange Board ofGovernors and Washington, then the panic might not have been followed bythe Depression (Sobel 156). Others arguethat the stock crash was essentially a market correction and simplysignaled the start of a recession (Friedrich 55). Works CitedBladen, Ashby. Nobody can say with certainty what caused those twin catastrophes,or who was to blame, and so theoreticians have accused greedy speculators,Wall Street manipulators, gold merchants, and other scapegoats. If the bankers' consortium had beenstronger and more persistent, then the panic might have been stopped in1929. Later in the year,the Exchange spearheaded a drive to rid the district of incompetent anddishonest customers' men. Many analysts state that there were a host of lost opportunities thatif they had been taken would have averted the crash. "Unpleasant Analogies." Forbes, 25 April 1988: 357.Dreman, David. The pound was also the world's strongest and most stablecurrency, so people all over the world deposited their savings in Londonbanks, which then invested domestic and foreign savings in the developingworld. For example, if theFederal Reserve had been less timid in the early part of the decade, manyabuses in the call money market might have been avoided. As Wall Street came to recognize its problems and shortcomings,attempts were made to reform. Thoseexperts who contend that the crash did bring on the Depression blame theFederal Reserve for reacting to the collapse by allowing the money supplyto diminish, thereby stifling consumption and investment. Thespeculators also did not seem to notice that the allegedly sound economyhad started slowing. The pound depreciated, but in1925, Chancellor of the Exchequer Winston Churchill tried to restoreBritain's role as the world's banker by putting the pound back on gold atthe prewar parity, despite the fact that inflation had left it worthconsiderably less than that (Bladen 357). From then on countries that could not meet their debtservice charges simply defaulted, and the slump turned into a decade ofdeflation and depression (Bladen 357). If Strong had not placed so high a priority on aiding the poundsterling, then raises in the rediscount rate might have curbed the public'sappetite for margin purchases. So their governments borrowed to finance commodityprice stabilization pools and other schemes to maintain the production ofunsalable goods for the account and risk of the taxpayers (Bladen 357). Celanese, for example,had dropped from 118 to 66 since 1927, Philip Morris from 41 to 12. 1987:54-55.Penmar, Karen. Ingeneral, however, the Exchange and the Wall Street community did little toreform themselves (Sobel 157). Many analysts believe the real cause of the Great Crash and theDepression was an excessive burden of debt. It took the market 25 years to recover from the Great Crash ofOctober 29, 1929, when it dropped an unprecedented 12% in a single day(Dreman 214). The poorcondition of the economy, the questionable business practices of theExchange and its practitioners, and the lack of vision of the FederalReserve and the government also contributed to the crash. However since then, they borrowed for more dubiousreasons (Bladen 357). However, they rebounded in 193 (Pennar 57). Whether thecrash caused the Depression or merely presaged it, is still a topic ofdebate. By October of 1929, the Federal Reserve index ofindustrial production had dropped from 126 to 117 since June of that year.Home building had been declining for several years, and farming had been introuble since the early 192 s (Friedrich 55). The leading figures of the periodmay have been foolish and short-sighted, but for the most part they werenot stupid. Along with Prohibition and baseball, it was the subject ofconversation at private meetings throughout the nation. 1989: 214.Friedrich, Otto. If Charles Mitchell had not declaredhis independence of the Federal Reserve or had been checked by BenjaminStrong or Roy Young, the great rise and fall of 1928-1929 might have beenavoided. Conditions might have beendifferent had Hoover been elected president in 1924 instead of 1928, andhad Harrison been in charge of the New York Federal Reserve Bank a fewyears earlier than 1928 (Sobel 156-157). To others in the country, the stock market was a symbol of thedangerous frivolity of the time. To many, it seemeda perfect reflection of a new industrial America--especially to investorswho spent much of their spare time following the market and who were ableto buy stock on margin, or credit, for as little as 1 percent in cash.About one-third of the nation's more than three million stockholders wereplaying the market on margin, and people at dinner parties kept tellingstories about average working class people who had kept a close watch onthe market, bought on margin, and became millionaires (Friedrich 54). "Once Upon a Time in October..." Time, 2 Nov. The Great Bull Market. As 1929 came to a close, President Hoover promised a tax cut,recommended public works, called a series of conferences with businessleaders, and declared that the country had now re-established confidence(Friedrich 55). Of course, his prediction did not come true. If labor and thefarmer had received higher wages and returns for their products, then theeconomy would have been stronger, and better able to cope with recessions.If businessmen had not become convinced that credit was the only way toprosper, and the consumer was made to see that credit could be harmful tothem, it might not have been abused. If Andrew Mellowhad been less concerned with correcting what he considered evil laws andpolicies of the Progressive era, and had a better knowledge of economicsand less of a dedication to the business community's short-range goals, hemight have proposed different types of tax reforms. However, the war forced Britain to go off gold, to sell itsoverseas investments, and to borrow abroad. Although Washington and Albany had placed restrictions on someaspects of the market, but for the most part, these were ignored,manipulated, or actually written by district leaders themselves. During the 192 s, Germany and Austria tried to maintain theirdomestic standards of living by borrowing heavily abroad, largely fromGreat Britain. Several securities were delisted forirregularities, among them Brockway Motors and Allied Chemical & Dye. In 1929, the economy and corporate earning power weredisintegrating in the face of the rapidly approaching Great Depression.The dollar and the British pound sterling was weak. "It's Almost As If It Never Happened--Almost."Business Week, 18 April 1988: 56-59.Sobel, Robert.
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