Speculation And The Resulting Stock Market Crashes example essay topic

... xis ted for the automotive and radio industries to take off. Second, due to federal government's easing of credit, money was available to invest in these industries. Thanks to pressure from President Coolidge and the business world, the Federal Reserve Board kept the rediscount rate low. The federal government favored the new industries as opposed to agriculture.

During World War I the federal government had subsidized farms, and payed absurdly high prices for wheat and other grains. The federal government had encouraged farmers to buy more land, to modernize their methods with the latest in farm technology, and to produce more food. This made sense during that war when war-ravaged Europe had to be fed too. However as soon as the war ended, the U.S. abruptly stopped its policies to help farmers. During the war the United States government had paid an unheard of $2 a bushel for wheat, but by 1920 wheat prices had fallen to as low as 67 cents a bushel 29. Farmers fell into debt; farm prices and food prices tumbled.

Although modest attempts to help farmers were made in 1923 with the Agricultural Credits Act, farmers were generally left out in the cold by the government. The problem with such heavy concentrations of wealth and such massive dependence upon essentially two industries is similar to the problem with few people having too much wealth. The economy is reliant upon those industries to expand and grow and invest in order to prosper. If those two industries, the automotive and radio industries, were to slow down or stop, so would the entire economy. While the economy did prosper greatly in the 1920's, because this prosperity wasn't balanced between different industries, when those industries that had all the wealth concentrated in them slowed down, the whole economy did. The fundamental problem with the automobile and radio industries was that they could not expand ad infinitum for the simple reason that people could and would buy only so many cars and radios.

When the automotive and radio industries went down all their dependents, essentially all of American industry, fell. Because it had been ignored, agriculture, which was still a fairly large segment of the economy, was already in ruin when American industry fell. A last major instability of the American economy had to do with large-scale international wealth distribution problems. While America was prospering in the 1920's, European nations were struggling to rebuild themselves after the damage of war. During World War I the U.S. government lent its European allies $7 billion, and then another $3.3 billion by 192030. By the Dawes Plan of 1924 the U.S. started lending to Axis Germany.

American foreign lending continued in the 1920's climbing to $900 million in 1924, and $1.25 billion in 1927 and 192831. Of these funds, more than 90% were used by the European allies to purchase U.S. goods 32. The nations the U.S. had lent money to (Britain, Italy, France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to pay off the debts. Their gold had flowed into the U.S. during and immediately after the war in great quantity; they couldn't send more gold without completely ruining their currencies.

Historian John D. Hicks describes the Allied attitude towards U.S. loan repayment: In their view the war was fought for a common objective, and the victory was as essential for the safety of the United States as for their own. The United States had entered the struggle late, and had poured forth no such contribution in lives and losses as the Allies had made. It had paid in dollars, not in death and destruction, and now it wanted its dollars back. 33 There were several causes to this awkward distribution of wealth between U.S. and its European counterparts. Most obvious is that fact that World War I had devastated European business. Factories, homes, and farms had been destroyed in the war.

It would take time and money to recuperate. Equally important to causing the disparate distribution of wealth was tariff policy of the United States. The United States had traditionally placed tariffs on imports from foreign countries in order to protect American business. However these tariffs reached an all-time high in the 1920's and early 1930's. Starting with the Ford ney-Mc Cumber Act of 1922 and ending with the Hawley-Smoot Tariff of 1930, the United States increased many tariffs by 100% or more 34.

The effect of these tariffs was that Europeans were unable to sell their own goods in the United States in reasonable quantities. In the 1920's the United States was trying 'to be the world's banker, food producer, and manufacturer, but to buy as little as possible from the world in return. ' 35 This attempt to have a constantly favorable trade balance could not succeed for long. The United States maintained high trade barriers so as to protect American business, but if the United States would not buy from our European counterparts, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans. The weakness of the international economy certainly contributed to the Great Depression. Europe was reliant upon U.S. loans to buy U.S. goods, and the U.S. needed Europe to buy these goods to prosper.

By 1929 10% of American gross national product went into exports 36. When the foreign countries became no longer able to buy U.S. goods, U.S. exports fell 30% immediately. That $1.5 billion of foreign sales lost between 1929 to 1933 was fully one eighth of all lost American sales in the early years of the depression 37. Mass speculation went on throughout the late 1920's. In 1929 alone, a record volume of 1,124,800,410 shares were traded on the New York Stock Exchange 38. From early 1928 to September 1929 the Dow Jones Industrial Average rose from 191 to 38139.

This sort of profit was irresistible to investors. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. One such example is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend 40. Even these returns of over 100% were no measure of the possibility for investors of the time.

Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin functioned much the same way as buying a car on credit. Using the example of RCA, a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker).

That makes a return of over 3400%! Investors' craze over the proposition of profits like this drove the market to absurdly high levels. By mid 1929 the total of outstanding brokers' loans was over $7 billion 41; in the next three months that number would reach $8.5 billion 42. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 192943. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear.

Prices had been drifting downward since September 3, but generally people where optimistic. Speculators continued to flock to the market. Then, on Monday October 21 prices started to fall quickly. The volume was so great that the ticker fell behind 44. Investors became fearful. Knowing that prices were falling, but not by how much, they started selling quickly.

This caused the collapse to happen faster. Prices stabilized a little on Tuesday and Wednesday, but then on Black Thursday, October 24, everything fell apart again. By this time most major investors had lost confidence in the market. Once enough investors had decided the boom was over, it was over. Partial recovery was achieved on Friday and Saturday when a group of leading bankers stepped in to try to stop the crash. But then on Monday the 28th prices started dropping again.

By the end of the day the market had fallen 13%45. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands 46. Stocks fell so much, that at many times during the day no buyers were available at any price 47. This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the mal distribution of wealth, the economy of the 1920's was one very much dependent upon confidence. The market crashes undermined this confidence.

The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest. As a result industrial production fell by more than 9% between the market crashes in October and December 192948. As a result jobs were lost, and soon people starting defaulting on their interest payment. Radios and cars bought with installment credit had to be returned. All of the sudden warehouses were piling up with inventory.

The thriving industries that had been connected with the automobile and radio industries started falling apart. Without a car people did not need fuel or tires; without a radio people had less need for electricity. On the international scene, the rich had practically stopped lending money to foreign countries. With such tremendous profits to be made in the stock market nobody wanted to make low interest loans. To protect the nation's businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930).

Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 193249. The country spiraled quickly into catastrophe. The Great Depression had begun.

Bibliography

1. John D. Hicks, Republican Ascendancy: 1921-1933 (New York: Harper & Row, 1960) 110.
2. Robert S. McElvaine, The Great Depression: America 1929-1941 (New York: Times Books, 1981) 38.
3. McElvaine, 38.4. American Decades: 1920-1929, 82.
5. McElvaine, 21.6. 'Average Hours and Earnings of Production Workers, 1964-1991,' The World Almanac, 1993 ed.
155.7. McElvaine, 38.8. McElvaine, 39.9. McElvaine, 39.10. McElvaine, 39.11. American Decades: 1920-1929, 80.
12. Hicks, 106.13. American Decades: 1920-1929, 78.
14. McElvaine, 50.15. McElvaine, 331.16. McElvaine, 41.17. McElvaine, 41.18. McElvaine, 41.19. McElvaine, 37.20. American Decades: 1920-1929, 76-77.
21. McElvaine, 21.22. Hicks, 114.23. Hicks, 114.24. American Decades: 1920-1929, 77.
25. American Decades: 1920-1929, 77.
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