Crediting the 1920s
It's 1920s America and everything is just jazzy. The United States is rising from the rubble of the Great War to be nurtured by widely-held sentiments of isolationism and Laissez-faire economics. It is a rocky transition back to peacetime industry at first, with high unemployment and tense labor conflicts, as the 1919 U.S. sees in the city-wide Seattle General Strike as well as the American Steel Industry strike. Business has the legal upper hand in almost all labor disputes in this Republican Era, but Commerce Secretary Herbert Hoover convinces many industries to increase production along with workers' wages of their own free will for the good of the economy.
The wartime transition is largely settled in 1922 and business is booming as America undergoes a cultural revolution. Real wages are raised over 20% which means people don't have to work as many hours and can enjoy more leisure time, listening to newly purchased radios while chugging a few bootlegged beers in defiance of Prohibition. It's an era of consumerism! There is enormous growth in the housing and automobile markets. Families that a decade earlier could only dream of owning a house or automobile are now parking their Ford Model-Ts outside their new suburban homes, both of which are bought with some form of credit.
It's 1920s America and everything is just jazzy. The United States is rising from the rubble of the Great War to be nurtured by widely-held sentiments of isolationism and Laissez-faire economics. It is a rocky transition back to peacetime industry at first, with high unemployment and tense labor conflicts, as the 1919 U.S. sees in the city-wide Seattle General Strike as well as the American Steel Industry strike. Business has the legal upper hand in almost all labor disputes in this Republican Era, but Commerce Secretary Herbert Hoover convinces many industries to increase production along with workers' wages of their own free will for the good of the economy.
The wartime transition is largely settled in 1922 and business is booming as America undergoes a cultural revolution. Real wages are raised over 20% which means people don't have to work as many hours and can enjoy more leisure time, listening to newly purchased radios while chugging a few bootlegged beers in defiance of Prohibition. It's an era of consumerism! There is enormous growth in the housing and automobile markets. Families that a decade earlier could only dream of owning a house or automobile are now parking their Ford Model-Ts outside their new suburban homes, both of which are bought with some form of credit.
"The man who builds a factory builds a temple, that the man who works there worships there, and to each is due, not scorn and blame, but reverence and praise."
— Calvin Coolidge, U.S. President (1923-1929)
The economy is jolting skyward and shows no signs of stopping anytime soon, and there's no better time to invest than when the market can't go anywhere but up. Americans are confident in the present and optimistic for the future, stirring up an economic recipe for investment. Middle-class Americans see how much money already rich elites are making by investing in the stock market and many decide they also want a piece of the financial-sector pie. Banks make it easy to invest in stocks by allowing on-margin buying for as low as 10% down. For only $100 your broker will make you the proud owner of $1000 worth of stock. The stock market is doing so well that people don't consider it a risk and see stocks for their short-term profitability without having to wait years for their investments to mature.
Quality of life for urban and suburban workers and families is higher than ever before. The exploding housing and automobile industries drive production to all-time highs, and more people than ever own their own home, car, and even stock. The American economy is the bee's knees, and nothing can go wrong.
Quality of life for urban and suburban workers and families is higher than ever before. The exploding housing and automobile industries drive production to all-time highs, and more people than ever own their own home, car, and even stock. The American economy is the bee's knees, and nothing can go wrong.
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As it all Comes Crashing Down
Stocks prices climbed at incredible rates as more people bought into the market, much faster than the actual businesses they reflected were growing. This created a highly speculative market. Stocks were being bought in a way that was simply unsustainable. At the beginning of the decade, people bought stocks for fairly cheap, and since businesses were doing very well with such high consumerism that the stocks--which act as shares that allow individuals to own a small part of a business--increased in value. Sell the stock at a higher price than what you paid for and you make a profit. Easy, right? |
Now the person who bought your stock waits for it to increase in value even more and sells it to someone else for a profit. Even though they bought the same stock for a higher price, they can still make a quick buck off it. As long as the value of the stocks keep increasing, there is still money to be made. But remember, by the mid to late-1920s stock prices were being over-speculated and no longer represented the actual worth of the business. It then became a game of hot-potato. Everyone wanted to buy into the stocks as long as they could find someone to sell to, but no one wanted to be the one stuck with stocks priced so high they couldn't find someone to buy it off them. As Professor Strickland explains in the video, this is called the Minksy Moment. That's when everything starts going downhill.
People had too much faith in Laissez-faire capitalism. It turned out that the market was not as self-regulating as some people had thought. Capitalism by its nature is prone to upturns and downturns, and without regulation, these downturns can be devastating as Americans found out by the end of 1929. On September 4, 1929 the stock market reached a critical high point. Everyone saw this as incentive to buy as many stocks as they could. Banks even took people's deposited funds and invested them in stocks without the fund-holder's knowledge or permission, thinking it would be highly profitable. Even though stock prices were at record highs, the markets they represented had been slowing since the beginning of the year. The steel, housing, and automobile industries had been gradually decreasing production over time as demand lessened because these products were grossly overproduced with the expectation that they would eventually sell. People had already bought their houses and their cars, and there were still many unoccupied houses and excess cars that hadn't purchased that it made no sense to continue fast-paced production.
People had too much faith in Laissez-faire capitalism. It turned out that the market was not as self-regulating as some people had thought. Capitalism by its nature is prone to upturns and downturns, and without regulation, these downturns can be devastating as Americans found out by the end of 1929. On September 4, 1929 the stock market reached a critical high point. Everyone saw this as incentive to buy as many stocks as they could. Banks even took people's deposited funds and invested them in stocks without the fund-holder's knowledge or permission, thinking it would be highly profitable. Even though stock prices were at record highs, the markets they represented had been slowing since the beginning of the year. The steel, housing, and automobile industries had been gradually decreasing production over time as demand lessened because these products were grossly overproduced with the expectation that they would eventually sell. People had already bought their houses and their cars, and there were still many unoccupied houses and excess cars that hadn't purchased that it made no sense to continue fast-paced production.
Everything changed on Thursday, October 24, 1929 which later became known as Black Thursday. Stock prices fell drastically and panic ensued. The day was seemingly saved by a group of bankers who injected a large sum of their combined wealth into the market. Thursday ended on an upturn and people bought stocks in even higher quantities before the business day came to a close. Four days later, on October 28th, the market crashed again and the price of stocks plummeted, this time with no hope of being saved. The very next day was the historically infamous Black Tuesday, and the most devastating day in the history of the stock market. Everyone tried selling all their shares at once, rendering them all little more than worthless. They became a commodity everyone had and no one wanted.
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Banks issued margin calls to reclaim the money they had lent out to be invested in the stock market, but no one had any money to pay the banks back and the stocks and mortgages that had sunk in value didn't come close to covering the debt. The banks themselves were deeply indebted after assuming so much risk from giving out unsafe loans and by investing in stocks themselves. As a result, nearly 4,000 banks failed. All the money people had deposited in them was lost. For many people this meant their entire life savings disappeared overnight. Meanwhile, the stock market continued to drop for more than two years afterward, finally reaching its lowest point on July 8, 1932.
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Autopsy of the Stock Market
More than 80 years after the Black Tuesday, economists still gather in the morgue, trying to pinpoint the Stock Market's cause of death. There was no single cause for the crash, and although the particulars and the degree to which each factor contributed are still contested, it is generally agreed that they all played some role in the market's demise.
Factors Leading to the Market Crash
More than 80 years after the Black Tuesday, economists still gather in the morgue, trying to pinpoint the Stock Market's cause of death. There was no single cause for the crash, and although the particulars and the degree to which each factor contributed are still contested, it is generally agreed that they all played some role in the market's demise.
Factors Leading to the Market Crash
- Overvalued Stocks: The most obvious cause was over-speculation of stock prices because of its direct connection to the market. High P/E ratios made it appear as if business would keep growing, though some analysts claim these ratios accurately reflected the market and justified such expensive stock prices. Regardless, as swarms of investors tried their hand at quick riches, market speculation got out of hand, causing prices to grow rampant far too quickly for the market to manage.
- On-Margin Buying: Loans given out haphazardly for very little down-payment allowed middle-class workers to purchase cars, homes, and even stock on credit. But when the markets dropped, there was no way for them to pay back their debt to the bank. Economists have debated whether stocks bought on-margin contributed significantly to the crash when only 5% of stocks were bought with borrowed money, since the Stock Market was still largely the money-making playground of the rich. Many analysts still insist that it was impossible for the market to stabilize while it was inflated by credit.
- Market Fraud: In the 1920s there was very little regulation of the stock exchange, and laws prohibiting inside trading didn't exist yet. Companies could give false financial reports to investors to make it seem like their business was doing better than it was, and there was no one to hold them accountable. These conditions would make it seem like illegal market activity was rampant but experts suggest that fraud was relatively nominal at the time.
- Strict Federal Reserve Board Policies: As President of Federal Reserve Board, Adolph Miller set strict monetary policies in 1929 to try and combat high stock prices that resulted of over-speculation. Interest rates on loans given out by brokers increased dramatically. These policies were enacted in an attempt to stop excessive bank lending but it was done far too late, which proved counterproductive and led to the speculative bubble popping.
- Poor Banking Practices: It would be false to claim all of America enjoyed the prosper of the golden period of the 1920s. While urban and suburban living improved drastically, rural communities were quite literally left in the dark with 90% not having access to electricity. The Ku Klux Klan regained popularity in the absence of a government to care for them and influence their cultural views. Areas dependent on agriculture began their Depression more than ten years before it hit Wall Street because of the flopped prices for wheat and cotton. Rural banks failed as farms foreclosed, each unable to pay their debts. There were hardly any requirements for starting up a bank so soon hundreds became appearing everywhere. Banks failed just as quickly as new ones sprung up; many invested in stock which turned to tragic ends at the time of the crash.
- The McFadden Act establishes a permanent central bank and allows national banks to work within their state, giving them equal status to state banks. Interstate banking is outlawed while national banks are allowed to buy and sell stock, adding to the debt. It also started the practice of commercial banks being allowed to underwrite their own equity securities, combining commercial and investment banking when the McFadden Act was passed in 1927. Banks became much more self-serving afterward, buying stocks in the general interest of the bank rather than the interest of each individual who saved their money at the bank. The line between saving and speculating was blurred as banks opened up new security affiliates under nearly identical names. National City Company resold doomed Latin American loans from its own bank affiliation and marketed them as new securities. This helped lead to the Glass-Steagall Act of 1933.
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The Stock Market crash did not necessarily cause the Great Depression, but it certainly served as welcome mat to the harsh decade that followed. Historians and economists are still unclear about the exact relationship between the two, but America was already quietly crawling towards depression over a year before the market finally crashed. Some speculate that the crash pushed what would have been a regular recession over the edge into a depression. It was the natural consequence that embraced capitalism so iron-cladly by police action of the Red Scare that the signs foreshadowing the collapse were ignored until the very end. But by the end it was too late and 4,000 banks failed as depositors rushed to withdraw all their money before the banks went under, which only made things worse.
Fast forward four years and preventive measures are taken to ensure such mass failures don't ever reoccur. To those ends, they needed to make sure the market didn't get over-speculated to such a degree again. They achieved this when Congress passed the Glass-Steagall Act, effectively ending the relationship between commercial and investment banking that had created the speculation bubble out of bank greed. Glass-Steagal was legislators' counter to the bank failures of the Depression. It was eventually repealed in 1999 with the Gramm-Leach-Bliley Bill.
However, by the time Gramm-Leach-Bliley came around, many aspects of Glass-Steagall had already been rejected. To learn a bit about how the gradual repeal of Glass-Steagall was responsible for the formation of giant conglomerates that puppeteer our lives through finance in the 21st century, then move on to the next article: From Glass-Seagall to Gramm-Leach-Blilely.
Fast forward four years and preventive measures are taken to ensure such mass failures don't ever reoccur. To those ends, they needed to make sure the market didn't get over-speculated to such a degree again. They achieved this when Congress passed the Glass-Steagall Act, effectively ending the relationship between commercial and investment banking that had created the speculation bubble out of bank greed. Glass-Steagal was legislators' counter to the bank failures of the Depression. It was eventually repealed in 1999 with the Gramm-Leach-Bliley Bill.
However, by the time Gramm-Leach-Bliley came around, many aspects of Glass-Steagall had already been rejected. To learn a bit about how the gradual repeal of Glass-Steagall was responsible for the formation of giant conglomerates that puppeteer our lives through finance in the 21st century, then move on to the next article: From Glass-Seagall to Gramm-Leach-Blilely.