Newspaper headlines emphasizing the money lost due to the Stock Market Crash
The 1929 Stock Market Crash
The stock market came into existence in the 1700s, but it wasn't until the Roaring Twenties that middle class citizens began to see the market as a feasible way to get rich. It was a place where a citizen could buy a share of a company. The buyer simply had to buy stocks and watch as they acquired more worth as the economy improved. In the twenties, it seemed that the nation could do no wrong. It seemed as though every citizen was on his way to achieving the American dream.
Many buyers bought stock based on speculation. Buying on speculation meant that the investor made risky business transactions in the stock market in order to profit from short term fluctuations in the value of stocks. That is, the investor would wait until they saw a positive trend occurring in the market to invest their money in their choice of a stock. With a positive trend being observed, there was a very high chance of the stock increasing in value soon. Then, when the stock did increase in value, the investor would sell the stock for more than what he bought it for, in that way making a profit.
Since many of the people investing in the stock market were middle class citizens, they had no way to pay for the stocks in full when they first bought them. There was a solution, however, and that was buying on margin. When someone bought on margin, they made a deal with a stock broker that they would pay 10-20% of the stock's original price, and borrow the rest of the money from the broker, promising to use the money they got from increasing stocks to pay the broker back.
If the value of the stock decreased below the amount the broker loaned out, the broker would issue margin calls. When an investor got a margin call, they were required to pay off their loan right away.
On Black Thursday, October 24, 1929, many margin calls were sent out as brokers hurried desperately to sell the stocks they possessed. The stock market suffered a crash, but recovered surprisingly quickly. Four days later, however, it crashed again. Soon, nearly everyone who owned stocks began to sell. Stock prices plummeted. Black Tuesday was an infamous day for the stock market. This was the day of the official drop in stock values. Throughout this span of time, there were many reports of suicides, as people watched their life's savings disappear.
Many scrambled to take their money out of banks. However, many banks invested customers' money in the stock market without the owners' knowledge, so when people came to reclaim their money, they found it simply was not there. Thousands lost the means to support themselves. The unemployment rate reached as high as 25% of Americans. The Federal Reserve refused to assist failing banks. Consumers continued to withdraw their money from banks if they could, making the economy even more stationary.
Ben Bernanke, the current Federal Reserve chairman, claims that the Federal Reserve's contractionary policies caused the Great Depression. The Federal Reserve started to raise the Federal Funds Rate in 1928 and continued until the crash of 1929. The higher the Fed Funds Rate, the less money banks will give out to consumers. After the crash, the Fed raised rates again, causing businesses to suffer from the lack of available money. When the Fed Funds rate goes up, mortgages become more expensive. Since people now had higher mortgage costs, they spent less money on other things, which slowed the circulation of money. This caused deflation, where the money was worth more but was harder to come by. The Federal Reserve has the power to put more money into circulation, but at this time, they chose not to. This caused a recession to become the Great Recession.
President Hoover's laissez-faire approach to government regulation was widely blamed for the crash and the Depression. Had Hoover been more present in the economy, things like speculation, margin buying, and the refusal of the Fed. to help might have been regulated and so may not have had the detrimental impact that they did.
Many buyers bought stock based on speculation. Buying on speculation meant that the investor made risky business transactions in the stock market in order to profit from short term fluctuations in the value of stocks. That is, the investor would wait until they saw a positive trend occurring in the market to invest their money in their choice of a stock. With a positive trend being observed, there was a very high chance of the stock increasing in value soon. Then, when the stock did increase in value, the investor would sell the stock for more than what he bought it for, in that way making a profit.
Since many of the people investing in the stock market were middle class citizens, they had no way to pay for the stocks in full when they first bought them. There was a solution, however, and that was buying on margin. When someone bought on margin, they made a deal with a stock broker that they would pay 10-20% of the stock's original price, and borrow the rest of the money from the broker, promising to use the money they got from increasing stocks to pay the broker back.
If the value of the stock decreased below the amount the broker loaned out, the broker would issue margin calls. When an investor got a margin call, they were required to pay off their loan right away.
On Black Thursday, October 24, 1929, many margin calls were sent out as brokers hurried desperately to sell the stocks they possessed. The stock market suffered a crash, but recovered surprisingly quickly. Four days later, however, it crashed again. Soon, nearly everyone who owned stocks began to sell. Stock prices plummeted. Black Tuesday was an infamous day for the stock market. This was the day of the official drop in stock values. Throughout this span of time, there were many reports of suicides, as people watched their life's savings disappear.
Many scrambled to take their money out of banks. However, many banks invested customers' money in the stock market without the owners' knowledge, so when people came to reclaim their money, they found it simply was not there. Thousands lost the means to support themselves. The unemployment rate reached as high as 25% of Americans. The Federal Reserve refused to assist failing banks. Consumers continued to withdraw their money from banks if they could, making the economy even more stationary.
Ben Bernanke, the current Federal Reserve chairman, claims that the Federal Reserve's contractionary policies caused the Great Depression. The Federal Reserve started to raise the Federal Funds Rate in 1928 and continued until the crash of 1929. The higher the Fed Funds Rate, the less money banks will give out to consumers. After the crash, the Fed raised rates again, causing businesses to suffer from the lack of available money. When the Fed Funds rate goes up, mortgages become more expensive. Since people now had higher mortgage costs, they spent less money on other things, which slowed the circulation of money. This caused deflation, where the money was worth more but was harder to come by. The Federal Reserve has the power to put more money into circulation, but at this time, they chose not to. This caused a recession to become the Great Recession.
President Hoover's laissez-faire approach to government regulation was widely blamed for the crash and the Depression. Had Hoover been more present in the economy, things like speculation, margin buying, and the refusal of the Fed. to help might have been regulated and so may not have had the detrimental impact that they did.