PAPER PRESENTATION ON STOCK MARKET CRASH AND THE GREAT DEPRESSION
2 INRODUCTION Market crash. Just the sound of the phrase makes most people shudder. But what exactly is a crash, and why do they occur? The answer lies within human psychology. People love bull markets. Bull markets have the uncanny ability to change the collective attitude of society. Eventually the euphoria changes into downright pessimism as the inevitable market crash occurs. Later on, the cycle repeats itself. In order to fully understand these events, we must learn about behavioral finance. In financial markets, the majority is always wrong. When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market. If it were possible for everyone to win in the markets, this would mean that money is being created from nothing. The creation of money, in this manner, is impossible. Therefore the markets are a zero-sum game. Zero-sum means that for every winner, there is a loser. The winner takes the losers money. Zero-sum games are games where the amount of winnable goods is fixed. CYCLE OF THE MARKET. The START of a BULL MARKET The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the smart money, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise. Rising stocks eventually gain the respect of mutual funds, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by mutual funds and other institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however. As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their
3 brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPOs generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market. At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as accounting fraud where companies over inflate their values. Other times companies make unrealistic promises, such as dot com stocks without any earnings. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. The START of a BEAR MARKET After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other abuses come to light. When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isnt anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors dont sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation. The CYCLE STARTS AGAIN It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the dumb money. They are perpetually late into the game. This cycle continues over and over. Only the smart investors actually buys low and sells high. Why BULL and BEAR as market symbols?
For those who don't spend a lot of time on Wall Street, bulls and bears refer to opposite trends in the stock market. According to Investor Words, a bull market is a prolonged period in which investment prices rise faster than their historical average. Conversely, a bear market means a prolonged period in which investment prices fall, accompanied by widespread pessimism. So, bulls good, bears bad...No one's quite sure how the two animals came to symbolize the market, but there are a few theories floating around. According to Motley Fool, a bear market earned its name because bears tend to swat at things with their paws in a downward motion (as in the market's going down). A bull market, on the other hand, got its name because bulls swing their horns upward when they strike (as in the market's going up).Another theory proposes that the animals' personalities are behind the symbolism. Bears move with caution, while bulls are bold and like to charge ahead. So a bearish investor thinks the market will go down, while a bullish investor thinks it's headed up. Certainly no one can argue that both animals are intimidating and best avoided. Maybe they're meant to serve as a warning to investors Unless you know what you're doing, you could be headed for pain What happens in a STOCK MARKET CRASH? Many would-be investors simply refuse to enter the stock market, because of the risks involved. When asked what they fear most, most respond by saying that they fear a stock market crash. They may even refer to the stock market crash of 1987 - or even to the 192stock market crash - when justifying their lack of interest in the market. While it is true that crashes can happen, understanding what causes a crash and what the effects are can help set your mind at ease and can help you understand more about investing A stock market, strangely, really begins to crash years before the actual market downturn. When the market is peaking and investors are buying and making profits, the market is commonly known as a bull market. However, as many economists point out, strong economic times are often followed by bad times. Whenever the stock market surges and profits are good, economic downturn eventually happens. Sometimes, stock markets crash because of a specific economic or political situation. For example, in 2002, the famous Enron scandal shook investor confidence and caused a downturn in the market. More often, however, crashes are caused by nothing more than panic. What we say that a market crashes, what we mean is that the value of stocks drops dramatically across the board. Rather than just one corporation being affected, the stocks of many or all corporations fall dramatically. This, in turn, causes investor panic and many people rush to sell their stocks. The more people try to sell their stocks lower stock value falls, making the problem worse
5 Who is involved in a stock market crash? Many people are involved in a stock market downturn. At the base level, it is shareholders or those who own stocks who are most involved. In many cases, it is investors themselves can contribute to a crash. Investors may borrow money to buy stocks or may invest in stocks without thoroughly understanding the stock market. Investors who are not disciplined and who do not understand the market may be among the first panic and try to sell their stock, pushing a temporary downturn into an actual crash. More significantly, however, investors are often part of speculation. This means that they buy stock in the hopes that it will increase in profit. When some sort of economic news seems to suggest that they will lose money, again, they often rush to sell their stock, driving stock prices down. Companies selling stock are also involved in the stock market crash. As their stock values drop, many companies will tighten their belts and reduce spending. Often, this can lead to job cuts and other types of cutbacks which can affect the economy overall and can reduce customer and investor confidence. Investments and finance professionals also involved in a crash. They're the ones that not only report the incidents to the media and explain it to reporters, but they are also the ones that people often turn to when their stocks fall. Who is affected by a crash? In short, everyone is affected by a crash. When the stock market takes a downturn, job loss, slow GDP growth, slow economic growth, and devastated consumer confidence are often the results. Investors and companies are making less money, companies are closing, and therefore people are buying less. This affects virtually every aspect of the economy and causes overall economic depression. Since the crash often follows a bull market, many people are panicked by the sudden economic downturn and may become even more cautious with their money, which can further hinder financial growth. FACTORS affecting the stock market Like any other commodity, in the stock market, share prices are also dependent on so many factors. So, it is hard to point out just one or two factors that affect the price of the stocks. There are still some factors that are that directly influence the share prices. Demand and Supply This fundamental rule of economics holds good for the equity market as well. The price is directly affected by the trend of stock market trading. When more people are buying a certain stock, the price of that stock increases and when more people are selling he stock, the price of that particular stock falls. Now it is difficult to predict the trend of the market but your stock broker can give you fair idea of the ongoing trend of the market but be careful before you blindly follow the advice.
6 News is undoubtedly a huge factor when it comes to stock price. Positive news about a company can increase buying interest in the market while a negative press release can ruin the prospect of a stock. Having said that, you must always remember that often times, despite amazingly good news, a stock can show least movement. It is the overall performance of the company that matters more than news. It is always wise to take a wait and watch policy in a volatile market or when there is mixed reaction about a particular stock. Market Cap If you are trying to guess the worth of a company from the price of the stock, you are making a huge mistake. It is the market capitalization of the company, rather than the stock, that is more important when it comes to determining the worth of the company. You need to multiply the stock price with the total number of outstanding blank stocks in the market to get the market cap of a company and that is the worth of the company. Earning Per Share Earning per share is the profit that the company made per share on the last quarter. It is mandatory for every public company to publish the quarterly report that states the earning per share of the company. This is perhaps the most important factor for deciding the health of any company and they influence the buying tendency in the market resulting in the increase in the price of that particular stock. So, if you want to make a profitable investment, you need to keep watch on the quarterly reports that the companies and scrutinize the possibilities before buying stocks of particular stock. Price/Earning Ratio - Price/Earning ratio or the P/E ratio gives you fair idea of how a company's share price compares to its earnings. If the price of the share is too much lower than the earning of the company, the stock is undervalued and it has the potential to rise in the near future. On the other hand, if the price is way too much higher than the actual earning of the company and then the stock is said to overvalued and the price can fall at any point. Before we conclude this discussion on share prices, let me remind you that there are so many other reasons behind the fall or rise of the share price. Especially there are stock specific factors that also play its part in the price of the stock. So, it is always important that you do your research well and stock trading on the basis of your research and information that you get from your broker. To get benefit from the effective consultancy service it is therefore always better from professional stock trading companies rather than getting lured by discount brokerage advertisements that you must be coming across everyday
Can Crashes be Forecasted? One of the greatest myths of all time is that market crashes are random, unpredictable events. The lead up to a market crash is often years in the making. Certain warning signs exist, which characterize the end of a bull market and the start of a bear market. By learning these common warning signs, you can liquidate your investments and prosper by shorting the market.
7 The stock market is a study in human psychology as it is human emotion that drives all market action. A healthy human mindset is cautious and skeptical, but also realistically optimistic. Throughout the early stages of a bull market, investors tend to be cautious and skeptical, as well. This caution always signifies the health of a bull market. Nearing the end of a bull market, the market psychology becomes manic, or excessively euphoric. Being manic is a form of mental illness in humans, as well. This is characterized by euphoria that isn’t rational. For example, a manic person may feel so wonderful that they may not sleep for days or give away their life savings. Later on, the mentally ill person is no longer manic, they are depressed. The stock market follows same exact manic-depressive pattern. This realization of the market being manic-depressive was by the brilliant Benjamin Graham. Benjamin Graham was the mentor of the greatest investor of all time and second richest man in the world, Warren Buffet. At the top of a bull market, words cant describe how euphoric investors are. It is very common for investors of very modest means to now have portfolios valued in the hundreds of thousands of dollars. In the Dot Com Bubble, many secretaries had multimillion dollar stock option portfolios This type of instant wealth isn’t reality, unfortunately. It is one of the prime characteristics of a coming stock market crash. In every stock bubble, people of average means become fantastically wealthy, all while barely trying. Another major sign of a coming stock market crash is overly euphoric news media. The news media has an extremely poor track record at forecasting markets. Their record is so horrible, that doing the direct opposite is highly profitable If financial newspapers have headlines that are exalting the recent stock market performance, SELL- as fast as you can The most deadly phrase in the market is this time is different Another costly adage is we are in a New Economy Both these phrases and their variations have been around since the dawn of markets. The markets never change, because human psychology never changes. When phrases like these are used, its because the user is in denial of reality. In these cases, it is the dumb money investors who want to keep riding the bull market in the same lazy fashion. The professional smart money realize that bull markets are always temporary. The smart money will profit in both a bull market and a stock market crash. At the precipice of financial disaster, inflation becomes rampant. Inflation is the rising cost of living, which decreases the buying power of a dollar. The rising cost of living can be observed by much higher gasoline prices, housing prices and food prices. Ironically, it is the strong economy that causes inflation. In simple terms, the strong economy causes more demand for goods and transportation. When salaries go up, people take more vacations, which require gasoline, etc. Small inflation is a good sign, but when it really heats up, look out below Once high inflation sets in, the Federal Reserve tries to cool down the economy. The Fed tries to engineer a soft landing by raising interest rates. If inflation and stock speculation is out of hand, rates will have to climb fairly high to have an effect. Pretty soon, the stock market crashes as speculators head for the exits. The overvalued stocks quickly become a fraction of their previous values. The
8 market will often crash for several years to come. Stock market crashes are not difficult to forecast, as they all have the same telltale signs. If you are astute enough to recognize these signs, prospering from a crash is a realistic proposition.
10 WORST STOCK MARKET CRASHES
If you thought the 2000-2002 crash was painful, think again It barely made the list of the ten worst markets crashes in U.S. history. I sifted through Dow Jones Industrial Average (DJIA) market data going back to 190(unfortunately I can't go this far back with S&P 50data) and compiled a list of the 1worst stock market crashes. To make this list, the market (as represented by the Dow) had to be down over 37 percent from high to low One interesting note before we get to the list, is that most market crashes are long (lasting over a year) and 6 out of the top 11 crashes started in either September or November. 10th Worst Stock Market Crash 2000 - 2002 Stock Market Crash This crash required the longest recovery time of all crashes in this list. The combination of the tech bubble bursting and the September 11th terrorist attack served a deadly blow to the stock market, but relative to markets past, this was a minor one. Date Started: 1/15/2000 Date Ended: 10/9/2002 Total Days: 999 Starting DJIA: 11,792.98 Ending DJIA: 7,286.27 Total Loss: -37.8% 9th Worst Stock Market Crash 1916 - 1917 Stock Market Crash If the 1930s sounded like a long time ago, well to find the 9th worst market crash, I had to go back to the WWI era. As you will see, this market suffered about a 40% loss. It's difficult to break even after a 40% loss. On a $1,00investment, your portfolio went down to $600. To get back to $1,000, it would have to go up 66.7%! Date Started: 11/21/1916 Date Ended: 12/19/1917 Total Days: 393 Starting DJIA: 110.15
9 Ending DJIA: 65.95 Total Loss: -40.1% 8th Worst Stock Market Crash 1939 - 1942 Stock Market Crash Although this stock market crash only took the 8th spot, it was one of the most grueling. It took nearly 3 years to recover from this crash With WWII and the attack on Pearl Harbor, the markets had a very tough time. Date Started: 9/12/1939 Date Ended: 4/28/1942 Total Days: 959 Starting DJIA: 155.92 Ending DJIA: 92.92 Total Loss: -40.4% 7th Worst Stock Market Crash 1973 - 1974 Stock Market Crash Another long market crash -one that many people still remember (think Vietnam and the Watergate scandal). This crash lasted for 694 days before bottoming out. Date Started: 1/11/1973 Date Ended: 12/06/1974 Total Days: 694 Starting DJIA: 1051.70 Ending DJIA: 577.60 Total Loss: -45.1% 6th Worst Stock Market Crash 1901 - 1903 Stock Market Crash This is the oldest crash to make the list (DJIA records are not available before 1900). To give you a perspective of what things were like during this time, take a look at these facts: Life expectancy in the U.S. was 47 Only 14% of homes had a bathtub Maximum speed limit in most cities was 10mph Average wage was 22 cents and hour - avg salary/year was about $30 More than 95% of all births took place at home Only 6% of the population had graduated from High School The #1 cause of death was Pneumonia and Influenza The American flag had 45 stars Date Started: 6/17/1901
10 Date Ended: 11/9/1903 Total Days: 875 Starting DJIA: 57.33 Ending DJIA: 30.88 Total Loss: -46.1% The 5th Worst Stock Market Crash 1919 - 1921 Stock Market Crash This crash followed a post war boom (Stock prices rose 51%). After the crash bottomed out in August of 1921, this decade saw tremendous growth in the stock market and the economy (often called the roaring twenties). Date Started: 11/3/1919 Date Ended: 8/24/1921 Total Days: 660 Starting DJIA: 119.62 Ending DJIA: 63.9 Total Loss: -46.6% The 4th Worst Stock Market Crash 1929 Stock Market Crash Although this is the shortest market crash observed, it was a deadly one. Investors saw almost half their money disappear in just two months. Often this crash is the worst in most people's minds. This crash kicked off what we now know as the Great Depression. You can read more about this crash by visiting my This crash kicked off what we now know as the Great Depression. Date Started: 9/3/1929 Date Ended: 11/13/1929 Total Days: 71 Starting DJIA: 381.17 Ending DJIA: 198.69 Total Loss: -47.9%
3rd Worst Stock Market Crash 1906 - 1907 Stock Market Crash This crash was called the Panic of 1907.The U.S. Treasury department bought 36 million dollars worth of government bonds to offset the decline (and remember, $36 million translates to a much bigger number in today's dollars).
11 Date Started: 1/19/1906 Date Ended: 11/15/1907 Total Days: 665 Starting DJIA: 75.45 Ending DJIA: 38.83 Total Loss: -48.5% 2nd Worst Stock Market Crash 1937 - 1938 Stock Market Crash Just when investors thought the market was finally good again, following a recovery of almost half of the great depression losses, the market plunged again due to war scare and Wall street scandals. Date Started: 3/10/1937 Date Ended: 3/31/1938 Total Days: 386 Starting DJIA: 194.40 Ending DJIA: 98.95 Total Loss: -49.1% Worst Stock Market Crash Ever 1932 Stock Market Crash This is the grand daddy of them all. Investors lost 86% of their money over this 813 day beast. This market crash combined with the 192crash, makes up the great depression. If you had $100on 9/3/192(beginning of the 4th worst crash, it would have gone down to a whopping $108.14 by July 8th, 1932 (end of the worst crash) or an 89.2% loss. To recover from a loss like that, you would have to watch your portfolio go up 825%The full recovery didn't take place until 1954, 22 years later! Date Started: 4/17/1930 Date Ended: 7/8/1932 Total Days: 813 Starting DJIA: 294.07 Ending DJIA: 41.22 Total Loss: -86.0%
THEGREATDEPRESSION(1929-1942) A DIFFICULT LEARNING EXPERIENCE FOR THE US
The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began
12 in late 192and lasted for about a decade. Many factors played a role in bringing about the depression; however, the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The misdistribution of wealth in the 1920's existed on many levels. Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the misdistribution of wealth, caused the American economy to capsize. The roaring twenties was an era when our country prospered tremendously. The nation's total realized income rose from $74.3 billion in 1923 to $8billion in 1929. However, the rewards of the Coolidge Prosperity of the 1920's were not shared evenly among all Americans. According to a study done by the Brookings Institute, in 192the top 0.1% of Americans had a combined income equal to the bottom 42%. That same top 0.1% of Americans in 192controlled 34% of all savings, while 80% of Americans had no savings at all. Automotive industry mogul Henry Ford provides a striking example of the unequal distribution of wealth between the rich and the middle-class. Henry Ford reported a personal income of $14 million in the same year that the average personal income was $750. By present day standards, where the average yearly income in the U.S. is around $18,500, Mr. Ford would be earning over $345 million a year This misdistribution of income between the rich and the middle class grew throughout the 1920's. While the disposable income per capita rose 9% from 192to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable income. A major reason for this large and growing gap between the rich and the workingclass people was the increased manufacturing output throughout this period. From 1923-192the average output per worker increased 32% in manufacturing. During that same period of time average wages for manufacturing jobs increased only 8%. Thus wages increased at a rate one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. In fact, from 1923-192corporate profits rose 62% and dividends rose 65%. The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's administration (and the conservativecontrolled government) favored business, and as a result the wealthy who invested in these businesses. An example of legislation to this purpose is the Revenue Act of 1926, signed by President Coolidge on February 26, 1926, which reduced federal income and inheritance taxes dramatically. Andrew Mellon, Coolidge's Secretary of the Treasury, was the main force behind these and other tax cuts throughout the 1920's. In effect, he was able to lower federal taxes such that a man with a million-dollar annual income had his federal taxes reduced from $600,00to $200,000. Even the Supreme Court played a role in expanding the
13 gap between the socioeconomic classes. In the 1923 case Adkins v. Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional. The large and growing disparity of wealth between the well-to-do and the middleincome citizens made the U.S. economy unstable. For an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply. Essentially what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products of industrialized society were not wanted, but rather that those whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income. A 1932 article in Current History articulates the problems of this misdistribution of wealth: We still pray to be given each day our daily bread. Yet there is too much bread, too much wheat and corn, meat and oil and almost every other commodity required by man for his subsistence and material happiness. We are not able to purchase the abundance that modern methods of agriculture, mining and manufacturing make available in such bountiful quantities. Three quarters of the U.S. population would spend essentially all of their yearly incomes to purchase consumer goods such as food, clothes, radios, and cars. These were the poor and middle class families with incomes around, or usually less than, $2,50a year. The bottom three quarters of the population had an aggregate income of less than 45% of the combined national income; the top 25% of the population took in more than 55% of the national income. While the wealthy too purchased consumer goods, a family earning $100,00could not be expected to eat 4times more than a family that only earned $2,50a year, or buy 4cars, 4radios, or 4houses. Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel credit sales, and luxury spending and investment from the rich. One obvious solution to the problem of the vast majority of the population not having enough money to satisfy all their needs was to let those who wanted goods buy products on credit. The concept of buying now and paying later caught on quickly. By the end of the 1920's 60% of cars and 80% of radios were bought on installment credit. Between 1925 and 192the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion. Installment credit allowed one to telescope the future into the present, as the President's Committee on Social Trends noted. This strategy created artificial demand for products which people could not ordinarily afford. It put off the day of reckoning, but it made the downfall worse when it came. By telescoping the future into the present, when the future arrived, there was little to buy that hadn't already been bought. In addition, people could not longer use their regular wages to purchase whatever items they didn't have yet, because so much of the wages went to paying back past purchases. The U.S. economy was also reliant upon luxury spending and investment from the rich to stay afloat during the 1920's. The significant problem with this reliance was that luxury spending and investment were based on the wealth’s confidence
14 in the U.S. economy. If conditions were to take a downturn (as they did with the market crashed in fall and winter 1929), this spending and investment would slow to a halt. While savings and investment are important for an economy to stay balanced, at excessive levels they are not good. Greater investment usually means greater productivity. However, since the rewards of the increased productivity were not being distributed equally, the problems of income distribution (and of overproduction) were only made worse. Lastly, the search for ever greater returns on investment lead to wide-spread market speculation. Misdistribution of wealth within our nation was not limited to only socioeconomic classes, but to entire industries. In 192a mere 20corporations controlled approximately half of all corporate wealth. While the automotive industry was thriving in the 1920's, some industries, agriculture in particular, were declining steadily. In 1921, the same year that Ford Motor Company reported record assets of more than $345 million, farm prices plummeted, and the price of food fell nearly 72% due to a huge surplus. While the average per capita income in 192was $75a year for all Americans, the average annual income for someone working in agriculture was only $273. The prosperity of the 1920's was simply not shared among industries evenly. In fact, most of the industries that were prospering in the 1920's were in some way linked to the automotive industry or to the radio industry. The automotive industry was the driving force behind many other booming industries in the 1920's. By 1928, with over 21 million cars on the roads, there was roughly one car for every six Americans. The first industries to prosper were those that made materials for cars. The booming steel industry sold roughly 15% of its products to the automobile industry. The nickel, lead, and other metal industries capitalized similarly. The new closed cars of the 1920's benefited the glass, leather, and textile industries greatly. And manufacturers of the rubber tires that these cars used grew even faster than the automobile industry itself, for each car would probably need more than one set of tires over the course of its life. The fuel industry also profited and expanded. Companies such as Ethyl Corporation made millions with items such as new knock-freefuel additives for cars. In addition, tourist homes(hotels and motels) opened up everywhere. With such a wealthy upper-class many luxury hotels were needed. In 1924 alone, hotels such as the Mayflower (Washington D.C.), the Parker House (Boston), The Palmer House (Chicago), and the Peabody (Memphis) opened their doors. Lastly, and possibly most importantly, the construction industry benefited tremendously from the automobile. With the growing number of cars, there was a big demand for paved roads. During the 1920's Americans spent more than a $1 billion each year on the construction and maintenance of highways, and at least another $40million annually for city streets. But the automotive industry affected construction far more than that. The automobile had been central to the urbanization of the country in the 1920's because so many other industries relied upon it. With urbanization came the need to build many more apartment buildings, factories, offices, and stores. From 191to 1928 the construction industry grew by around $5 billion dollars, nearly 50%. Also prospering during the 1920's were businesses dependent upon the radio
15 business. Radio stations, electronic stores, and electricity companies all needed the radio to survive, and relied upon the constant growth of the radio market to expand and grow themselves. By 1930, 40% of American families had radios. In 1926 major broadcasting companies started appearing, such as the National Broadcasting Company. The advertising industry was also becoming heavily reliant upon the radio both as a product to be advertised, and as a method of advertising. Several factors lead to the concentration of wealth and prosperity into the automotive and radio industries. First, during World War I both the automobile and the radio were significantly improved upon. Both had existed before, but radio had been mostly experimental. Due to the demands of the war, by 192automobiles, radios, and the parts necessary to build these things were being produced in large quantities; the work force in these industries had been formed and had become experienced. Manufacturing plants were already in place. The infrastructure existed 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 paid 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 192wheat prices had fallen to as low as 67 cents a bushel. 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
16 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 1920. By the Dawes Plan of 1924 the U.S. started lending to Axis Germany. American foreign lending continued in the 1920's climbing to $90million in 1924, and $1.25 billion in 1927 and 1928. Of these funds, more than 90% were used by the European allies to purchase U.S. goods. 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. 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 Fordney-McCumber Act of 1922 and ending with the Hawley-Smoot Tariff of 1930, the United States increased many tariffs by 100% or more. 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. 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 19210% of American gross national product went into exports. 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 192to 1933 was fully one eighth of all lost American sales in the early years of the depression. Mass speculation went on throughout the late 1920's. In 192alone, a record volume of 1,124,800,41shares were traded on the New York Stock Exchange. From early 1928 to September 192the Dow Jones Industrial Average rose from
17 191 to 381. 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 42during 1928, even though it had not yet paid a single dividend. 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 $1of his own, and borrowing $75 from his broker. If he sold the stock at $42a year later he would have turned his original investment of just $1into $341.25 ($42minus 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 192the total of outstanding brokers' loans was over $7 billion; in the next three months that number would reach $8.5 billion. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 1929. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 192were 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. 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%. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands. Stocks fell so much, that at many times during the day no buyers were available at any price. This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the misdistribution 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 1929. 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
18 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 1932. The country spiraled quickly into catastrophe. The Great Depression had begun. EFFECTS OF THE GREAT DEPRESSION The Depression became a worldwide business downturn of the 1930's that affected almost all countries. International commerce declined quickly. There was a sharp reduction in tax revenues, profits and personal incomes. It affected both countries that exported raw materials and industrialized countries. It led to a sharp decrease in world trade as each country tried to protect their own industries and products by raising tariffs on imports. Governments reduced their spending, which led to decreased consumer demand. Construction came to a standstill in many nations. Some nations changed their heads and their type of government. World Trade collapsed with trade in 193still below the 192level. In Germany, weak economic conditions led to the rise to power of Adolf Hitler. Germany suffered greatly because of the huge debt the country was burdened by following World War I. The Japanese invaded China and developed mines and industries in Manchuria. Japan thought this economic growth would relieve the depression. The Depression had profound political effects. In countries such as Germany and Japan, reaction to the Depression brought about the rise to power of militarist governments who adopted the aggressive foreign policies that led to the Second World War. In countries such as the United States and Britain, the government intervened which ultimately resulted in the creation of welfare systems. Thousands of investors lost large sums of money and several were wiped out, losing everything. Banks, stores, and factories were closed and left millions of people jobless, penniless, and homeless. Many people came to depend on the government or charities to provide them with food. Franklin D. Roosevelt became the United States President in 1933. He promised a New Deal under which the government would intervene to reduce unemployment by workcreation schemes such as painting of the post offices and street cleaning. Both agriculture and industry were supported by policies to limit output and increase prices. The Great Depression ended as nations augmented their production of war materials at the beginning of World War II. This increased production provided jobs and put considerable amounts of money back into circulation. In Germany Hitler developed a massive work-creation scheme that had largely removed unemployment by 1936. Rearmament, paid for by government borrowing, started in a major way. In order to control inflation, consumption was restricted by rationing and trade controls. By 193the Germans Gross National Product was 51 per cent higher than in 192which was due mainly to the manufacture of machinery and armaments.
END OF THE GREAT DEPRESSION The end of The Great Depression took place around 1934. In the USA the economy began a slow turnaround as unemployment fell to 21.7% and GNP rose 7.7%. It was in 1934 that Sweden became the first country to fully recover from the Great Depression. During 1935 the American economy continued to recover as GNP grew another 8.1% and unemployment falls to 20.1%The recovery continued through 1935 to 1936 when GNP grew a record 14.1% and unemployment has fallen to 16.9% It was also in 1936 that Germany became the second country to recover from the great depression, by large deficit spending by Hitler in preparation for war. Roosevelt cuts government spending, fearing an unbalanced budget, and America suffers a minor recession. In spite of this unemployment falls to 14.3% and the yearly GNP rises 5%Britain is the third nation to fully recover from the great depression as it begins heavy deficit spending in preparation for WW2.In 193the USA begins to emerge form the Great Depression as it borrows and spends $1 billion in order to build up the army, navy and air force. By 1941, when Japan attacks Pearl Harbor, manufacturing in the USA will have skyrocketed by an astronomical 50%The world began to fully recover from The Great Depression in 193as governments begin spending in preparation for the coming hostilities of World War Two, which begins which the invasion of Poland by Hitler on 1st September 1939.
REFERENCES www.wikipedia.com www.investorwords.com www.wisegeek.com www.stock-market-crashes.com STOCK MARKET AND CRASHES by Ratchana Vasudev
20 The Times Of India Daily The Hindu Daily