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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

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

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.



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

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.


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.


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

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.

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.

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

market will often crash for several years to come.

Stock market crashes are not difficult to forecast, as they all have the same tell-
tale signs. If you are astute enough to recognize these signs, prospering from a
crash is a realistic proposition.


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

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


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).

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%


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

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 working-
class 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 conservative-
controlled 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

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 middle-
income 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

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

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
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

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

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

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.


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 work-
creation 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.


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.


The Times Of India Daily

The Hindu Daily