In the 1920s, life seemed to be on the upswing. The Great War was over, the economy was booming, the worst of the great influenza seemed to be behind us, jobs were plentiful, women gained the right to vote, Jazz and swing were all the rage. New innovations like the radio, automobile, electric appliances all seemed to be making life easier. The 1920s came roaring in, but by the end of the decade, the United States and the world would plunge into the worst economic crisis in history. The stock Market Crash of 1929, along with other factors would usher in what we call The Great Depression.
In the Post WWI era, jobs were plentiful and people were making money. Most were not making big money by any means but certainly enough to feel as though they were living well. Stories of The Stock Market and some people striking it rich by purchasing stocks encouraged others to try their hand on wall street as well. The phrase playing the stock market is often thrown around. If you’re reckless and don’t care what happens to your investment, by all means, play the stock market, but it is far better to study the stock market research companies, their products and their earnings, do your due diligence and then by all means invest in the stock market.
A stock is a share of a publicly traded company. A stock exchange is a physical or digital (once the internet came along) place for stocks to be bought and sold. The price of a stock is based on supply and demand. The first modern stock market was founded in Amsterdam. The Philadelphia Stock Exchange is the oldest stock exchange in the United States. It was founded in 1790 and originally named the Board of Brokers of Philadelphia. After a series of mergers over its history it is now known as the PHLX
A stock exchange is essentially a marketplace where stocks are bought and sold.
The most famous stock exchange is located in NYC on Wall Street.
On May 17, 1792, 24 businessmen and leading merchants signed an agreement that would become known as the Buttonwood Tree Agreement. The agreement was named after the tree where the first stocks had been sold on Wall Street. This document is considered one of the most important financial documents in US History. Within the document they agreed to only do business or trade with each other and set a standard for charging commission to clients, at that point it was 0.25%. The agreement came about after the economic panic of 1792. The hope was that it would reestablish trust and confidence in the industry. The members at first met at a coffee house. By 1817, they created the New York Stock and Exchange Board. Individuals could become members of the board by purchasing a seat. Seat prices were determined by Supply and Demand and by the strength of the US economy. At first the price was 4,000. At the height of the 1920s, the price climbed to $625,000. After the market crashed in 1929, the priced plummeted to 68,000 and by the end of The Great Depression, one could purchase a seat for 17,000 – a big difference. The last listed price for a seat before the NYSE became a public company was under 4 Million.
Once meeting at a coffee house or on different floors of other exchanges, the NYSE Exchange got their own home on Wall Street. Wall Street got its name from Dutch settlers in the 1600s who built an earthen wall to prevent a British invasion and to protect them from pirates. The invasion didn’t come but the name stuck. The stock exchange got a home of its own at 18 Broad Street in 1903. The original building was designed by George Post and is magnificent. As the exchange grew, more buildings were acquired and connected. The financial district in NYC encompasses 3 major streets – wall street, broad street and Exchange Place.
In addition to the NYSE, there was also the New York curb market which goes on to become known as The American Stock Exchange. Across the US, you have about 20 different stock exchanges.
Terms that you should know when discussing the stock market
Stock - A stock represents fractional ownership of equity in an organization.
Share – a piece of a company’s stock. Once you own a percentage of a company’s stock, you become known as a shareholder.
Dow Jones Industrial Average – this was created in 1896 by two financial reporters. Charles Dow and Edward Jones who followed the 12 largest companies in every sector of the US Stock Market. Today it tracks 30 blue chip stocks. A blue chip stock is a large well established company – think coca cola, IBM, Disney. The index helps to provide a picture of the over health of the Stock Market. The second most followed index is the S&P 500. This index began in 1957 and follows 500 companies. It tracks the performance of the top 500 companies. They track the market capitalization or the market cap which is the total value of all shares of stock that a company has issued.
The companies on the index are selected by a committee. Factors such as liquidity, size and industry are all taken into account. Each company has to meet some certain criteria: US Company, a market cap of at least 13.1 billion, 50% of stock available to the public. Stock price has to be more than $1 per share, file a 10-K report (an annual comprehensive report that details its financial performance) and 50% of revenue and profits must be in the US.
For the majority of the 1920s, stock prices soared. The values of stocks were inflated. Throughout the 1920s, people purchased stocks in rather unorthodox ways. The level of involvement in the stock market in the 1920s was unprecedented. It was very much a fad. People were trying their luck at striking it rich in the stock market. People were purchasing Stocks on an installment plan. stocks via investment clubs, stocks bought with capital rather than income, and buying stocks on margin. Buying on margin means that you could put up as little as 10% of the price in cash and then borrow the rest. Now if your stock decreases in value, when the loan is called in, you most likely can’t pay it back. Buying stocks became one of the many new fads of the 1920s.
During the 1920s, the stock market was considered a Bull Market. A Bull Market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains.
The opposite is known as a bear market. This is when there is a steady drop in the stock market over a period of time. It is accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history followed the 1929 stock market crash.
There were attempts to stop a total collapse.
Reaction of The Federal Reserve to the Bull Market – lowered to rediscount rate in 1927 & purchased government securities on the open market. By 1928, the Federal Reserve kept raising the rediscount rate. The hope was that this increase in rate would slow down or stop speculators from borrowing money to buy stocks. It didn’t have the intended effect. People we were willing to take out loans at any amount. The Federal Reserve also went as far as issuing a statement that federal reserve money shouldn’t be given out in the form of loans for speculative purposes. Non federal reserve banks offered up loans and people kept buying.
Stock Market in the 1920s
Causes of the Crash
When people talk of the stock market crash. The date that is always discussed it Oct. 29, 1929. The truth is, ominous rumbles start to be heard in August and September. In the days just prior to black Tuesday, panic starts to set in. On Oct. 24th, people started selling stocks at whatever they could get for them. For those who bought on margin, as stock prices fell, loans were called. People had to put more money up to keep their stocks. You have people going to banks, going to pawn shops. Selling whatever they could for whatever they could. Accepting loans against items worth way more than they were getting and with very little possibility of being able to repay that loan and get their money back. More than 650 banks failed by 1929 well over 1,300 in 1930. Banks were not insured like they are today. When the banks didn’t have money and started to call in loans that people were unable to pay back, the banks failed.
Oct. 29, 1929 is known as Black Tuesday. Some historians called the crash necessary – it was an end to an orgy of reckless speculation. On this day 16 million shares were traded and billions of dollars vanished.
President Herbert Hoover believed in a limited government in terms of how much responsibility the federal government held over the lives of US citizens. He didn’t believe it was the government’s responsibility to provide direct relief. As Coolidge’s Sec. of Commerce he tried to warn against the wildly rampant speculation. He gave numerous interviews and encourages editors to educate the masses. The warnings weren’t headed. He encouraged industrialists to maintain wages and for labor leaders to quell demands for higher wages. He didn’t think this was going to become the massive economic collapse it became. He believed as did many other experts at the time that this would pass. After all, there had been numerous economic panics throughout history. This one was different. It’s easy for us to say now but at the time no one really knew just how difficult things would get.
Hoover requested an investigation into the Stock Market Crash in 1932 after learning of a scheme to lower stock prices
Smoot-Hawley Tariff this was a tax on imported goods. Import taxes were already high before this law went into place. It was passed to protect American businesses and especially American farmers by making the import tax in some cases close to 40%.
The Senate Banking & Currency Committee investigated the events leading up to the stock market crash. It was known as the Pecora Investigation. It exposed the abusive practices in financial industry and led to calls for stricter regulations. The highest profile bankers and stockbrokers were interviewed. The investigation led to the passage of the 1933 Securities Act – this set penalties for filing false information about stocks. The Securities and Exchange Act of 1934 was also passed. This created the SEC which regulated stock exchanges.
In 1934, the Securities and Exchange Commission was created to restore the public's trust in capital markets. It is an independent federal regulatory agency. The SEC attempts to prevent future market meltdowns. Brokerage firms, dealers, investment advisors must register with the SEC in order to conduct business. They also ensure investors are provided with accurate information and promote full transparency.
FDR confounded partisans by appointing Joseph P. Kennedy one of the SEC's first five Commissioners and insisting that the group designate Kennedy as Chairman. The two men had become friends during WWI. FDR was Assistant Sec of the Navy and Kennedy was manager of Bethlehem Steel Company. Kennedy, over the course of his years of experience in business dealings had profited significantly from financial manipulation. He worked at a wall street brokerage firm, learning how to master the market and even opened up his own brokerage firm. He increased his personal wealth by partaking in the very same practices, while technically legal they were certainly corrupt practices that would go on to cause the stock market crash in 1929. He was a match for the crooked big wigs of wall street and he understood how to balance the interests of the masses with protecting the essential components of the financial markets. Today, the SEC ensures regulations are followed and works with the Justice Dept to bring charges against individuals who have broken the law. Two famous people the SEC have gone after are Martha Stewart and Bernie Madoff.
Investors were driven out of the market after the crash of 1929– How do you get them back? It would take some time, that's for sure.
The stock market crash was not the sole cause of the Great Depression. It was caused by a series of economic weaknesses. Globally, there are these very same problems worldwide. If we are going to look at the causes, you also have to consider the following issues. The fact that the working class received the smallest amount of the productivity of the 1920s – caused a significant wage and class gap within the United States. The end of WWI and lack of demand for American made products and especially American grown crops. The decrease in demand hurt American farmers. When the depression hit the rest of the country, American farmers had been hurting for years already. The biggest issue was that banks were uninsured. People who had worked and saved and put their money in the bank, saw their life savings wiped out. They had played it safe, but their money was gone. The war was over, there wasn’t as high of a demand for workers, companies could cut wages, as companies were hurt by the economic collapse, they let more people go and before you know you have millions and millions of people unemployed.
