Wall Street Crash of 1929 and its aftermath
1: How does a Stock Market work?
Watch
the
following
YouTube
clip
https://www.youtube.com/watch?v=F3QpgXBtDeo and answer the
questions that follow:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
What words are used to describe a stock exchange? (00:00 –
00:15)
What is the definition of a security? (00:30 – 00:40)
When you purchase a share in a company, what are you
actually buying? (00:40 – 00:60)
When the size of a company’s profits, like Facebook, rise
what happens to the value of your share in the company?
(01:00 – 01:10)
What does a company, like Facebook, gain from selling
shares on the stock market? (01:20 – 01:30)
What is the key factor that determines whether a company
sells its shares easily or not? (01:35 – 01:50)
Even though a company can have solid fundamentals, what
can cause a share price to fall very quickly as in the case of
Taco Inc? (02:00 – 02:15)
How does an Index illusrate the performance of the
company share prices included in the index? (02:50 – 03:05)
2: A stock index is a compilation of stocks constructed in such a
manner to track a particular market, sector, commodity1, currency,
bond, or other asset.
A broad based index or composite index is the one which covers
almost all stocks on the exchange (or a certain majority percentage of
the market capitalization2 on the exchange). The main purpose of the
broad based index is to act as a proxy3 for the performance of the
economic conditions of the entire market, or reveal investor
sentiment4 towards the market.
Goods that are traded internationally like Oil, Coffee and Diamonds
Total value of companies on the Stock Exchange
3 Substitute
4 Feelings
1
2
1
Calculation of a Stock Index
The S&P 500 is a U.S.market index that gives investors an idea of the
overall movement in the U.S.equity market. The value of the S&P 500
constantly changes based on the movement of 500 underlying stocks.
The index is computed by weighted average market capitalization.
 The first step in this methodology is to compute the market
capitalization of each component in the index.
 This is done by taking the number of outstanding shares of
each company and multiplying that number by the company's
current share price, or market value.
 For example, if Apple Computer has roughly 830 million shares
outstanding and its current market price is $53.55, the market
capitalization for the company is $44.45 billion (830 million x
$53.55).
 Next, the market capitalizations for all 500 component stocks
are summed to obtain the total market capitalization of the S&P
500, as illustrated in the table below. This market
capitalization number will fluctuate as the underlying share
prices and outstanding share numbers change.
2
(a) Example of Calculation of Share Index
Assume that the Dow Jones Industrial Index (DJIA) has 5 shares:
Company name
Market
Capitalisation
1250
1000
750
500
1500
Exxon Mobil
Apple
Washington Post
Cargill
Goldman Sachs
Total
Weighting
0.25
0.20
0.15
0.10
0.30
When you calculate an index you must choose a base year
Base Year: Index = 100
Company name
Weighting
Share Index
Value
Exxon Mobil
0.25
100
Apple
0.20
100
Washington Post
0.15
100
Cargill
0.10
100
Goldman Sachs
0.30
100
Share Index (summation of share index x weighting)
Share Index
value x
weighting
.25 x 100 =
25
.20 x 100 =
20
.15 x 100 =
15
.10 x 100 =
10
.30 x 100 =
30
=100
3
Year 2
Assume the following price changes occurred. Calculate the Share
Index value
Company name
Weighting
Share Index
Value
Share Index
value x
weighting
Exxon Mobil
0.25
102
Apple
0.20
105
Washington Post 0.15
95
Cargill
0.10
90
Goldman Sachs
0.30
101
Share Index (summation of share index x weighting)
Year 3
Assume the following price changes occurred. Calculate the Share
Index value
Company name
Weighting
Share Index
Value
Share Index
value x
weighting
Exxon Mobil
0.25
108
Apple
0.20
106
Washington Post 0.15
88
Cargill
0.10
99
Goldman Sachs
0.30
90
Share Index (summation of share index x weighting)
Year 4
Assume the following price changes occurred. Calculate the Share
Index value
Company name
Weighting
Share Index
Value
Share Index
value x
weighting
Exxon Mobil
0.25
102
Apple
0.20
112
Washington Post 0.15
85
Cargill
0.10
104
Goldman Sachs
0.30
101
Share Index (summation of share index x weighting)
4
Year 5
Assume the following price changes occurred. Calculate the Share
Index value
Company name
Weighting
Share Index
Value
Share Index
value x
weighting
Exxon Mobil
0.25
95
Apple
0.20
98
Washington Post 0.15
80
Cargill
0.10
92
Goldman Sachs
0.30
93
Share Index (summation of share index x weighting)
(b) Now take the DJIA share index value for the five years and
plot the values in a spreadsheet
(c) Comment on the trend that is evident.
3: How would you invest in the Stock Market?
Before you undertake the stock market simulations read the
following information about stock indicators.
Price/Earnings (P/E) ratio: This ratio describes how much one is
paying for every dollar a company earns. It is a measure of how
expensive shares are.
 For example, if a company's stock price is $15 per share, and it
earned $1 per share over the preceding year, its P/E ratio
would be 15.
 To give you some historical perspective, the average P/E ratio
over the last 80 years has been 15.7 All else equal, the lower
the P/E ratio, the less expensive stock prices are.
5
Dividend Yield: Many stocks pay dividends. Dividends are payments
to shareholders from the company's earnings. The dividend yield is
the dividend divided by the share price.
 As an example, suppose you buy stock at $10 a share and the
company pays $1 per share in dividends. In this case, the
dividend yield would be $1/$10 = 10%.
 For historical perspective, consider that the average dividend
yield over the last 80 years has been 4.39 percent. All else
equal, the higher the dividend yield, the more attractive stocks
are.
3. Interest Rate: The one-year interest rate tells you how much you
can expect to earn on bonds over the next year.
 Bonds are fixed-income instruments that guarantee a fixed
return. Think of them as savings that you may have.
 The higher the interest rate, the more bonds pay and the less
attractive stocks will be. Thus, as interest rates rise, stock
prices generally fall as investors move money out of stocks and
into bonds. Conversely, as interest rates decline, investors
move wealth from bonds and into stocks.
Simulation activity 1 (Under Exercises choose Interactive Activity)
http://www.econedlink.org/lessons/index.php?lid=333&type=stude
nt
Simulation activity 2 (Under Process choose Interactive Activity)
http://www.econedlink.org/lessons/index.php?lid=334&type=stude
nt
Simulation activity 3 (Under Process choose Interactive Activity)
http://www.econedlink.org/lessons/index.php?lid=335&type=stude
nt
6
4: Try the Investment Tolerance Quiz and see what type of potential
investor you are
http://njaes.rutgers.edu:8080/money/riskquiz/
5: Wall Street Crash of 1929
Source
The rich man's chauffer drove with his ears laid back to catch the
news of an impending move in Bethlehem Steel; he held 50 shares
himself. The window-cleaner at the banker's office paused to watch
the ticker, for he was thinking of converting his savings into a few
shares of Simmons ... a broker's valet who made nearly a quarter of a
million on the market, a trained nurse who cleaned up $30,000
following the tips given her by grateful patients; and the Wyoming
cattleman, 30 miles from the nearest railroad, who bought or sold
1,000 shares a day.
Frederick Lewis Allen, Only Yesterday (1931)
What does the above source imply about the extent of the sharebuying behaviour in US society during the 1920s?
6: Causes of the Wall Street Crash of 1929
Access
the
following
website
http://www.schoolhistory.co.uk/lessons/usa192941/crashcauses.ht
ml and summarise in your own words the six main causes of the Wall
Street Crash
7: Take the matchup quiz
Access the following website and take the matchup test:
http://www.schoolhistory.co.uk/lessons/usa192941/crashcausesm
atchup.html
7
8: Movements in the Dow Jones Industrial Average Index
View the following graphs and answer the questions that follow
Graph 1: 1927 - 1931
(a)
(b)
(c)
(d)
(e)
What was the value of the DJIA in 1927?
Giving your best estimate, what was the value of the DJIA
when it peaked in 1929?
What was the percentage change in the DJIA value between
the beginning of 1927 and its peak in 1929?
Assume that the DJIA plummeted to a value of 230 on
29/10/1929, what was the percentage change between its
peak in August 1929 and the value on 29/10/1929?
What happened to the DJIA value after 29/10/1929 and up
until March 1930? Why do you find this unusual?
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Graph 2: 1927 - 1935
(a)
(b)
(c)
(d)
In what year did the DJIA bottom out?
What value, in percentage terms, did the DJIA lose between
its peak value in 1929 and its bottom value in 1932?
In 1935, the DJIA value is 100. What is significant about the
value of 100?
Find out in what year did the DJIA recover to its pre-crash
value in 1929
9
9: Stories of the carnage
"This was real panic."
Jonathan Leonard was a reporter who was on the scene as Wall Street
tumbled. We join his story following "Black Thursday."
"That Saturday and Sunday Wall Street hummed with week-day
activity. The great buildings were ablaze with lights all night as
sleepy clerks fought desperately to get the accounts in shape for the
Monday opening. Horrified brokers watched the selling orders
accumulate. It wasn't a flood; it was a deluge. Everybody wanted to
sell-the man with five shares and the man with ten thousand.
Evidently the week-end cheer barrage had not hit its mark.
Monday was a rout for the banking pool, which was still supposed to
be 'on guard.' If it did any net buying at all, which is doubtful, the
market paid little attention. Leading stocks broke through the
support levels as soon as trading started and kept sinking all day.
Periodically the news would circulate that the banks were about to
turn the tide as they had done on Thursday, but it didn't happen. A
certain cynicism developed in the board rooms as the day wore on.
Obviously the big financial interests had abandoned the market to its
fate, probably intending to pick up the fragments cheap when the
wreck hit the final bottom. 'Very well,' said the little man, 'I shall do
the same.'
When the market finally closed, 9,212,800 shares had been sold. The
Times index of 25 industrials fell from 367.42 to 318.29. The whole
list showed alarming losses, and margin calls were on their way to
those speculators who had not already sold out.
That night Wall Street was lit up like a Christmas tree. Restaurants,
barber shops, and speakeasies were open and doing a roaring
business. Messenger boys and runners raced through the streets
whooping and singing at the tops of their lungs. Slum children
invaded the district to play with balls of ticker tape. Well-dressed
gentlemen fell asleep in lunch counters. All the downtown hotels,
rooming houses, even flophouses were full of financial employees
who usually slept in the Bronx. It was probably Wall Street's worst
night. Not only had the day been bad, but everybody down to the
youngest office boy had a pretty good idea of what was going to
happen tomorrow.
10
The morning papers
were black with the
story of the Monday
smash. Except for
rather feeble hopes
that the great banks
would step into the
gap they had no
heart for cheerful
headlines. In the
inside
pages,
however,
the Bewildered crowds on Wall Street
sunshine chorus continued as merry as ever. Bankers said that heavy
buying had been sighted on the horizon. Brokers were loud with
"technical" reasons why the decline could not continue.
The next day, Tuesday, the 29th of October, was the worst of all. In
the first half hour 3,259,800 shares were traded, almost a full day's
work for the laboring machinery of the Exchange. The selling
pressure was wholly without precedent. It was coming from
everywhere. The wires to other cities were jammed with frantic
orders to sell. So were the cables, radio and telephones to Europe and
the rest of the world. Buyers were few, sometimes wholly absent.
Often the specialists stood baffled at their posts, sellers pressing
around them and not a single buyer at any price.
This was real panic. It was what the banks had prevented on
Thursday, had slowed on Monday. Now they were helpless.
Reportedly they were trying to force their associated corporations to
toss their buying power into the whirlpool, but they were getting no
results. Albert Conway, New York State Superintendent of Insurance,
took the dubious step of urging the companies under his jurisdiction
to buy common stocks. If they did so, their buying was insufficient to
halt the rout."
References:
This account appears in: Leonard, Jonathan Norton, Three Years
Down (1944); Allen, Frederick, Lewis, Since Yesterday: the 30's in
America (1972).
11
Having read the above extract from a journalist, view the
photographs
on
the
Wall
Street
Crash
http://www.businessinsider.com/stock-market-crash-of-19292011-11?op=1
Imagine that you are a journalist, write a brief article for your
local newspaper explaining to your readers in Chicago the
events of October 1929 in New York.
10: How did the Wall Street Crash of 1929 affect the Germany?
‘Over-heated
During the 1920s, the economy of the United States was booming. It
was the largest and richest economy in the world. People made
fortunes by buying stocks and shares on the United
States' stockmarket. Many borrowed money so that they
could invest.
Prices kept increasing, making people richer. But, too much money
was chasing too few stocks resulting in the market becoming overheated. On 3 September 1929, stock prices reached an all-time high.
Shortly, prices began to drop, leading to panic and mass-selling. By
October 1929, the value of the market had nearly halved. This is
known as the Wall Street Crash.
Suddenly everyone wanted to get their money out. Banks did not
have enough money to repay everyone or to lend to businesses. As a
result businesses failed, leading to high unemployment across
America. As economies were linked together, the rest of the world
suffered too.
During the 1920s, the German economy had been supported by loans
from American banks. After the Wall Street Crash, the Americans
wanted their money back and called in the loans. America gave
Germany just 90 days to start repayments. Germany could not pay.
As in America, German businesses failed. Unemployment reached
more than four million by 1931. Germany suspended payment
of reparations to the Allies.’
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Source: http://www.theholocaustexplained.org/ks4/the-nazi-riseto-power/was-the-economy-doomed-to-fail/what-were-theimmediate-effects-of-the-wall-street-crash/#.VKOEF4qUcmc
(a) Access the following webpage and read the effect of the
consequent Great Depression on German people from various walks
of life
http://www.theholocaustexplained.org/ks4/the-nazi-rise-topower/was-the-economy-doomed-to-fail/how-did-the-depressionaffect-german-people/#.VKOEuoqUcmc
Having read the various stories answer the question:
How might the Nazi Party have benefited from the Wall Street
Crash?
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