It’s Causes and Effects
By Jeanine Brotherston
Dr. Volpert: Mathematics of Finance
Some Basic Background on the
Stocks and the Economic Market
What are Securities?
• Securities can be either stocks or bonds
which are sold and bought on the stock
market.
What is the New York Stock
Exchange?
• World’s largest market place for securities
• Currently membership limited to 1,366
members.
• Seat obtained by purchasing from existing
member
Interesting Fact: How did Stock
Exchange begin?
• The Exchange evolved from a group of men
who used to meet under a buttonwood tree
on what is now Wall Street in 1792 to
discuss securities
The Great Bull Market
• Great American stock exchange boom of
1928-1929
• Huge bubble where there were high
speculations
• People made many investments to make big
money
Bull Market sparked by?
•
•
•
•
Growth in American industries
Technological progress
Increase in productivity
Rise in national income from 33,200 million
to 79,200 million from 1914 to 1925
• Expectation for great future and unboundless optimism for the market
What Sparked This Growth in
Industry?
• The Electrification of the production
process
– This expanded the ability to transform raw
materials into finished products
– Ex. Ford Motors
HOWEVER??????
• Wages did not raise even though the
production did and prices of products failed
to decrease.
• There was not an excess demand for labor
– Leaving unemployment rate steady
Stock Exchange Average Rise in
Share Prices 1924-1928
250
200
24-May
24-Dec
25-Dec
26-Dec
27-Dec
150
100
50
0
Stock
Exchange
Political Promises Spark Market
Speculation
• Herbert Hoover was the most promising
candidate for president because of his ideas
which promised increased economic growth
in America.
Hoover’s Plan
• Proposed a Tariff bill which Senator Smoot
presented called the Smoot-Hawley Tariff
– Promised increased tariffs on imports
– Planned to allow more productivity for US
manufacturers
– Help ease unemployment
Investors marvel at This Proposal
• Investors believed profits from stocks
would increase if the tariff bill was passed
• Sparked intense speculation
• Dow Jones Industrial Average increased by
almost 35% because expected election of
Hoover and his bill
This Bubble was bound to Burst!
The Crash of 1929
• “American economic disaster that
precipitated the Great Depression which
was approximately a 10 year economic
slump affecting all the western
industrialized countries.” –Encyclopedia
Britannica
General Causes of the Crash
• Rampant over speculation in market
• People holding companies and investment
trusts (which by nature creates debt)
• Bursting of Bull Market economic bubble in
August 1929
• Large bank loans could not be liquidated
Direct Cause of Crash of Stock
Market
• After Hoovers election certain people began
to doubt if the tariff bill would help the US
Economy
– Farmers, America’s trading partners,
Democrats, and some Republican’s opposed the
passage of new tariffs.
– On October 21, 1929 Senate announces plans to
limit tariff revisions
– October 22, 1929 more limits set on tariff bill
Investors Realize Tariff Bill is
DOOMED!!!!!!!!!!!!!
PANIC! PANIC! PANIC!
Black Thursday
• On October 18, 1929 prices began to fall
• Panic stuck out on October 24 “BLACK
THURSDAY” after the announcements
from the Senate
• Record of 12,894,650 shares were traded
Black Thursday (Continued)
• Major banks and investment companies
bought up great blocks of stocks to stop the
panic but….
THERE ATTEMPTS FAILED!!!!!!!!!
Black Monday and Tuesday
• The Panic continued and 16,000,000 shares
were traded
• Prices on the stock market collapsed
completely!!!!
Hoover’s Plan to combat Crash
• Extracted promises from manufacturers to
maintain production.
• Signed legislation providing generous
additional funds to pubic works
• Smoot-Hawley Tariff 1930 (finally passed):
to raise duties 50%
• ALL THESE FAILED TO EASE CRISIS
AND DEPRESSION FOLLOWED!!!!
Causes of Great Depression
• Agriculture had crashed in 1919 and was a
continuing source of weakness.
• Banks over-extended
• Wages had not kept up with profits
• In 1920’s consumers were reaching limits of
ability to borrow and spend
Cause’s of Depression
(continued)
• Production was declining and
unemployment increasing EVEN before the
crash!
• Destroyed confidence in the economy
• Down sizing of industry causing
unemployment
The Great Depression
• The stock prices in the next three years
continued to fall
• By 1932 prices had dropped to only about
20% of there original value
Effects of Depression on
Individual
•
•
•
•
•
•
Thousands of individual investors ruined
Loss of savings
Poverty and panic
Less spending and demand
Unemployment
Wages decrease
Decline in Production
DOWNWARD SPIRAL
- little out put means
less jobs
- Manufacturing output
fallen to 54% of its
1929 output
- 25-30% of work force
unemployed
- 12 -15 Million jobless
Effects of Depression on
Economy
•
•
•
•
•
Stock prices drop
Industry declines
Value of assets decline
11,000 of 25,000 banks fail
Because of tariffs international trade market
decreases
• Causes a world wide depression
World Wide Depression
• America’s intimate relationship with Europe
causes serious economic troubles overseas
and contributes to a world wide depression
Reasons America’s Depression
Effects World
• World War I left Europe with large war
debts
– America was a major financer and creditor of
post war Europe. Once US slumped American
investments to Europe dried up
– Germany hurt because of large war reparations
Reasons (continued)
• Nations attempt to protect domestic
production with tariffs and having quotas on
imports
– This only reduced international trade and
damaged market even more
Hope Shattered
• In 1930 there is a slight rise in production
and it seems depression might ease
however: Spring 1931 the weakening of
western European economy causes the
major bank in Vienna to crash and Germany
defaults on its war reparation payments
Hoover’s last Attempts
• Hoover proposes one year moratorium on
war debt payments
– Too little too late
– Financial panic: European Government goes off
their gold standard and devalues currencies,
destroying exchange system (hurts trade)
– Europe withdraws gold from US banks
Gold Crisis
• With draw of European gold from US banks
causes
–
–
–
–
Banks to call their loans on US businesses
Bankruptcies
Bank customers go into ruin
Eventually banks in ruin
Hoover’s last Attempts
(continued)
• Reconstruction Finance Corp- to lend funds
to banks, railroads, etc
• Glass-Steagall Act- Gold to meet w/ foreign
withdraws
THESE AND OTHER ACTS FAILED TO
PROMOTE RECOVERY!!!!
The American People lose fail in Hoover.
Franklin D. Roosevelt Wins
Presidency
• Political and revolutionary thinker
• Elected 1932
• Introduced major changes in structure of
economy
• New Deal
FDR’s New Deal
• Opposite of Laissez-Faire
• Increased government regulation
• Massive public works projects for relief of
poverty
• Aid for the unemployed and unfortunate
Some of FDR’s Programs
• Civilian Conservation
Corp
• National Recovery
Administration
• Federal Deposit
Insurance Corporation
• Securities and
Exchange
Commission
More Programs
• 1935 Wagner Act (authority of Federal
government in industrial relations)
• National Labor Relations Board
• Social Security, unemployment
compensation, disability insurance
End to Depression
• Outbreak of World War II causes
– US factories flooded with orders form
armaments and munitions
– Unemployment decreases and production
increase
– Depression ends completely by the time the US
enters the war in 1941
What did we learn from the 1929
Crash?
• Market can be very unpredictable
• Investors must not get caught up in market
bubble illusions
• Market forces alone may be unable to
achieve recovery from economic slump
• Changes were needed in US economic
structure
Government Action Taken now to
Ensure Economic Stability
• Taxation
• Industrial regulation
• Social programs (social security, pensions,
welfare, others)
• Public programs
• Deficit spending
Food for Thought
• Currently our economy is prosperous
because of new technology and
advancements (especially in computers)
• Its Important not to over speculate or jump
the gun when it comes to investments
• Important to know stock market crashes are
still possible (Crash of 1987 and 1997)
Thank You for Your Attention