The Stock Market Crash of 1929 Aim: What were the causes and effects of the Stock Market Crash of 1929. Do Now: Quiz –You have 5-7 minutes. Mr. Ott @ BETA 2011-12

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

Before The Crash

Buying on Margin Investors were buying on margin, or buying stocks with loans from stockbrokers, intending to pay brokers back when they sold the stock. As the market rose, brokers required less margin, or investors’ money, for stocks and gave bigger loans to investors. Buying on margin was risky, because fallen stocks left investors in debt with no money. If stocks fell, brokers could ask for their loans back, which was called a margin call.

The Great Bull Market Great American stock exchange boom of 1928-1929 Huge bubble where there were high speculations (investment involving high risk but also the possibility of high profits) People made many investments to make big money

Bull Market sparked by? Growth in American industries Technological progress Increase in productivity (worker) Rise in national income from 33,200 million to 79,200 million from 1914 to 1925 Expectation for great future and un-boundless 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

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!

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%

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 Withdrawal 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 withdrawals THESE AND OTHER ACTS FAILED TO PROMOTE RECOVERY!!!! The American People lose faith in Hoover.

Franklin D. Roosevelt Wins Presidency Political and revolutionary thinker Elected 1932 Introduced major changes in structure of economy New Deal

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)