The stock market crash of 1929 Who were the ignorant, the brokers or investors?

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The stock market crash of 1929

Who were the ignorant, the brokers or investors?

Justin Dalton

If I were to say "Stock Market" and then say the year "1929", what is the first thing that comes to your mind? My topic is on the Stock Market Crash of 1929, which led to the great depression. My focus is more on the stock market crash itself and what caused it to happen. Looking at the history behind the scenes will help me to determine such analysis. With the Stock Market Crash of 1929 being one of the biggest economical events, if not the most talked about with financial systems, it makes one ponder the ideas and practice of what caused such a crash. Were the brokers selling and managing the stocks ignorant to the fact of how the stock market was to be run, or were the investors whom are trying to get their piece of the American dream the ignorant ones?

Looking into the securities market in general, one thing we know that will drive a stock price is the investor optimism for the price to go up. This could also be said as supply and demand. The more the demand or want for such a stock, the higher the supply or price will go up with it. This is not however the accurate and analytical way to look at the market. This is just one reason the crash happened. J. Bradford De Long and Andrei Shleifer have pointed to the extraordinary premia for closed-end funds in 1929 as an indication of “excessive investor optimism.”1 Such optimism is what drove the market in 1928 up and up to such a now known bubble that would eventually burst.

There are a few ways to do investments, one of which would be on margin. This theory is to lend money at a particularly higher interest rate than normal and then use that money to purchase the stock or bonds in which you choose to invest in. This theory not only sounds risky, but is a very high risk. Did the brokers selling and advising these strategies see the risk? The market for brokers’ loans are significantly related to stock prices. These results imply that even if investors in the stock market believed it to be driven by fundamentals, lenders were apprehensive and attached significant risk to a large stock market decline.2 These lending habits is what I believe ultimately lead the early 1920’s into what we now call the stock market crash of 1929. If it were not for the lending of such funds, investors would have not been able to invest in the stock market in the first place and thus no rise and speculation on the price of such stocks and bonds. The apprehensive and attached significant risk by the lenders should be evidence enough.

As you have already seen, I have some quotes and reference to my secondary source "Was There a Bubble in the 1929 Stock Market?” Authors are Peter Rappoport and Eugene N. White. This article will help to argue my points that the stock market crash of 1929 was due to ignorant lending habits. The article is about, obviously, the stock market crash in 1929 that led the American depression years. Rappoport and White go on to a full analysis of that historical event in 1929 and look at the reasons of what may have caused the crash. They also then compare to the market today and through all of history to see the trends and all of the bull markets in comparison to the bear markets (up’s and down’s). This source will give a better view of what really happens in the year of 1929 and more over the years prior to, which lead to the crash. Was it really the stock markets or governments fault? This will support many of my primary sources as the glue that fits all the pieces together. The topic being how we can learn from our past history and educate ourselves to not make the same mistakes. Pictures are some of my primary sources and they show the very image of what the great depression was like. The words in this article now show the analytics’ to back up the pictures and cartoon articles that I have.

Herbert Hoover speech, “The Gigantic Forces of Depression Are Today in Retreat: Hoover Insists That Things Are Getting Better”. This speech is all about how Hoover is trying to convince America that things will and are getting better. This was to rally the positivity of the American people after the crash and try to get them to believe the market is normal again. This was as you can imagine, after the crash and in so much, I pose the question, did it work? Not really. The American people still became unwearied of his words and took matters into their own hands. They would try to make gain of anything they could.

The Brooklyn Daily Eagle, one of the Newspaper headlines “Wall St. In Panic as Stocks Crash.” This newspaper headline and following article speak of what the stock market did. It goes into simple detail of how the stock market had “crashed” overnight basically. Never before had such an article stuck out from the cover of a newspaper. Needless to say that the article was not needed as everyone, at least those that had invested into the market, had already known about the crash. It interests me that the newspapers would keep producing headlines and articles with such a major crisis going on. On the other hand and to their defense, nothing like this had happened before and such an event needed to be noted in the paper for not only those in the city to know about but also all in America.

There is an image of man trying to sell his car after the stock market crash of 1929. This image I feel is one of the best representations of what the crash did to people. They used to live the ‘high life’ with fancy clothes and fancy cars but now that they had lost all or most all of their money, he was trying to sell his car to simply get by in life. The image shows him holding up a sign that says, “$100 will buy this car, Must have cash, lost all on the stock market”.3 I also feel it a perfect picture because nobody else was willing to buy the car. So not only did the stock market effect simply that of stocks and bonds, but the economy as well. This is obvious but the image depicts just that, that the economy is bad just as equally as the stock market. This also give America a false hope for the future of what they can believe in if our society and government cannot even control the economy that they are supposed to be in control of.

“Six Days in October: The Stock Market Crash Of 1929” was written by Karen Blumenthal. This source is a book that simply gives chronicles of the stock market crash in 1929. Blumenthal writes of many stories that were involved in the particular event. One to be name was Michael J. Meehan, an immigrant that started his career selling cigars outside of theaters. As you can imagine, once the economy went down, people did not have the same luxuries that they once had. Going to the theaters was a time of the past for the middle class and thus the hurt that Meehan also felt from the stock market crash and economy to follow suit. There are many other stories of many who lost all their money to stocks. Simple necessities like milk and bread are now such a hot commodity that was is such need. There are stories of those who would mix in water with their milk because they would not have the substance needed nor could they afford to buy more milk.

New York Times Newspaper headline “Stocks Collapse In 16,410,030-Share Day, But Rally At Close Cheers Brokers: Bankers Optimistic To Continue Aid”. This newspaper headline stands out because it shows how much stock shares were gone, missing, vanished to nothing. Of course the Brokers are optimistic because they are the ones that sold everyone on the stocks in the first place. As the brokers are still learning the system in general, they hope, and pray most likely, that the market will bounce back and has a show for the investors to gain what they have lost. This shows how dramatic the crash was and how much it effected the Americans. The worst part is not the fact that the American investors simply lost all their money, but rather with the horrible lending habits that the brokers and banks had, the investors still owed money on the borrowed funds to buy the stocks in the first place, which stocks are now no longer to be found. This is what led to the bubble in the beginning. Bad lending with optimistic hopes of the stock market to rise and all is well. “They sold stocks and bonds to many people who had little or no prior experience with investment in securities, thereby creating another favorable condition for a bubble to emerge.”4 This leads into the ideas that investors had of the market. With the ignorance they had, they simply trusted in the popularity of riches and trends of others. They trusted in the brokers leading them to what we now know as the “Great Depression.

There is cartoon image of a man jumping into a lake, but with no water. A comment said by a farmer on the side of the lake with a broken arm and leg in casts’ saying, “Its fine as long as you’re going up”. The individual jumping into the lake saying “Whoopeeee!”. This cartoon depicts the fact that most Americans fell into this category of happiness, as long as things were going up and good. Anyone who was in the stock market before the crash was great, and happy with lots of money. But, this is because it was all going up and they all made money for the most part. Until you hit the bottom of the lake and feel the pain that there is no water, and now it’s already too late.

From my research, I have found that Americans should and could learn much from the stock market crash of 1929. But did we? In 2008 America’s stock market suffered the same idea of the crash in 1929. These actions, with any crash in the stock market are usually based on the same principles discussed earlier. Bad lending habits which will cause the investors to pay back on lent money that was used to purchase stocks, stocks that they no longer have due to the crash. Also much speculation in that all are worried and panic that the market will crash at any time. This only becomes true because of the actions they take. The crowd behavior will drive all others to follow and sell as well. Or take their money out of the market. With not enough funds to back up the dollar amounts in the market, the market is then said to start to crash. We have learned much since 1929 but still the unpredictability of the stock market will always tell us one thing, that we don’t know anything. At least when it comes to the stock market and predicting the future of such.

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