The Economics Of The Causes Of The — страница 2

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way. Another problem with the speculative boom was that when people bought stock they usually bought it on margin. This meant that you only paid 40% of the value of the stock. The broker got the rest of the money on credit, which you paid back when you sold the stock. If your stock’s value fell below the breakeven point for the broker, he would either sell the stock, and take a loss, or ask you for more money. What all this meant was that banks were indirectly, and sometimes directly, investing their depositors’ money in the stock market. Generally the largest cause for the crash of 1929, and therefore the depression, was the fact that the stock market boom was based on confidence, not actual reality. If investors lost confidence in the market’s ability to turn a profit the

whole system would come crashing down. Instead of being based on confidence, a crash would be based on fear. During the summer of 1929 many warning signs of the impending crash were noticed. However, these signs were generally ignored because most investors believed there was no way the market could crash. The one strong response to the warning signs was when the Federal Reserve raised interest rates to 6%. However, this had little effect because banks could still make 12% in stocks, an incredible profit margin. October 24, 1929 is now remembered as “Black Thursday.” On this day the whole US financial system came tumbling down. Investors lost all confidence in the value of their stocks and tried to sell at lower and lower prices. Some couldn’t find buyers at any price. The

ticker tape, which allowed those not in the actual exchange to know prices, ran two hours behind. In response to the crash a group of incredibly wealthy bankers, whose personal fortunes totaled more than $300 million, met to try and calm the people and stop the panic. They bought stocks at much higher prices than the going rate, calming and stabilizing the exchange. However, since the ticker tape was running several hours behind, sell orders continued to pour in from across the country. On “Black Thursday” the New York Stock Exchange alone lost $4 billion dollars. The magazine Variety memorably summed up the crash with the headline, “Wall Street Lays an Egg.” On the next day, Friday, prices remain relatively stable as investors tried to take stock of the situation.

However, this did not last. The next Monday, although trading was less, the market fell still further. “Black Tuesday,” October 29, proved even more fruitless. The bankers that had tried to stop the crash were now selling. It was the worst day in the market’s 112-year history. As the prices fell further and further many brokers frantically sent out margin calls for more money. Some sold their investors’ stocks outright. The problem was that the people getting called simply didn’t have the money, or didn’t want to invest it, forcing brokers to take a loss. This money was, of course, on credit and the banks were demanding payment to pay for the losses they had sustained. The brokers simply didn’t have the money and were forced to default. This meant that the banks

lost billions of dollars of their depositors’ money, which the depositors were now trying to withdrawal. Once again the banks simply didn’t have the money and were forced to go bankrupt. Between 1929-33 more than 10,000 banks failed, greatly shrinking the money supply. The speculative boom had been built like an “Upside-down pyramid” on credit. Now it collapsed like one. On Halloween Thursday the New York Stock Exchange closed and didn’t reopen until the following Monday. During this, the second week since “Black Thursday,” prices fell still further in even larger selling frenzies. By mid November the market had sustained an average $26 billion, or 40% loss. Some companies had seen their value drop from $100 to $3 per share as little as two days. The stock market

crash started a chain reaction throughout our economy, and, indeed, the economy of the world. Since most of the money was with the rich, and these were the people that had lost everything, spending declined very rapidly, especially on luxuries. Contributing to the continued downfall was the fact that industry hadn’t shared its profits with its workers. This meant that there was no mass purchasing power left once the rich lost out. Another contributor was the huge inventories kept by many retailers. Since no one was buying no orders came in for many months, forcing businesses to layoff workers. Due to the strong anti-union sentiment of the 20’s, there were no unions left to prevent the mass layoffs. Laying-off workers constricted business’s markets still further until they