Stock prices began to decline in September and early October , and on October 18 the fall began. Panic set in, and on October 24, Black Thursday, a record 12,, shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday October 29, , in which stock prices collapsed completely and 16,, shares were traded on the New York Stock Exchange in a single day.
Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading. After October 29, , stock prices had nowhere to go but up, so there was considerable recovery during succeeding weeks.
Overall, however, prices continued to drop as the United States slumped into the Great Depression , and by stocks were worth only about 20 percent of their value in the summer of The stock market crash of was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom.
Life for the average family during the Great Depression was difficult. Roosevelt helped lessen the worst effects of the Great Depression; however, the U.
But if you see something that doesn't look right, click here to contact us! Subscribe for fascinating stories connecting the past to the present. In stock pools a group of speculators would pool large amounts of their funds and then begin purchasing large amounts of shares of a stock.
This increased demand led to rising prices for that stock. Outsiders, seeing the price rising, would decide to purchase the stock whose price was rising. At a predetermined higher price the pool members would, within a short period, sell their shares and pull out of the market for that stock.
Another factor commonly used to explain both the speculative boom and the October crash was the purchase of stocks on small margins. However, contrary to popular perception, margin requirements through most of the twenties were essentially the same as in previous decades. Brokers, recognizing the problems with margin lending in the rapidly changing market, began raising margin requirements in late , and by the fall of , margin requirements were the highest in the history of the New York Stock Exchange.
In the s, as was the case for decades prior to that, the usual margin requirements were 10 to 15 percent of the purchase price, and, apparently, more often around 10 percent. There were increases in this percentage by and by the fall of , well before the crash and at the urging of a special New York Clearinghouse committee, margin requirements had been raised to some of the highest levels in New York Stock Exchange history. One brokerage house required the following of its clients.
These were, historically, very high margin requirements. The crash began on Monday, October 21, as the index of stock prices fell 3 points on the third-largest volume in the history of the New York Stock Exchange. After a slight rally on Tuesday, prices began declining on Wednesday and fell 21 points by the end of the day bringing on the third call for more margin in that week. On Black Thursday, October 24, prices initially fell sharply, but rallied somewhat in the afternoon so that the net loss was only 7 points, but the volume of thirteen million shares set a NYSE record.
Friday brought a small gain that was wiped out on Saturday. On Monday, October 28, the Dow Jones index fell 38 points on a volume of nine million shares—three million in the final hour of trading. Black Tuesday, October 29, brought declines in virtually every stock price. Manufacturing firms, which had been lending large sums to brokers for margin loans, had been calling in these loans and this accelerated on Monday and Tuesday. The big Wall Street banks increased their lending on call loans to offset some of this loss of loanable funds.
The Dow Jones Index fell 30 points on a record volume of nearly sixteen and a half million shares exchanged. Black Thursday and Black Tuesday wiped out entire fortunes.
Though the worst was over, prices continued to decline until November 13, , as brokers cleaned up their accounts and sold off the stocks of clients who could not supply additional margin. From that point, stock prices resumed their depressing decline until the low point was reached in the summer of In Irving Fisher argued that the stock prices of and were based on fundamental expectations that future corporate earnings would be high.
The market broke each time news arrived of advances in congressional consideration of the Hawley-Smoot tariff. However, examination of after-the-fact common stock yields and price-earning ratios can do no more than provide some ex post justification for suggesting that there was not excessive speculation during the Great Bull Market. Because of this element of subjectivity, not only can we never accurately know those values, but also we can never know how they varied among individuals.
The market price we observe will be the end result of all of the actions of the market participants, and the observed price may be different from the price almost all of the participants expected.
In fact, there are some indications that there were differences in and Yields on common stocks were somewhat lower in and In October of , brokers generally began raising margin requirements, and by the beginning of the fall of , margin requirements were, on average, the highest in the history of the New York Stock Exchange.
These facts suggest that brokers and New York City bankers may have come to believe that stock prices had been bid above a sustainable level by late and early White created a quarterly index of dividends for firms in the Dow-Jones index and related this to the DJI.
Through the two track closely, but in and the index of stock prices grows much more rapidly than the index of dividends. The qualitative evidence for a bubble in the stock market in and that White assembled was strengthened by the findings of J.
Bradford De Long and Andre Shleifer They examined closed-end mutual funds, a type of fund where investors wishing to liquidate must sell their shares to other individual investors allowing its fundamental value to be exactly measurable. Rappoport and White and found other evidence that supported a bubble in the stock market in and There are several reasons for the creation of such a bubble.
First, the fundamental values of earnings and dividends become difficult to assess when there are major industrial changes, such as the rapid changes in the automobile industry, the new electric utilities, and the new radio industry. Second, participation in the stock market widened noticeably in the twenties. The new investors were relatively unsophisticated, and they were more likely to be caught up in the euphoria of the boom and bid prices upward.
These observations were strengthened by the experimental work of economist Vernon Smith. Bishop, In a number of experiments over a three-year period using students and Tucson businessmen and businesswomen, bubbles developed as inexperienced investors valued stocks differently and engaged in price speculation. As these investors in the experiments began to realize that speculative profits were unsustainable and uncertain, their dividend expectations changed, the market crashed, and ultimately stocks began trading at their fundamental dividend values.
These bubbles and crashes occurred repeatedly, leading Smith to conjecture that there are few regulatory steps that can be taken to prevent a crash. Though the bubble of and made some downward adjustment in stock prices inevitable, as Barsky and De Long have shown, changes in fundamentals govern the overall movements.
And the end of the long bull market was almost certainly governed by this. In late and early there was a striking rise in economic activity, but a decline began somewhere between May and July of that year and was clearly evident by August of By the middle of August, the rise in stock prices had slowed down as better information on the contraction was received. As this information was assessed, the number of speculators selling stocks increased, and the number buying decreased.
With the decreased demand, stock prices began to fall, and as more accurate information on the nature and extent of the decline was received, stock prices fell more. The late October crash made the decline occur much more rapidly, and the margin purchases and consequent forced selling of many of those stocks contributed to a more severe price fall. The recovery of stock prices from November 13 into April of suggests that stock prices may have been driven somewhat too low during the crash.
There is now widespread agreement that the stock market crash did not cause the Great Depression. Instead, the initial downturn in economic activity was a primary determinant of the ending of the stock market bubble. The stock market crash did make the downturn become more severe beginning in November It reduced discretionary consumption spending Romer, and created greater income uncertainty helping to bring on the contraction Flacco and Parker, Though stock market prices reached a bottom and began to recover following November 13, , the continuing decline in economic activity took its toll and by May stock prices resumed their decline and continued to fall through the summer of In the nineteenth century, a complex array of wholesalers, jobbers, and retailers had developed, but changes in the postbellum period reduced the role of the wholesalers and jobbers and strengthened the importance of the retailers in domestic trade.
Cochran, ; Chandler, ; Marburg, ; Clewett, The appearance of the department store in the major cities and the rise of mail order firms in the postbellum period changed the retailing market.
A department store is a combination of specialty stores organized as departments within one general store. Resseguie, ; Sobel-Sicilia, R. By the end of the nineteenth century, every city of any size had at least one major department store.
Appel, ; Benson, ; Hendrickson, ; Hower, ; Sobel, Until the late twenties, the department store field was dominated by independent stores, though some department stores in the largest cities had opened a few suburban branches and stores in other cities.
In the interwar period department stores accounted for about 8 percent of retail sales. In the antebellum period and into the postbellum period, it was common not to post a specific price on an item; rather, each purchaser haggled with a sales clerk over what the price would be. Stewart posted fixed prices on the various dry goods sold, and the customer could either decide to buy or not buy at the fixed price.
The policy dramatically lowered transactions costs for both the retailer and the purchaser. What changed the department store field in the twenties was the entrance of Sears Roebuck and Montgomery Ward, the two dominant mail order firms in the United States. Emmet-Jeuck, ; Chandler, , Both firms had begun in the late nineteenth century and by the younger Sears Roebuck had surpassed Montgomery Ward.
In Sears hired Robert C. Wood, who was able to convince Sears Roebuck to open retail stores. Wood believed that the declining rural population and the growing urban population forecast the gradual demise of the mail order business; survival of the mail order firms required a move into retail sales.
By Sears Roebuck had opened 8 retail stores, and by it had stores. Montgomery Ward quickly followed suit. Rather than locating these in the central business district CBD , Wood located many on major streets closer to the residential areas. These moves of Sears Roebuck and Montgomery Ward expanded department store retailing and provided a new type of chain store.
Though chain stores grew rapidly in the first two decades of the twentieth century, they date back to the s when George F. They then phased out the small stores to reduce the chain to 4, full-range, supermarket-type stores. As a result, retail prices were generally marked up well above the wholesale prices.
In cash-and-carry stores, items were sold only for cash; no credit was extended, and no expensive home deliveries were provided. Markups on prices could be much lower because other costs were much lower. Consumers liked the lower prices and were willing to pay cash and carry their groceries, and the policy became common by the twenties. Chains also developed in other retail product lines. In Frank W. Woolworth stores by the mids.
In Clarence Saunders, a grocer in Memphis, Tennessee, built upon the one-price policy and began offering self-service at his Piggly Wiggly store.
Previously, customers handed a clerk a list or asked for the items desired, which the clerk then collected and the customer paid for. With self-service, items for sale were placed on open shelves among which the customers could walk, carrying a shopping bag or pushing a shopping cart. Each customer could then browse as he or she pleased, picking out whatever was desired. Saunders and other retailers who adopted the self-service method of retail selling found that customers often purchased more because of exposure to the array of products on the shelves; as well, self-service lowered the labor required for retail sales and therefore lowered costs.
Shopping Centers, another innovation in retailing that began in the twenties, was not destined to become a major force in retail development until after the Second World War. The ultimate cause of this innovation was the widening ownership and use of the automobile.
By the s, as the ownership and use of the car began expanding, population began to move out of the crowded central cities toward the more open suburbs. When General Robert Wood set Sears off on its development of urban stores, he located these not in the central business district, CBD, but as free-standing stores on major arteries away from the CBD with sufficient space for parking. At about the same time, a few entrepreneurs began to develop shopping centers.
Nichols Company in Kansas City, Missouri. Other early shopping centers appeared in Baltimore and Dallas. By the mids the concept of a planned shopping center was well known and was expected to be the means to capture the trade of the growing number of suburban consumers. In the twenties a gold exchange standard was developed to replace the gold standard of the prewar world.
As a result, all countries on the gold standard had fixed exchange rates with all other countries. Adjustments to balance international trade flows were made by gold flows.
If a country had a deficit in its trade balance, gold would leave the country, forcing the money stock to decline and prices to fall. Countries with a surplus imported gold, which increased the money stock and caused prices to rise. Most economists who have studied the prewar gold standard contend that it did not work as the conventional textbook model says, because capital flows frequently reduced or eliminated the need for gold flows for long periods of time. However, there is no consensus on whether fortuitous circumstances, rather than the gold standard, saved the international economy from periodic convulsions or whether the gold standard as it did work was sufficient to promote stability and growth in international transactions.
To do this, two basic changes were made. First, most nations, other than the United States, stopped domestic circulation of gold. Most countries held their international reserves in the form of U.
However, the overvaluation of the pound and the undervaluation of the franc threatened these arrangements. The British trade deficit led to a capital outflow, higher interest rates, and a weak economy.
In the late twenties, the French trade surplus led to the importation of gold that they did not allow to expand the money supply. Unfortunately, in doing this politicians eliminated the equilibrating mechanism of the gold standard but had nothing with which to replace it. The new international monetary arrangements of the twenties were potentially destabilizing because they were not allowed to operate as a price mechanism promoting equilibrating adjustments.
There were other problems with international economic activity in the twenties. Because of the war, the United States was abruptly transformed from a debtor to a creditor on international accounts.
Though the United States did not want reparations payments from Germany, it did insist that Allied governments repay American loans. The Allied governments then insisted on war reparations from Germany. These initial reparations assessments were quite large. The treaty allowed France to occupy the Ruhr after Germany defaulted in Ultimately, this tangled web of debts and reparations, which was a major factor in the course of international trade, depended upon two principal actions.
First, the United States had to run an import surplus or, on net, export capital out of the United States to provide a pool of dollars overseas. Germany then had either to have an export surplus or else import American capital so as to build up dollar reserves—that is, the dollars the United States was exporting. In effect, these dollars were paid by Germany to Great Britain, France, and other countries that then shipped them back to the United States as payment on their U.
In the wake of the depression Congress passed the Emergency Tariff Act, which raised tariffs, particularly on manufactured goods. Figures 26 and 27 The Fordney-McCumber Tariff of continued the Emergency Tariff of , and its protection on many items was extremely high, ranging from 60 to percent ad valorem or as a percent of the price of the item. As farm product prices fell at the end of the decade presidential candidate Herbert Hoover proposed, as part of his platform, tariff increases and other changes to aid the farmers.
Special interests succeeded in gaining additional or new protection for most domestically produced commodities and the goal of greater protection for the farmers tended to get lost in the increased protection for multitudes of American manufactured products. In spite of widespread condemnation by economists, President Hoover signed the Smoot-Hawley Tariff in June and rates rose sharply.
Following the First World War, the U. Figure 28 However, the surplus declined in the s as both exports and imports fell sharply after From the mids on finished manufactures were the most important exports, while agricultural products dominated American imports.
The majority of the funds that allowed Germany to make its reparations payments to France and Great Britain and hence allowed those countries to pay their debts to the United States came from the net flow of capital out of the United States in the form of direct investment in real assets and investments in long- and short-term foreign financial assets. After the devastating German hyperinflation of and , the Dawes Plan reformed the German economy and currency and accelerated the U.
American investors began to actively and aggressively pursue foreign investments, particularly loans Lewis, and in the late twenties there was a marked deterioration in the quality of foreign bonds sold in the United States. Mintz, The system, then, worked well as long as there was a net outflow of American capital, but this did not continue. In the middle of , the flow of short-term capital began to decline.
Though arguments now exist as to whether the booming stock market in the United States was to blame for this, it had far-reaching effects on the international economic system and the various domestic economies. In the Federal Reserve System had reduced discount rates the interest rate at which they lent reserves to member commercial banks and engaged in open market purchases purchasing U.
By early the Federal Reserve System was worried about its loss of gold due to this policy as well as the ongoing boom in the stock market. It began to raise the discount rate to stop these outflows. Gold was also entering the United States so that foreigners could obtain dollars to invest in stocks and bonds. In country after country these deflationary strategies began contracting economic activity and by some countries in Europe, Asia, and South America had entered into a depression.
Temin, ; Eichengreen, As a tool to promote stability in aggregate economic activity, fiscal policy is largely a post-Second World War phenomenon. Herbert Stein points out that in the twenties Herbert Hoover and some of his contemporaries shared two ideas about the proper role of the federal government. The first was that federal spending on public works could be an important force in reducin investment.
Both concepts fit the ideas held by Hoover and others of his persuasion that the U. The federal personal income tax was enacted in Table 4 As the United States prepared for war in , rates were increased and reached a maximum marginal rate of 12 percent. With the onset of the First World War, the rates were dramatically increased. To obtain additional revenue in , marginal rates were again increased. The share of federal revenue generated by income taxes rose from 11 percent in to 69 percent in However, through the purchase of tax exempt state and local securities and through steps taken by corporations to avoid the cash distribution of profits, the number of high income taxpayers and their share of total taxes paid declined as Congress kept increasing the tax rates.
The normal or base tax rate was reduced slightly for but the surtax rates, which made the income tax highly progressive, were retained. Smiley-Keehn, Though most agreed that the rates were too high, there was sharp disagreement on how the rates should be cut.
Democrats and Progressive Republicans argued for rate cuts targeted for the lower income taxpayers while maintaining most of the steep progressivity of the tax rates. They believed that remedies could be found to change the tax laws to stop the legal avoidance of federal income taxes.
Republicans argued for sharper cuts that reduced the progressivity of the rates. Mellon proposed a maximum rate of 25 percent. The highest marginal tax rate was reduced from 73 percent to 58 percent to 46 percent and finally to 25 percent for the tax year. All of the other rates were also reduced and exemptions increased. By , only about the top 10 percent of income recipients were subject to federal income taxes.
As tax rates were reduced, the number of high income tax returns increased and the share of total federal personal income taxes paid rose. Tables 5 and 6 Even with the dramatic income tax rate cuts and reductions in the number of low income taxpayers, federal personal income tax revenue continued to rise during the s. Though early estimates of the distribution of personal income showed sharp increases in income inequality during the s Kuznets, ; Holt, , more recent estimates have found that the increases in inequality were considerably less and these appear largely to be related to the sharp rise in capital gains due to the booming stock market in the late twenties.
Smiley, and Each year in the twenties the federal government generated a surplus, in some years as much as 1 percent of GNP. The surpluses were used to reduce the federal deficit and it declined by 25 percent between and Contrary to simple macroeconomic models that argue a federal government budget surplus must be contractionary and tend to stop an economy from reaching full employment, the American economy operated at full-employment or close to it throughout the twenties and saw significant economic growth.
In this case, the surpluses were not contractionary because the dollars were circulated back into the economy through the purchase of outstanding federal debt rather than pulled out as currency and held in a vault somewhere.
The new central banks were to control money and credit and act as lenders of last resort to end banking panics. All national banks had to become members of the Federal Reserve System, the Fed, and any state bank meeting the qualifications could elect to do so.
The act specified fixed reserve requirements on demand and time deposits, all of which had to be on deposit in the district bank. Commercial banks were allowed to rediscount commercial paper and given Federal Reserve currency.
Initially, each district bank set its own rediscount rate. To provide additional income when there was little rediscounting, the district banks were allowed to engage in open market operations that involved the purchasing and selling of federal government securities, short-term securities of state and local governments issued in anticipation of taxes, foreign exchange, and domestic bills of exchange.
The district banks were also designated to act as fiscal agents for the federal government. Finally, the Federal Reserve System provided a central check clearinghouse for the entire banking system. Both the Federal Reserve Board and the Governors of the District Banks were bodies established to jointly exercise these activities.
The division of functions was not clear, and a struggle for power ensued, mainly between the New York Federal Reserve Bank, which was led by J. By the thirties the Federal Reserve Board had achieved dominance. There were really two conflicting criteria upon which monetary actions were ostensibly based: the Gold Standard and the Real Bills Doctrine. The Gold Standard was supposed to be quasi-automatic, with an effective limit to the quantity of money.
However, the Real Bills Doctrine which required that all loans be made on short-term, self-liquidating commercial paper had no effective limit on the quantity of money. Actually the rediscounting of commercial paper, open market purchases, and gold inflows all had the same effects on the money stock. The final Victory Loan had not been floated when the Armistice was signed in November of in fact, it took until October of for the government to fully sell this last loan issue.
The Treasury, with the secretary of the treasury sitting on the Federal Reserve Board, persuaded the Federal Reserve System to maintain low interest rates and discount the Victory bonds necessary to keep bond prices high until this last issue had been floated. As a result, during this period the money supply grew rapidly and prices rose sharply. A shift from a federal deficit to a surplus and supply disruptions due to steel and coal strikes in and a railroad strike in early contributed to the end of the boom.
When the Fed was released from its informal agreement with the Treasury in November of , it raised the discount rate from 4 to 4. However, with Strong out of the country, the Federal Reserve Board increased the discount rate from 4. By the middle of , economic activity and employment were rapidly falling, and prices had begun their downward spiral in one of the sharpest price declines in American history.
The Federal Reserve System kept the discount rate at 7 percent until May 5, , when it was lowered to 6. By June of , the rate had been lowered yet again to 4 percent. Friedman and Schwartz, The Federal Reserve System authorities received considerable criticism then and later for their actions. Milton Friedman and Anna Schwartz contend that the discount rate was raised too much too late and then kept too high for too long, causing the decline to be more severe and the price deflation to be greater.
In their opinion the Fed acted in this manner due to the necessity of meeting the legal reserve requirement with a safe margin of gold reserves. Elmus Wicker , however, argues that the gold reserve ratio was not the main factor determining the Federal Reserve policy in the episode. Rather, the Fed knowingly pursued a deflationary policy because it felt that the money supply was simply too large and prices too high.
To return to the prewar parity for gold required lowering the price level, and there was an excessive stock of money because the additional money had been used to finance the war, not to produce consumer goods. Finally, the outstanding indebtedness was too large due to the creation of Fed credit. Whether statutory gold reserve requirements to maintain the gold standard or domestic credit conditions were the most important determinant of Fed policy is still an open question, though both certainly had some influence.
By the district banks began to recognize that their open market purchases had effects on interest rates, the money stock, and economic activity. For the next several years, economists in the Federal Reserve System discussed how this worked and how it could be related to discounting by member banks.
A committee was created to coordinate the open market purchases of the district banks. The recovery from the depression had proceeded smoothly with moderate price increases. Government caused the Great Depression but could not muster the integrity to admit as much and blamed something else. What is useful for us to ascertain today is why people invest in stocks in contemporary society. As I noted last week, they do so because conventional means of saving money are not available.
And as in the Roaring s, the more resources we devote to figuring out the mundane matter of saving, the more we deprive our economy of investment capital and useful growth. This is a BETA experience. You may opt-out by clicking here. More From Forbes. Nov 12, , am EST. Nov 11, , pm EST. Nov 11, , am EST. Nov 9, , pm EST. Nov 9, , am EST. Nov 8, , pm EST. For example, radio shares increased from 94 cents in March to cents in September By , over 20 million people had invested in shares.
Banks also became involved in speculation on the stock market.
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