Download The Stock Market Boom

The Stock Market Boom
Although the stock market has the reputation of being a risky investment, it did
not appear that way in the 1920s. With the mood of the country exuberant, the
stock market seemed an infallible investment in the future.
As more people invested in the stock market, stock prices began to rise. This
was first noticeable in 1925. stock prices then bobbed up and down throughout
1 925 and 1926, followed by a strong upward trend in 1 927.
The strong bull market (when prices are rising in the stock market) enticed even
more people to invest. And by 1928, a stock market boom had begun.
The stock market boom changed the way investors viewed the stock market. No
longer was the stock market for long-term investment. Rather, in 1929, the stock
market had become a place where everyday people truly believed that they
could become rich.
lnterest in the stock market reached a fevered pitch. Stocks had become the
talk of eVery town. Discussions about stocks could be heard everywhere, from
parties to barber shops. As newspapers reported stories of ordinary people like chauffeurs, maids, and teachers - making millions off the stock market, the
fervor to buy stocks grew exponentially.
Although an increasing number of people wanted to buy stocks, not everyone
had the money to do so.
Buying on Margin
When someone did not have the money to pay the full price of stocks, they
could buy stocks "on margin." Buying stocks on margin means that the buyer
would put down some of his own money, but the rest he would borrow from a
broker. ln the 1920s, the buyer only had to put down 10 to 20 percent of his own
money and thus borrowed 80 to 90 percent ofthe cost ofthe stock.
Buying on margin could be very risky. lf the price of stock fell lower than the
loan amount, the broker would likely issue a "margin call," which means that the
buyer must come up with the cash io pay back his loan immediately.
ln the 1920s, many speculators (people who hoped to make a lot of money on
the stock market) bought stocks on margin. Confident in what seemed a neverending rise in prices, many of these speculators neglected to seriously consider
the risk they were taking.
Signs of Trouble
By early '1929, people across the United States were scrambling to get into the
stock market. The profits seemed so assured that even many companies placed
money in the stock market. And even more problematically, some banks placed
customers' money in the stock market (without their knowledge). With the stocf<
market prices upward bound, evefihing seemed wonder-ful. When the great
crash hit in October, these people were taken by surprise. However, there had
been warning signs.
On March 25,1929, the stock market suffered a mini-crash. lt was a prelude of
what was to come. As prices began to drop, panic struck across the country as
margin calls were issued. When banker Charles Mitchell made an
announcement that his bank would keep lending, his reassurance stopped the
panic. Although Mitchell and others tried the tactic of reassurance again in
October, it did not stop the big crash.
By the spring of 1929, there were additional signs that the economy might be
headed for a serious setback. Steel production went down; house construction
slowed; and car sales waned.
At this time, there were also a few reputable people warning of an impending,
major crash; however, as month after month went by without one, those that
advised caution were labeled pessimists and ignored.
Summer Boom
Both the mini-crash and the naysayers were nearly forgotten when the market
surged ahead during the summer of 1929. From June through August, stock
market prices reached their highest levels to date. To many, the continual
increase of stocks seemed inevitable. When economist lrving Fisher stated,
"Stock prices have reached what looks like a permanently high plateau," he was
stating what many speculators wanted to believe.
On September 3, 1929, the stock market reached its peak with the Dow Jones
lndustrial Average closing at 38'l .17. Two days later, the market started
dropping. At first, there was no massive drop. Stock prices fluctuated
throughout September and into October until the massive drop on Black
Thursday.
Black Thursdav - October 24, 1929
On the morning of Thursday, October 24, 1929, stock prices plummeted. Vast
numbers of people were selling their stocks. Margin calls were sent out. People
across the country watched the ticker as the numbers it spit out spelled their
doom. The ticker was so overwhelmed that it quickly fell behind. A crowd
gathered outside ofthe New York Stock Exchanqe on Wall Stree!, stunned at
the downturn. Rumors circulated of people committing suicide.
To the great relief of many, the panic subsided in the afternoon. When a group
of bankers pooled their money and invested a large sum back into the stock
market, their willingness to invest their own money in the stock market
convinced others to stop selling.
The morning had been shocking, but the recovery was amazing. By the end of
the day, many people were again buying stocks at what they thought were
bargain prices.
On "Black Thursday," '12.9 million shares were sold - double the previous
record.
Four days later, the stock market fell again.
Black Monday - October 28, 1929
Although the market had closed on an upswing on Black Thursday, the low
numbers of the ticker that day had shocked many speculators. Hoping to get
out of the stock market before they lost everything (as they thought they had on
Thursday morning), they decided to sell.
This time, as the stock prices plummeted, no one came in to save it.
Black Tuesday - October 29, 1929
October 29,'1929, "Black Tuesday," is known as the worst day in stock market
history.
There were so many orders to sell that the ticker quickly fell behind. (By the end
of close, it had lagged lo 21/2 hours behind.) People were in a panic; they
couldn't get rid of their stocks fast enough. Since everyone was selling and
nearly no one was buying, stock prices collapsed.
Rather than the bankers rallying investors by buying more stocks, rumors
circulated that they were selling.
Panic hit the country. Over 16.4 million shares of stock were sold - a new
record.
The Drop Continues
Not sure how to stem the panic, the decision was made to close the stock
market on Friday, November 1 for few days. When it reopened on Monday,
November 4 for limited hours, stocks dropped again. The slump continued until
November 23, 1929, when prices seemed to stabilize. However, this was not the
end. Over the next two years, the stock market continued to drop. lt reached its
low point on July 8, 1932 when the Dow Jones lndustrial Average closed at
41.22.
Aftermath
To say that the Stock Market Crash of 1929 devastated the economy is an
understatement. Although reports of mass suicides in the aftermath of the crash
were most likely exaggerations, many people lost their entire savings.
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The Stock Market Crash of 1929 occurred at the beginning of the Great
Depression. Whether it was a symptom of the impending depression or a direct
cause of it is still hotly debated.
Historians, economists, and others continue to study the Stock Market Crash of
1929 in the hopes of discovering the secret to what started the boom and what
instigated the panic.
As of yet, there has been little agreement as to the causes. ln the years after the
crash, regulations covering buying stocks on margin and the roles of banks have
added protections in the hopes that another severe crash could never happen
again.