Download 1929 Stock Market Crash ¡@ October 1929 was the beginning of the

1929 Stock Market Crash
¡@
October 1929 was the beginning of the 1929 Stock Market Crash. Within the first few hours the stock market
was open, prices fell so far as to wipe out all the gains that had been made in the previous year. The Dow
Jones Industrial Index closed at 230. Since the stock market was viewed as the chief indicator of the
American economy,
public confidence was shattered. Between October 29 and November 13 (when stock prices hit their lowest
point) over $30 billion disappeared from the American economy. It took nearly twenty-five years for many
stocks to recover.
The U.S. Government's Reaction to the Crash
There was criticism of Federal Reserve policy after the 1929 Stock Market Crash, even though the Federal
Reserve initial reaction to the Crash seemed to have been fully appropriate. Between October 1929 and
February 1930, the interest rate was lowered from 6 to 4 percent, and the money supply increased
immediately after the Crash. Commercial banks in New York made loans to securities brokers and dealers,
which in turn provided liquidity to the non-financial and other corporations that financed brokers and dealers
prior to the Crash.
However, monetary policy became ambiguous during February 1930 and 1932. Government securities
purchases in the open market continued to decline until 1932. This reduced liquidity by lowering nonborrowed reserves. Furthermore, although the interest rate was reduced between March 1930 and
September 1931, it was raised twice later in 1931. This rise made loans more expensive and deterred people
and corporations from borrowing. What is worse, the money supply dropped by 31 percent between 1929
and 1933 -- depressing economic development further during the Depression.
Why many people in the U.S. invested in the stock market during 1929
Here are some of the reasons why many people bought shares during 1929:
1. Rising Stock Dividends
The stock market was propped up by new investors entering the market, who viewed it as an easy way to get
rich quick. However, economic historians estimate that a relatively small number of Americans -- about 4
million -- had investments in the market at any one time. Rather, the constant influx of new investors coming
in and old investors moving out ensured that new money was always floating around.
2. Increase in Personal Savings
Higher wages meant that even average Americans now had surplus money to put into savings or invest in
the stock market.
3. Relatively Easy Money Policy
At this time, banks made money more readily available at lower interest rates to more and more people.
Although economists debate the actual influence of this phenomenon on the stock market, it's conceivable
that many people took out loans not only to buy cars, but also to buy stock.
4. Over-production Profits were Invested in New Production
From 1925 on, industry was over-producing. In anticipation of eventually selling the surplus, business leaders
funneled their profits right back into industry, investing in factories, new machinery, and more workers, which
led to even greater overproduction. This increased production gave the companies an
aura of financial soundness, which encouraged Americans to buy more stock.
5. Investors' High Expectation
At this time there were no effective legal guidelines on the buying and selling of stock. Free from legal
guidelines, corporations began printing up more and more common stock. Many investors in the stock
market practiced "buying on margin," that is, buying stock on credit. Confident that a given stock's value
would rise, an investor put a down payment on the stock, expecting in a few months to pay the balance of the
initial cost plus receive a hefty profit. This turned the stock market into a speculative pyramid game, in which
most of the money invested in the market wasn't actually there.
Regulations enforced to protect investors after the 1929 Stock Market Crash
Before the 1929 Stock Market Crash, few regulations were enforced. Investors were not protected from
fraud, hype and shoddy stocks. Individuals did not know whether companies were doing as well as they
claimed to be doing and whether companies' financial reports were reliable. It was after the Crash that an
agency known as the Securities and Exchange Commission (SEC) was established to lay down the law and
punish the violators.
During the stock market crash of 1929, 4,000 banks failed because depositors fought to reach teller windows
before the money ran out and their savings disappeared forever. Four years later, Congress passed the
Glass-Steagall Act, which banned any connection between commercial banks and investment banking, to
ensure that such a tragedy would never be repeated in the belief that the banks' collapse was due to their
stock market speculation. However, over the past decade, the Federal Reserve and other banking regulators
have softened some of Glass-Steagall's separations of securities and banking functions by letting banks sell
certain securities through affiliated companies. Commercial banks have made inroads into both investment
banking and insurance during the last five years.
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