STOCK MARKET CRASH, 1929
The Global Financial Crisis
‘Odon’ Bat-Erdene
ROARING 1920s (economy)
• Annual income increase: more than 15% (1923-1929)
• Real income rose: 10.5% per year from 1921 to 1923
3.4% from 1923 to 1929
• 1919-1929, total factor productivity increased by 5.3%
• 1928-1929, GNP increased about 6.6%
• Technological developments: radio, telephone,
automobile, air-condition, refrigerator, washing machine.
WELCOME TO THE STOCK MARKET
• Eight straight years rise in stock values: 218.7%• Mid 1920s’ real growth and prosperity• Boundless hope and Optimism • New American Characteristic
(get rich quickly with a minimum of physical effort)• Consumer Credit:
$2.6billion (1920)
$7.1billion (1929)• Buying on Margin
BLACK THURSDAY (Oct 24th, 1929)
• Major Panic• The nation’s most powerful financiers met to stop the
panic• Thomas Lamont: “There has been a little distress selling
on the Stock Exchange due to a technical condition of the market”
• 12.8 million shares had been sold• DJI: 21 percent decline from the high of 381.2 (Sept
3rd,1929) to 299.5. • Drop of 9% from Oct 23rd
• President Herbert Hoover said that the economy was fine on Friday, Oct 25th
• The most notorious day in American financial history• 16.4 million shares were sold• Dow Jones lost another 12 percent• Nearly $16 billion in market value (about $121 billion in
2007) evaporated• Twenty-nine public utilities lost $5.1 billion in the month
• The market closed down 12.8 percent on Monday, Oct 28th
BLACK TUESDAY (Oct 29th, 1929)
Allied Chemical & DyeGeneral ElectricMontgomery WardRadio Corp. of AmericaU.S. Steel
A CATALOGUE OF NINE CAUSES
1. Stock market value was too high
2. Real downturn in business activity
3. The subsequent raising of interest rates in London and liquidation of English investments in the United States
4. Actions of the Federal Reserve
5. Media and government figures
6. Buying on margin and margin-call
7. Excessive leverage used in utility sector
8. Setback in the public utility market
9. Overreaction by the market
FEDERAL RESERVE ACTIONS
Before the crash• Raised interest rate (loan to brokers and buy on margin)
During the week of the crash (final week of October)
Expand credit and bolster shaky financial positions• Added almost $300 million to the reserves of the banks• Doubled its holdings of government securities:
- adding over $150 million to reserves• Discounted about $200 million more for member banks• Lowered its rediscount rate from 6 to 4.5% (by mid-Nov)
THE PROBLEM: THE CLUSTER OF ERROR
1. Errors in forecasting
2. Capital-goods industries fluctuate
3. Increase in the quantity of money in the economy
Central bank• Lowered loan rate of interest• Businessmen invest in “longer process of production”
especially in the “higher order”
“HOOVER NEW DEAL”
(Laissez-faire: leave the economy alone)• Bolstering of wage rates and prices (1929)• Expansion of credit• Propping up of weak firms• Increased government spending
(e.g., subsidies to unemployment and public works)
The White House Conference (November 21)
- All the great industrial leaders: “stimulate the industry”
- Agreed to maintain wage rates and expand their investments
- Keep everyone employed by reducing the work-week
THE GREAT DEPRESSION
1929 1930 1931 1932$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00 $104.40
$91.10
$76.30
$58.50
$99.30
$85.80
$70.90
$53.30
GNPGPP
THE GREAT DEPRESSION
• Companies’ bankruptcy• Stockbrokers were ruined• Bank Crisis• The confidence in the nation’s economy was lost.• National unemployment rate – 25 percent• Average weekly wage: had fallen from $25 to $17• About two out of every three children in NYC were sick • Homeless and hungry• Revenue Act of 1932
- increased taxes: personal income, estate, sales, postal rates
- surtaxes: from 25 % to 63 % on the highest incomes
JULY 8TH 1932
• Market hit its bottom – 79.4• From 1929 to 1932,
stocks lost 73 percent
of their values.
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