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It’s Causes and Effects By Jeanine Brotherston

Dr. Volpert: Mathematics of Finance

Some Basic Background on the Stocks and the Economic Market

What are Securities?

• Securities can be either stocks or bonds which are sold and bought on the stock market.

What is the New York Stock Exchange?

• World’s largest market place for securities

• Currently membership limited to 1,366 members.

• Seat obtained by purchasing from existing member

Interesting Fact: How did Stock Exchange begin?

• The Exchange evolved from a group of men who used to meet under a buttonwood tree on what is now Wall Street in 1792 to discuss securities

The Great Bull Market

• Great American stock exchange boom of 1928-1929

• Huge bubble where there were high speculations

• People made many investments to make big money

Bull Market sparked by?

• Growth in American industries• Technological progress• Increase in productivity • Rise in national income from 33,200 million

to 79,200 million from 1914 to 1925• Expectation for great future and un-boundless

optimism for the market

What Sparked This Growth in Industry?

• The Electrification of the production process– This expanded the ability to transform raw

materials into finished products– Ex. Ford Motors

HOWEVER??????

• Wages did not raise even though the production did and prices of products failed to decrease.

• There was not an excess demand for labor– Leaving unemployment rate steady

Stock Exchange Average Rise in Share Prices 1924-1928

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StockExchange

24-May24-Dec25-Dec26-Dec27-Dec

Political Promises Spark Market Speculation

• Herbert Hoover was the most promising candidate for president because of his ideas which promised increased economic growth in America.

Hoover’s Plan

• Proposed a Tariff bill which Senator Smoot presented called the Smoot-Hawley Tariff– Promised increased tariffs on imports– Planned to allow more productivity for US

manufacturers– Help ease unemployment

Investors marvel at This Proposal

• Investors believed profits from stocks would increase if the tariff bill was passed

• Sparked intense speculation• Dow Jones Industrial Average increased by

almost 35% because expected election of Hoover and his bill

This Bubble was bound to Burst!

The Crash of 1929

• “American economic disaster that precipitated the Great Depression which was approximately a 10 year economic slump affecting all the western industrialized countries.” –Encyclopedia Britannica

General Causes of the Crash

• Rampant over speculation in market• People holding companies and investment

trusts (which by nature creates debt)• Bursting of Bull Market economic bubble

in August 1929• Large bank loans could not be liquidated

Direct Cause of Crash of Stock Market

• After Hoovers election certain people began to doubt if the tariff bill would help the US Economy– Farmers, America’s trading partners,

Democrats, and some Republican’s opposed the passage of new tariffs.

– On October 21, 1929 Senate announces plans to limit tariff revisions

– October 22, 1929 more limits set on tariff bill

Investors Realize Tariff Bill is DOOMED!!!!!!!!!!!!!

PANIC! PANIC! PANIC!

Black Thursday

• On October 18, 1929 prices began to fall

• Panic stuck out on October 24 “BLACK THURSDAY” after the announcements from the Senate

• Record of 12,894,650 shares were traded

Black Thursday (Continued)

• Major banks and investment companies bought up great blocks of stocks to stop the panic but….

THERE ATTEMPTS FAILED!!!!!!!!!

Black Monday and Tuesday

• The Panic continued and 16,000,000 shares were traded

• Prices on the stock market collapsed completely!!!!

Hoover’s Plan to combat Crash

• Extracted promises from manufacturers to maintain production.

• Signed legislation providing generous additional funds to pubic works

• Smoot-Hawley Tariff 1930 (finally passed): to raise duties 50%

• ALL THESE FAILED TO EASE CRISIS AND DEPRESSION FOLLOWED!!!!

Causes of Great Depression

• Agriculture had crashed in 1919 and was a continuing source of weakness.

• Banks over-extended

• Wages had not kept up with profits

• In 1920’s consumers were reaching limits of ability to borrow and spend

Cause’s of Depression (continued)

• Production was declining and unemployment increasing EVEN before the crash!

• Destroyed confidence in the economy

• Down sizing of industry causing unemployment

The Great Depression

• The stock prices in the next three years continued to fall

• By 1932 prices had dropped to only about 20% of there original value

Effects of Depression on Individual

• Thousands of individual investors ruined• Loss of savings• Poverty and panic• Less spending and demand• Unemployment• Wages decrease

Decline in Production

DOWNWARD SPIRAL- little out put means

less jobs- Manufacturing output

fallen to 54% of its 1929 output

- 25-30% of work force unemployed

- 12 -15 Million jobless

Effects of Depression on Economy

• Stock prices drop• Industry declines• Value of assets decline• 11,000 of 25,000 banks fail• Because of tariffs international trade market

decreases• Causes a world wide depression

World Wide Depression

• America’s intimate relationship with Europe causes serious economic troubles overseas and contributes to a world wide depression

Reasons America’s Depression Effects World

• World War I left Europe with large war debts– America was a major financer and creditor of

post war Europe. Once US slumped American investments to Europe dried up

– Germany hurt because of large war reparations

Reasons (continued)

• Nations attempt to protect domestic production with tariffs and having quotas on imports– This only reduced international trade and

damaged market even more

Hope Shattered

• In 1930 there is a slight rise in production and it seems depression might ease however: Spring 1931 the weakening of western European economy causes the major bank in Vienna to crash and Germany defaults on its war reparation payments

Hoover’s last Attempts

• Hoover proposes one year moratorium on war debt payments– Too little too late– Financial panic: European Government goes off

their gold standard and devalues currencies, destroying exchange system (hurts trade)

– Europe withdraws gold from US banks

Gold Crisis

• With draw of European gold from US banks causes– Banks to call their loans on US businesses– Bankruptcies– Bank customers go into ruin– Eventually banks in ruin

Hoover’s last Attempts (continued)

• Reconstruction Finance Corp- to lend funds to banks, railroads, etc

• Glass-Steagall Act- Gold to meet w/ foreign withdraws

THESE AND OTHER ACTS FAILED TO PROMOTE RECOVERY!!!!The American People lose fail in Hoover.

Franklin D. Roosevelt Wins Presidency

• Political and revolutionary thinker• Elected 1932• Introduced major changes in structure of

economy• New Deal

FDR’s New Deal

• Opposite of Laissez-Faire• Increased government regulation• Massive public works projects for relief of

poverty• Aid for the unemployed and unfortunate

Some of FDR’s Programs

• Civilian Conservation Corp

• National Recovery Administration

• Federal Deposit Insurance Corporation

• Securities and Exchange Commission

More Programs

• 1935 Wagner Act (authority of Federal government in industrial relations)

• National Labor Relations Board• Social Security, unemployment

compensation, disability insurance

End to Depression

• Outbreak of World War II causes– US factories flooded with orders form

armaments and munitions– Unemployment decreases and production

increase– Depression ends completely by the time the US

enters the war in 1941

What did we learn from the 1929 Crash?

• Market can be very unpredictable• Investors must not get caught up in market

bubble illusions• Market forces alone may be unable to

achieve recovery from economic slump• Changes were needed in US economic

structure

Government Action Taken now to Ensure Economic Stability

• Taxation• Industrial regulation• Social programs (social security, pensions,

welfare, others)• Public programs• Deficit spending

Food for Thought

• Currently our economy is prosperous because of new technology and advancements (especially in computers)

• Its Important not to over speculate or jump the gun when it comes to investments

• Important to know stock market crashes are still possible (Crash of 1987 and 1997)

Thank You for Your Attention