Stock market crash of 1929 - Business in United States of America

The Event: The single most dramatic decline in the the United States stock market to occur in the twentieth century
Date: October, 1929
Significance: Every sector of the American business community was affected by the stock market crash of 1929, which eliminated more than half of the value of all American assets in thirty months.
The period from the end of World War I in 1918 to the stock market crash in October, 1929, was a heady time for American investors. The New York Times stock index was in the 50’s in 1918. By 1921, it rose to 65. It continued its steady advance until the end of August, 1929, when it peaked at 449. As the market rose, larger numbers of people, many totally inexperienced in playing the stock market, became stockholders. The advances sustained for over a decade appeared to have no end.

Sources of Investment Money

World War I was enormously profitable for manufacturers of the materials required to wage the war. These manufacturers had large sums of money available for investment. Billions were placed in the stock market, driving stock prices up and leading to considerable speculative buying. Often, a stock bought in the morning could be sold the same afternoon at a considerable profit.
Money for investment also became plentiful during the administration of President Warren G. Harding (1921-1923). Under this administration, taxes on the wealthy were reduced substantially, making available more money to invest. Harding decided to pay off the national debt, thereby removing U.S. securities from American financial markets. Money that would normally have gone into such securities ended up in the stock market.
Excess corporate funds were used to buy large quantities of stock, and working-class Americans, most of whom had no previous experience in such financial matters, withdrew their savings from banks and put them into the rapidly expanding stock market with the expectation of reaping immediate profits. Few of these inexperienced investors had realistic notions of the hazards involved in their investments.

Buying on Margin

A pernicious aspect of the stock market speculation rampant during the 1920’s was buying stocks on margin. Stock brokers encouraged their clients to buy shares by putting down anywhere from 10 to 50 percent of the purchase price. These brokers arranged for bank loans, using the shares purchased in this way as collateral. The chance to buy $1,000 worth of stock for $100 was extremely tempting, particularly if the shares purchased in this way were worth $2,000 within a few days. Inexperienced traders expected to increase their wealth dramatically through buying on margin.
Margin buying works well in markets that rise consistently, but few markets do that. If a stock bought on margin falls to the point that it is worth less than the amount borrowed on it, the lender sells it immediately for whatever price it can command, often leaving the borrower in substantial debt for the balance. Such margin calls became the bane of many stock traders’ lives. For some, the only way out of debt was suicide, which some traders resorted to when the market crashed in the final months of 1929.

The Bubble Bursts

The stock market rose substantially every year from 1918 until the last quarter of 1929. Considerable money was made, but the advances were not sustainable, because, although corporate profits were up throughout the decade, they advanced only modestly. Thus, the companies’ profits were insufficient to justify the increase in their stocks’ value over the decade. On August 31, 1929, the New York Times index reached its all-time high of 449. Discouraging news from the corporate world, however, soon drove the market down.