Market Panic


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market panic Great depression 8

"The Great Depression of the 1930's was a worldwide phenomenon composed an infinite number of separate but related events."   The Great Depression was a time of poverty and despair caused by many different events.  Its hard to say what caused this worldwide depression because it's all based on opinion as opposed to factual data.  There are many contributing factors but not one specific event can be pin pointed for starting the depression.  It is believed that some events contribute more than others-such as the Stock Market Crash of 1929.
The Stock Market Crash of 1929 was in the majorities opinion, a long and overdue crash that was bound to happen.  Prices sky-rocketed so high that when they reached what was believed to be it's all time high, most people sold their gaining stocks for a profit.  So many people sold their stocks at a rapid rate that the corporations were unable to pay the shareholders.  Speculation arouse months before the crash when Roger Babson made his speech at the annual National Business Conference which he said "..... Sooner or later a crash is coming which will take the leading stocks and cause a decline from 60 to 90 points in the Dow Jones Barometer."   This and many others speeches like this scared people into selling there stocks before the inevitable would happen.  This was a leading causes that assisted the Great Depression become one of the bleakest and most studied events in the history of our country: yet not the only cause.  
Another large contributing factor was Mother Nature, I say this because in Oklahoma the weather was so dry that the farmers were unable to harvest their crops: these farmers became known as Okies.  The land was a barren wasteland of dust and dirt in which it got it's name the Dust Bowl.  In other areas, the extreme opposite took place: farmers overproduced and prices rapidly dropped because the demand decreased.  The drastic result of this oversupply made it hard for farmers to make money due to the fact that they had so much that they were forced to sell it at substantial low priced just to remain competitive enough to make even the small profit they were making. The imbalances were however, self correcting in which if manufacturers made too much of something, it's price would fall, profits would disappear, and the producers would cut back on output.  In 1932 the American writer, Stuart Chase described cycles as "the spree and hangover of an undisciplined economy."
Economists recognized the depression as a cycle in which there were four cycles; expansion; crisis(or panic); recession (or contraction); and recovery.  The definitive description was made by Wesley Clair Mitchell of the University of California.  A cycle Mitchell explained in Business Cycles(1913) was "the process of cumulative change by renewal of [Economic] activity develops into intense prosperity by which the prosperity engenders a crisis, by which crisis turns into depression and by which depression finally leads to.... a revival of activity."  
Banks played a significant role in the depression because they were in  charge of all the money and interest rates.  For example when banks had large reserves, they lowered interest rates.  Cheaper loans encouraged manufactures to invest in new equipment and hire additional workers.  The resulting expansion of production caused an upswing of the cycle.  The increased borrowing eventually reduced the bank's reserves, thus resulting in a drastic increase of interest rates.  That discouraged investors and slowed the economy down.  Another good explanation was the bad distribution of wealth for the cycles. During these challenging and difficult times the rich opted not to spend there money: they saved in banks, vaults, etc.  This resulted in increased investments, more production, and eventually more goods piled up on shelves and warehouses.  Prices fell, production was cut back and workers were discharged. As a result, the economy entered the depression phase of the cycle.
The crisis stage of the cycle was brought about by bank failures and by irrational selling of stocks ;thus causing business failures, a slowing in production, a rise in unemployment, and an overall optimistic view about the future.
Another helpful aide in the depression was the chief International creditor ... more

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1929 Stock Market Crash

The 1929 Stock Market Crash
In early 1928 the Dow Jones Average went from a low of 191 early in the year, to a high of 300 in December of 1928 and peaked at 381 in September of 1929. (1929) It was anticipated that the increases in earnings and dividends would continue. (1929) The price to earnings ratings rose from 10 to 12 to 20 and higher for the markets favorite stocks. (1929)  Observers believed that stock market prices in the first 6 months of 1929 were high, while others saw them to be cheap. (1929)  On October 3rd, the Dow Jones Average began to drop, declining through the week of October 14th. (1929)
On the night of Monday, October 21st, 1929, margin calls were heavy and Dutch and German calls came in from overseas to sell overnight for the Tuesday morning opening. (1929)  On Tuesday morning, out-of-town banks and corporations sent in $150 million  of call loans, and Wall Street was in a panic before the New York Stock Exchange opened. (1929)
On Thursday, October 24th, 1929, people began to sell their stocks as fast as they could. Sell orders flooded the market exchanges. (1929) This day became known as Black Thursday. (Black Thursday) On a normal day, only 750-800 members of the New York Stock Exchange started the exchange. (1929) There were 1100 members on the floor for the morning opening. (1929) Furthermore, the exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight. Extra telephone staff was also arranged at the members boxes around the floor. (1929) The Dow Jones Average closed at 299 that day. (1929)
On Tuesday, October 29th, 1929, the crash began. (1929) Within the first few hours, the price fell so far as to wipe out all gains that had been made the entire previous year. (1929) This day the Dow Jones Average would close at 230. (1929) Between October 29th, and November 13 over 30 billion dollars disappeared from the American economy. (1929) It took nearly 25 years for many of the stocks to recover. (1929)
By mid November, the value of the New York Stock Exchange listings had dropped over 40%, a loss of $26 billion. (1929-1931)  At one point in the crash tickers were 68 minutes behind. (1929-1931) An average of about $50,000,000 a minute was wiped out on the exchange. (1929-1931) A few investors that lost all of their money jumped to their deaths from office buildings. Others gathered in the streets outside the Stock Exchange to learn how much they had lost. (Black Thursday)
The Cause
There are five proposed reasons as to why the stock market crashed. One of the reasons was that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price to Earning ratios and Price to Dividend ratios, argue that the share prices were not too high. Another reason is that there were massive frauds and illegal activity in the 1920s stock market. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. (1929)
Margin buying is another reason why people believed that the crash happened. Though it is not the main reason, there was very little margin relative to the value of the market. The new President of the Federal Reserve Board, Adolph Miller, tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, in the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporations that financed brokers and dealers. Lastly, many public officials commented that the stock price was too high. Herbert Hoover publicly stated that stocks were overvalued and that speculation hurt the economy. Hoovers statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of ... more

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