The Wall Street Crash of 1929 and the Great Depression - Essay Example

The Wall Street Crash of 1929 and the Great Depression The recent global financial crisis of 2007 to 2009 is often compared to the Great Depression which had a major impact on the United States and has been identified as one of the catalysts of the Second World War (Bell 145). However, before that, a significant event occurred, the Wall Street Crash. This had a major impact on the entire global economy and this was accentuated by the fact that the global order was based on gold prices and things were not as thorough and transparent as it might be today (Robbins 23). The purpose of this paper is to critically examine the Wall Street Crash and the related events that came with it. This will provide an exegesis to the main causes of the Great Depression and the centrality of the Wall Street Crash to this entire system and situation. There will therefore be a critique of the background to the problem and how each event played out in determining the outcome of the Great Depression. Pre-World War I Economic Impacts Throughout the history of America, there has been a small elite and a small group of people in society have always sought to control affairs and determine issues for the entire society for many centuries. This brings to light, the view that most situation and financial crisis are artificially created and engineered by a small group of people at the helm of political and economic power who define circumstances and situations. “It is a growing belief that certain individuals with vast wealth and power, not generally known to the public, are the real masters in the United States and the world. Power is a fact of life in America, but most Americans are far removed from it. Secrecy is powers chief tool. Government seems distant, yet somehow domineering” (Marrs 4). This implies that there is a small group of people who are used by the government to show a positive image and do things whilst the government itself distant itself from these events. These small groups of people conspire and put together various patterns of activities that end up creating chaos which they benefit from. This includes various groups of people like bankers who connive with political leaders to pursue various goals and agendas. These bankers remain the heads of different endowment funds that determine the distribution of money in an economy and as such, they can induce various situations and matters without much resistance. Thus, there are numerous conspiracy theories that can be linked to historic trends and processes. As Marrs puts it “…conspiracy theories are an attempt to grasp the "big picture" of history.” (5). At the end of the 19th Century, the United States was in the process of consolidating its national systems and structures. It had not overtly sought to pursue an internationalization strategy or global leadership goals. There were a few bankers, mainly in New England who rose to prominence and became extremely powerful. One of these is what became known as JP Morgan and Co which is now merged into Chase Manhattan Bank. JP Morgan and Co has a history that goes back to London in the 1850s. This included two influential bankers - Junius S Morgan and George Peabody who both had separate banking entities that sold government bonds successfully in Britain. These British government bonds had the capacity to earn a lot of interest as the government gained more power and authority around the world. Hence, a lot of people believe that these bankers and their speculation played a role in inducing wars between the Imperialist nations and communities (Strouse 13) JS Morgan’s son saw a lot of potential in the fast industrializing US economy and saw the opportunity to move to the United States and help the government to also raise money and improve their financial standing and become a leading global power (Strouse 18). Therefore, in 1890, when Morgan Senior died, his son, JP Morgan took a senior position. And when the other partners passed on by 1895, JP Morgan concentrated on developing the American markets for the company, which was one of the pioneering entity for the speculation in government bonds and selling them to the American public. One of JP Morgan’s first and most important roles in 1895 was to help the US government to float $62 million worth of gold, through which JP Morgan was able to get the right to raise money for the government and also help return the US to a Treasury surplus of $100 million. The partnership had already injected a lot of money into funding the railway systems of New England and this was to bring them some revenue to render it as strong and powerful force in US financial affairs and situations. In 1907, there was a few entities that operated as banks and commercial investment entities in the United States. This gave room for a few bankers to control affairs and take decisions and make choices that could be far-reaching. In October of 1907, a number of banks speculated significantly, but their speculation failed, giving room for a major panic that spread through the United States (Braunstein 49). Thus, small group of financial elites and top investment bankers including Henry Clay Frick, William Rockefeller, Jason Schiff and JP Morgan gathered secretly to draw a plan which required that there must be $25 million raised to stabilize the loses that firms had made through that panic situation. “The name of Nelson Aldrich, senator from Rhode Island, was well known even in New Jersey. By 1910, he was one of the most powerful men in Washington, D.C., and his private railway car often was seen at the New York and New Jersey rail terminals during frequent trips to Wall Street. Aldrich was far more than a senator. He was considered to be the political spokesman for big business. As an investment associate of J.P. Morgan, he had extensive holdings in banking, manufacturing, and public utilities. His son-in-law was John D. Rockefeller, Jr. Sixty years later, his grandson, Nelson Aldrich Rockefeller, would become Vice- President of the United States.” (Gittelman 206). Meanwhile, evidence from the Pujo committee in 1913 concluded that leaving financial power into the hands of a small few people could be dangerous and they recommended that some checks should be put in place to avoid risks (Leab 345). This culminated in Congress forming the Federal Reserve System (FRS) which was going to be a system that would ensure that there was regulation and there were checks. In this process, though, evidence from the past indicates that the leading authorities in the financial sector including Aldrich, Rockefeller, Schiff, Warburg and others met secretly in Morgan’s private property near Georgia to discuss how they could lobby for the FRS to be formed to strengthen their expansionist drive and desire to grow their financial empires throughout the United States (Griffin 35). There is also evidence that this small group tried to get President Taft to accept the idea of creating and maintaining a Federal Reserve System. When Taft refused, they got Theodore Roosevelt to accept it and then they sponsored him with a lot of money and got him to create the Federal Reserve System (Leab 89). This therefore confirms the position that the theory of value and the worth of activities in society are strongly influenced by a small group of people who define the yardstick and control a lot of trends on the markets. Then with time, the United States entered the First World War and came out victories alongside the Allies. The international community moved towards a model whereby banking was to expand in all the nations that emerged victorious on the Allied side. Therefore Japan, Britain, France, USA and many other countries set up strong and powerful commercial banking systems that were centered on a strong stock market. Post-First World War Due to the size of the United States and the role the United States played in literally bailing Britain out of a losing position in the First World War, the United States gained prominence. The people around the world began to take the American people seriously and they sought to make it a major financial hub in place of London, which was in Europe and was considered vulnerable. The potential of the United States also came to the fore since it was a large economy and a lot of groundwork had been laid to grow and develop it further. The US equity market went through a major transformation after the First World War ended officially. There was an average increase of 600% increases in stock prices in the United States during that period (Richardson, Komai and Gou Para 3). The Dow Jones rose by unprecedented highs in 1923 after the Treaties dividing up Europe were finalized after World War I and this gave impetus for the growth of the US economy. There are two things that are said to occur when such rapid bullish rises occur they are: 1. Reduction in inflation and interest rates which causes stock values to move further and 2. The rise in corporate profits is since in the absolute sense as well as an expression of a growth in national income (International Monetary Fund 116). This led to a 6-year rise and consistent growth in the US economy because the structures and foundations were laid significantly for growth and further expansion. Analysts identify that it was simply due to the fact that Germany, which had been found guilty for starting the First World War was facing the economic consequences of the reparations they had to pay (Groseclose 158). This culminated in the restitution of major pointers in the international economy that had either been frozen or put on hold. For instance, the price of gold had remained stagnant throughout the war. The exchange rate of the US Dollar to the Deutsche Mark had remained stable and was based on an artificial rate. However, when the German reparations were factored in after the various treaties were completed, Germany was to bear the brunt of the war and they were to devalue their currency at one of the fastest rates ever in history. On the other hand, the gold prices shot up and the British Pound and US Dollars gained unprecedented values. This was because everything was to start afresh and Germany was to bear the consequences. The implication of this change that came up implied that the US Dollar and the US Stock prices could only gain value as everything that was being produced in the US was to attract extremely high amounts of profits on the international markets. This continued significantly over the years and the US economy showed a major sign of growing at a rapid rate. This continued for almost six years. However, as more money was invested in the New York Stock Exchange, there were signs and indicators that was apparent to the insiders that the stock could be stretched beyond limit. This gave signs that there was the need for buyers to cut down on their spending on US stocks. In 1929, things were set to change significantly. In February 1929, Evangeline Adams, a celebrity astrologist who claims her clients included Charlie Chaplin, Mary Pickford and JP Morgan predicted that the stock market prices were going to rise significantly (PBS). In March 1929, US Treasury Secretary, Andrew Mellon stated that there are bargains to be found on the stock exchange. Therefore, a lot of sales occurred in the period. On the other hand, the Federal Reserve met in the same month of March but did not make their discussions public. Meanwhile, the number of sales in Wall Street increased significantly in the first half of March, 1929. This was due to the optimism expressed by some very popular and seemingly powerful individuals about the markets. On March 25, 1929, a mini crash occurred when investors started selling their stocks significantly. This led to the slow movement of goods and services in the United States because there was a high rate of speculation and there was fear and uncertainty. Thus, people were not sure of the next move to make. The banker, Charles Mitchell identified that the national City Bank was going to provide a $25 million bailout but there were calls for him to resign from his post as a board member of the Federal Reserve Bank because he was seen to be compromised and not independent anymore due to his role in trying to rescue the economy. Throughout the months of April, May and June, the prices of shares on the New York Stock Exchange continued to decline. The boom ended significantly in October 1929 when there was a major disaster that spelt the absolute crash and fall of the US Stock Markets. In spite of the fall, there were authorities in the US government and other financial institutions that encouraged Americans to continue buying the stocks. On Thursday October 24, US Governor Hoovers was quoted as saying Americans should continue buying stocks. On Monday October 28, 1929, the Dow declined by 13%, this was followed by Black Tuesday, October 29 when it declined by nearly 12% when over 16 million shares were sold (Richardson, Komai and Gou). The fall continued to mid-November when the Dow fell to as low as half of its peak value. The fall continued until mid-1932 when the value fell to as low as 89% of the highest levels of the early 1920s (Richardson, Komai and Gou). This was the official genesis of the US Depression oft eh 1930s. The low levels of stocks on the New York Stock Exchange and other American stock exchanges could also be due in part to the recovery and rise of Germany and the need to revalue financial assets and currencies. This is because Germany had defied a lot of agreements in the League of Nations and the League in itself was in tatters and was heading towards disintegration. This sent major threats of uncertainties to the US and other economies around the world. By January 1931, over 4 million Americans had lost their jobs and there was little anyone could do to stop it because there was little money to spend and inflation was rising whilst the economy was contracting and more people had to spend less money and cut down on luxuries. There was a sharp fall in demand and things became extremely difficult. This marked the beginning of the Great Depression, when the US economy was stuck and limited and there was little by way of economic injection into the economy. Conclusion The Great Depression can be widely attributed to the fact that the American financial sector was controlled by a small but influential group of bankers who had a firm control over affairs in the country. This small group of people had a lot of control and could influence many things like the sale of government bonds by JP Morgan, the creation of the Federal Reserve, sponsoring of political parties amongst other things. This allowed this small group of people to influence policy significantly and also gain by speculating in order to carry out unethical practices and processes. The US economic boom of 1923 was due in part to the political settlement that occurred in Europe where Germany decided to pay a lot in reparations for being found guilty for starting the First World War. This culminated in the revaluation of gold prices and the rise in the value of the US Dollar and British Pound at the expense of the German Mark which went through record-high inflation. As a result, the United States’ stock prices were increased artificially and this presenting what on hindsight, was a misleading posture of the US stock markets. As a result of these artificial rises, there was the need to revalue the gold prices and US Dollars again in the late 1920s. And with Germany steadily rising complemented by the glut in the stock market, the condition were that the people were purchasing highly overvalued stocks. In spite of this, some influential insiders like the Treasury Secretary and others were quoted as encouraging Americans to continue buying the stocks. Eventually, the inevitable happened and the stock markets crushed and prices fell by over 90% of peak prices. This culminated in a stagnation in growth in the US economy. Works Cited Bell, M. H. The Origins of the Second World War in Europe. London: Routledge, 2012. Print. Braunstein, Y. M. “The Role of Information Failures in the Financial Meltdown.” School of Information, UC Berkeley (Summer 2009). Print. Gittelman, S. H. J.P. Morgan and the Transportation Kings: The Titanic and Other Disasters. Washington, DC: University of America Press, 2013. Primnt. Griffin, Edward. THe Creature form Jekyll Island. New York: Amer Media, 1994. Print. Groseclose, Elgin. Americas Money Machine. London: Creative Commons, 2013. Print. International Monetary Fund. International Capital Markets: Developments, Prospects, and Key Policy. New York: IMF Publication, 1997. Print. Leab, Deborah. Encyclopedia of American Recessions and Depressions. Santa Barbera: ABC CLIO, 2012. Print. Marrs, John. Rule by Secrecy. New York: Harper Collins, 2006. Print. PBS. A Selected Wall Street Chronology. 2014. Web. 26 April 2015. . Richardson, Gray, et al. Stock Market Crash 1929. 2015. Web. 26 April 2015. Robbins, Lionel. The Great Depression. New York: Transaction Books, 2014. Print\. Strouse, Jean. Morgan: American Financier. New York: Random House, 2010. Print. Read More