Financial Stroke, Stock Market Crash of 1929 - Term Paper Example

October 29, 1929, the Dow Jones Industrial Average disintegrated and with it, the financial condition of investors vanished and the middle class deteriorated. The American dream became a nightmare when the stock market crashed in 1929. The 1929 stock market crash pushed thousands of banks and businesses to cease operations. Millions of Americans became unemployed and they lost the homes and goods they purchased on credit. The event had a ripple effect throughout the United States and the government attempted to correct the issues cause by the stock market crash. The crash and resulting depression had a profound effect on New York and the middle class. Introduction The stock market crash of 1929 affected the financial condition of investors and the middle class deteriorated. Because of buying stocks on margin, excessive corporate earnings, and the expectations that quick fortunes could be made on Wall Street, Americans were urged to invest their savings and hard earned money. Because numerous shares of stock were purchased by inexperienced Americans who had very little capital assets, the falling prices on October 24, 1929 produced a panic. The drop in share prices resulted in margin calls and the investors had to sell their shares to pay off the loans used to purchase stocks. The effort by the leading bankers to stop the skid temporarily worked but on October 29, 1929 stock prices began to decline rapidly. The 1929 stock market crash pushed thousands of banks to cease operations. The first major bank to shutdown was a branch owned by the Bank of the United States. Consumers who had their life savings in the banks lost everything because during this period bank deposits were not insured. In an effort to restore the lost confidence by public, the Emergency Banking Act and the Glass-Steagall Act was legislated. Jackson Heights in Queens, New York was an elite suburban neighborhood and because of the 1929 stock market crash the middle class community underwent a transformation. Middle class Americans found their apartments and homes padlocked with their belongings and families in the street. Americans traveled around looking for any type of employment and numerous Americans resided in makeshift shantytowns called Hoovervilles. The Americans who took advantage of credit and installment plans to purchase homes, automobiles, furniture and household appliances faced foreclosures and repossessions because of the reduction in income. Pre crash environment October 29, 1929, the Dow Jones Industrial Average disintegrated and with it, the financial condition of investors vanished and the middle class deteriorated. Before the stock market crashed, the banking regulations environment permitted financial institutions to speculate in the stock market. The expansion of bank brokerage loans used for margin and the get rich quick mentally of investors produced the speculative bubble in the stock market before the crash. Although only 7 or 8 percent of the United States population in reality owed stocks during the 1920’s, many Americans became attracted to investing, and during those years, investment and speculation were talked about by many Americans. (Salem) Banks used deposits from its customers to generate revenue by providing margin loans to investors, loans to businesses for expansion, and installment loans to customers to purchase goods. Wall Street, in New York City, was the place where money could be invested with the expectation of rising stock prices creating wealth and, as a result, Wall Street became the locale of frantic speculation. Contributing to the frantic speculation were government regulations and legislation that advocated manufacturing growth and investment. Because of margin buying, excessive corporate earnings, and the expectations that quick fortunes could be made on Wall Street, Americans were urged to invest their savings and hard earned money (Alverson). Share prices increased because of the excess demand and shortly before President Coolidge left office, he promoted the speculative atmosphere by postulating that stocks were still undervalued. To participate in the buying frenzy, an investor did not have to pay the full price with all of their available funds. The investor could own shares by buying on margin that allowed them to purchase shares with as little as 10 percent of the share price (Salem). The investor would obtain the rest of the funds with a loan from the broker and the broker would receive a loan from the bank. The shares of stock were the collateral in the event of a loan default. Buying on margin fueled the speculative atmosphere and limited government regulations encouraged the practice. Financial institutions and stockbrokers promoted that Americans could participate on Wall Street even if they had limited funds. The City Bank of New York, which was a merchant bank chartered in 1812 and later altered its name to National City Bank, was the biggest bank in the nation by 1984. During the frenzied speculative buying during the 1920s, National City became a leading marketer of investments to individual shareholders, even though state banking legislation barred commercial banks from participating in the investment banking trade. Commercial banks could not lawfully acquire stocks but the financial institutions, such as National City, formed subsidiaries that permitted them to take on investment banking and brokerage behavior. Lawmakers blamed National City’s insistent sales methods for the stock bubble and resulting crash (Annys). John Jacob Raskob who was an affluent capitalist mentioned how effortless it was for Americans to participate in stock speculation and attain wealth (Salem). President Herbert Hoover had also advocated that Americans prosperity would grow and poverty would vanish (Salem). Because of these assurances from prominent individuals, many Americans invested on Wall Street instead of placing their hard earned funds in savings accounts. Before the stock market crash of 1929, bank activities and investment activities were sometimes identical. Regulations and legislation prior to the 1920’s created the banking environment that led to the crash. Stock market crash In 1925 the stocks had a value of $34 billion the value of stocks would almost double to $64 billion by 1929 (Baron). Investment in company’s often occurred because of the get rich mentally of the era and not because of the earnings that a corporation would produce. Increased demand drove the prices of stocks higher and investors would continue to purchase the stocks at higher prices. Share prices did not mirror company’s earnings but indicated Americans speculated desires to produce wealth (Salem). In September, 1929, investors came to the realization that the stock prices could not maintain the frenzied growth pace and, as a result, share prices declined and investors began to sell, even at a loss (Salem). On Black Thursday, October 24, more than 13 million shares were exchanged and the market lost $9 billion in value (Baron). Because numerous shares of stock were purchased by inexperienced Americans who had very little capital assets, the falling prices produced a panic. The drop in share prices resulted in margin calls and the investors had to sell their shares to pay off the loans used to purchase stocks. Shareholders who had all of their funds invested in stocks had to sell before the prices declined. Since numerous investors purchased shares by buying on margin, sell orders flooded the stock exchange and the ticker tape at the New York Stock Exchange could not keep pace with the sell transactions (Salem). There was confusion because the ticker tape was not providing accurate information as to what was occurring with the stock trades. In an effort to stem the confusion, an assemblage of prominent New York bankers pooled their assets to purchase shares of stock at prices above the current asking levels. The Morgan bank, which had assisted the United States government with financial panics in the past, brought $20 million worth of stock in an effort to reinforce the market (Baron). Richard Whitney, who was a Vice President for the New York Stock Exchange and a stockbroker for the House of Morgan, began to acquire shares on Thursday, October 24, 1929 to stem the tide of selling (Salem). Although their purchases were small, investors witnessed prominent banking capitalists purchasing shares and this helped restore small investor’s confidence in the market. The effort by the leading bankers temporarily worked but on October 29, 1929 stock prices began to decline rapidly. More than 16 million shares were bought and sold causing the market to lose $15 billion in value and conventionally prominent corporations like AT&T and General Electric saw the value of their stock prices decline drastically (Baron). Within two weeks, share price values had declined by 37.5 percent and by early 1932, share prices were valued at only 20 percent of their value at the 1929 peak (Salem). Government’s response to the crash The 1929 stock market crash pushed thousands of banks to cease operations. Consumers who had their life savings in the banks lost everything because during this period bank deposits were not insured. In a viscous downward cycle that occurs in an economic downturn, consumers lost their capability to purchase products so companies decreased manufacturing, which leads to layoffs of American workers and, as a result, further decreases the spending power of the American public. Americans lost confidence in the banking system. Franklin Roosevelt won the presidential election of 1932 and promised Americans a New Deal and part of the New Deal was restoring the citizen’s faith in the US banking system. In an effort to restore the lost confidence, President Roosevelt created the Emergency Banking Act on March 6, 1933. The first activity of the Banking Act was to declare a banking holiday that closed the US banks, while the financial health of the banks was inspected for solvency. Additional regulatory measures were accomplished by President Roosevelt to address the banking crisis during the Great Depression and on June 16, 1933 the Glass-Steagall Act was passed. Congress placed into law the Glass-Steagall Act, which among other things banned commercial banks from getting into the insurance dealings (Annys). The Glass-Steagall Act prohibited commercial banks from carrying on investment banking activities. Specifically, it deprived commercial banks of creating securities processes except if the bank was purchasing and selling stocks on behalf of a client’s authorization. Stock market crash importance to New York history The stock market crash had a ripple effect across the economy, particularly in the banking industry. The banking sector was distressed after the 1929 stock market crash. On Black Tuesday, October 29, 1929, corporate revenue dried up and the consumer’s deposits vaporized. Customers trying to retrieve their deposits from the commercial banks found the intuitions closed because the banks had insufficient capital because of losses from the margin buying loans. Numerous banks became insolvent after the crash because of illiquidity issues and this cause a domino effect of bank customers requesting their savings. The 1929 stock market collapse and ensuing bank insolvencies was the start of the Great Depression and customer’s lack of faith in the financial sector. After the stock market crash of 1929, the first major bank collapse occurred at a bank branch established in 1921 at the southeast corner of Freeman Street and Southern Boulevard in the Morrisania community of the Bronx (Christopher). The branch was the first Bronx location of the Bank of the United States, which was created in 1913. The Bank of the United States was established to provide banking service to immigrants. On December 10, 1929, $2 million was withdrawn from the Bank of the United States Bronx branch by 2,500 depositors (Christopher). Many depositors stood in line for more than 2 hours to withdraw their money and the activity fascinated a multitude of more than 20,000 people. The Bank of the United States had 400,000 depositors, which was more than any other bank in the nation (Christopher). The collapse had a devastating effect on the garment sector that required capital for their payrolls. Withdrawal requests were handled in a systematic fashion, but on December 21st an assemblage of 3,000 yelling “We want our money!” attempted to penetrate the locked Bronx branch (Christopher). Six Bronx residents were arrested but the charges were dismissed the following day. The bank eventually paid out more than 80 percent of the deposits, but the apparent community fear set the phase for a sequence of bank insolvencies that extended to 1933 (Christopher). Edward MacDougall of the Queensboro Realty Company initially conceived of and constructed Jackson Heights in Queens, New York in the early 1900’s as an elite suburban neighborhood for white, nonimmigrant Protestants in close proximity of Midtown Manhattan (Miyares). MacDougall did not anticipate the 1929 stock market crash and the accompanying real estate market occurrence. The 1929 stock market crash and the real estate doldrums in the 1930s caused the alteration of Jackson Heights. Selling prices were discounted because vacant apartments were extremely difficult to sell and the Tower’s bigger seven room apartments were split up into three and four room apartments (Miyares). Renters who became unemployed or loss their funds because of the bank closings had to sell or default on their living accommodations. The quality of the community’s businesses declined because the prosperity of the inhabitants worsened (Miyares). Stock market crash affect on the middle class Americans could purchase the amenities of contemporary living including electric irons, radios, vacuum cleaners, washing machines, refrigerators, cars and go to sound motion pictures in air conditioned theaters (Alverson). Modern systems of manufacturing created expectations in the daily lives of Americans and much of the population took advantage of the new inventions by outright purchasing or acquiring goods with installment plans. Twenty-three million cars were in use by 1929 and America had grown into a country of consumers where everyone wanted a piece of the American dream (Alverson). The American dream became a nightmare when the stock market crashed in 1929. The Great Depression was a global economic disaster that in the United States was discernible by extensive unemployment, declining manufacturing output and construction activities, and an 89 percent decrease in the value of stock (Taylor). By 1932 the number of unemployed had increased to more than 20 percent and thousands of banks and businesses had closed, and millions of Americans were homeless (Taylor). Middle class Americans returned home from their daily search for employment and found their apartments and homes padlocked with their belongings and families in the street. Americans traveled around looking for any type of employment and numerous Americans resided in makeshift shantytowns called Hoovervilles (Taylor). In order to feed their families, many Americans lined up at soup kitchens or scrounged in trash dumps and garbage cans for food. The amount of people who lost their jobs during the Great Depression increased but those individuals who were fortunate to keep their jobs faced declining wages. The Americans who took advantage of credit and installment plans to purchase homes, automobiles, furniture and household appliances faced foreclosures and repossessions because of the reduction in income. As consumer’s purchasing power decreased because of the reduction of income, manufacturing decreased, companies ceased to exist, and more employees were out of work (Taylor). The Great Depression had an effect on between fifteen and twenty five million people and their families in the United States who had invested in stock (Alverson). The 1929 stock market crash triggered the Great Depression and affected even those individuals and families who did not participate in the speculative stock market (Alverson). The economic anxiety induced by the 1929 stock market crash quickly germinated into a depression that Americans had never witnessed. Millions became unemployed, lost their homes, their possessions, and went hungry as manufacturing businesses laid off employees to cut output and expenditures. Shantytowns called Hoovervilles became the new home of the homeless and unemployed middleclass throughout the United States. Conclusion The stock market crash of 1929 affected the financial condition of investors and the middle class deteriorated. The 1929 stock market crash pushed thousands of banks to cease operations. In an effort to restore the lost confidence by public, the Emergency Banking Act and the Glass-Steagall Act was legislated. Millions of Americans became unemployed and they lost the homes and goods they purchased on credit. The event had a ripple effect throughout the United States and the government attempted to correct the issues cause by the stock market crash. The crash and resulting depression had a profound effect on New York and the middle class. References Alverson, J. Stewart. "The Day America Crashed." Magill’s Literary Annual 1980 (1980): 1-4. Literary Reference Center. EBSCO. Web. 22 Apr. 2011. Annys, Shin. "Citi's Relentless Quest for Growth." Washington Post, The n.d.: Newspaper Source Plus. EBSCO. Web. 22 Apr. 2011. Baron, Robert C., and Samuel Scinta. "1920-1930 The Roaring Twenties: 1929 Stock Market Crash." Millennium 2000 -- 20th Century America: Key Events in History (1996): 34-35. History Reference Center. EBSCO. Web. 23 Apr. 2011. Christopher, Gray. "Streetscapes: The Bank of the United States in the Bronx; The First Domino In the Depression." New York Times 18 Aug. 1991: 6. Newspaper Source Plus. EBSCO. Web. 22 Apr. 2011. Miyares, Ines M. "From Exclusionary Covenant To Ethnic Hyperdiversity In Jackson Heights, Queens." Geographical Review 94.4 (2004): 462-483. Academic Search Premier. EBSCO. Web. 22 Apr. 2011. Salem, Press. "The Stock Market Crashes." Great Events. 274. US: Salem Press, 1999. History Reference Center. EBSCO. Web. 22 Apr. 2011. Taylor, Nick . "Great Depression (1930's) News - The New York Times." New York Times. N.p., n.d. Web. 23 Apr. 2011. Read More