The Great Depression

The Great Depression 

Notes on the BBC documentary: 

 The Great Depression of 1929 was a prolonged economic recession during which thousands of banks failed. It lasted over a decade, easing with the start of the second world war. It happened on the 23rd of October 1929, during which share prices plummeted, as there were no buyers and many sellers. 

Timeline: 

1919 - the US won WWI, bringing about optimism. Across the pond, Britain and Europe had been financially crippled while the US was thriving. 

1920s - PROSPERITY! brought about by electrification, new tech, the car industry, etc. There was a consumer culture - mass consumption and instalment buying was rife. 

Consumer credit became more widespread - people would 'buy now, pay later', as the tendency towards instant gratification grew. 

Investing became more normal. Previously only those in the industry had invested but many 'normal' people became investors for the first time in the 20s. this was because the US had sold bonds dubbed 'Liberty bonds' to pay for the war, which many bought. This was a gateway for many into more risky investment - stocks lost a lot of the stigma of being too 'risky'.  Women also became more involved in the stock market. An investing culture was born and 'ordinary' people became accustomed to buying things like securities. The professional bankers on Wall Street took advantage of this. For example Citibank (then the National City Bank) opened brokerage offices across the US and gave advice to the public about investment. 

Advancements in technology facilitated the public interest in investment as share prices could be know within seconds with the new tickers. 

Mid 1920s - There were now millions in the stock marker. The media reflected this - it was fascinated by the market and often featured how celebs would invest. People would read about what their favourite celebrities invested in and many who succeeded in the stock market became celebrities and role models. 

People had so much confidence in the market that they would borrow to speculate. This buying stocks with borrowed money became known as 'buying on the margin'. Brokerage firms would often loan a lot of money as they had such high confidence also. Eventually nearly 40cents for every dollar loaned was loaned for the purchase of stocks. 

As more and more people borrowed to invest the market was pushed up. the president himself, Calvin Coolidge was an investor. He was connected to Wall Street's inner circle of bankers and so they had a lot of influence over the government's financial policy. Wall Street had loads of power in general. This close relationship between elite bankers and politicians meant that regulation over the financial sector was kept to a minimum. 

As a result there was a lot of market rigging by the professional speculators, at the expensive newcomers or 'ordinary' people. A technique often used by larger firms/investors would be hyping up a certain share by buying lots of it and then dumping it on the market as soon as they began to profit. 

1929 - President Hoover was elected. He was more sceptical than Coolidge about Wall Street, but did nothing to regulate it. Already he was worried about the bubble bursting. The Depression was actually predicted by Ludwig von Mises but this was ignored and in fact more shares were but on the market. People thought things were different now (sound familiar?) 

September 1929 - The stock market became increasingly volatile. 

23 October 1929 - The stock market crashed. Millions of shares were being put up for sale. 

24 October 1929 - Black Thursday. From here the crash really began as market dropped - share prices plummeted. There were crowds on Wall Street as people tried to grasp what was going on. Confidence immediately fell and the investing elite their to restore it to avert a total meltdown.

A meeting with the leading brokers on Wall Street led to a pool of $250 million being put together and injected back into the market (stocks were purchased at well about the asking price). The media was reassured. 

26 - 27 October 1929 - The bankers' injections appeared to have worked over the weekend. Trading became more stable, though the tickers that communicated share prices were often too slow, with a time lag of four hours. 

28 October 1929 - Monday. Thousands jammed phone lines to find out what the latest share prices were and the technology struggled to keep up. Those who had borrowed to buy stocks were asked to put up more collateral as brokers were nervous that people would be unable to pay off their loans. They asked many to bring extra cash or else their stocks would be sold. Share prices began to fall steeply and even larger firms saw their valuations plummet. 

29 October 1929 - Tuesday. there was a huge volume of selling and no chance of stemming this tide. By lunchtime all stocks were worth about 22% less that what they had been worth early on Monday. Hoover adopted a laissez-faire approach and did little to nothing to help. Non interventionist. 

1929-1931 - many lost everything after the crash. Some killed themselves as they had lost their life-savings. 1931- over 2000 banks were left to fail. There was a domino effect as confidence crashed, and no was to back banks then - no insurance so when a bank failed, people would lose all their money. This meant bank runs that would happen in cycles, domino effect. (people would hear about a bank run and would then run their bank and so on...) People lost trust in banks for a long time and would even hold money 'under their mattresses. 

Companies lost capital and there were many bankruptcies and liquidity crises as firms couldn't get short-term loans. People got laid off and as unemployment rose, demand fell, leading to a depression. Poverty was everywhere. 

1932 - Hoover's term came to an end and FDR was elected. He opted for a more interventionist approach and the 'New Deal' came about. He promised to regulate the financial market. The crimes of bankers came into light then as the Senate Banking Committee organised an investigation into the financial sector/cause of the crash. Rigging and insider dealing was discovered and many bankers were sent to court. The Securities and Exchange Commission was set up by FDR to regulate Wall Street. 

Meanwhile the Great Depression carried on - in many countries people fell to extremism and anti-capitalist movements as they were so desperate. Many nations put up barriers to prevent free trade leading to trade wars. Eventually all this led to WWII. 

Recovery - As confidence once again grew post-war, regulations were relaxed as they were deemed no longer necessary. Speculation once again rose and we were back in the same position.