Overview
This lecture covered the causes, events, and consequences of the 1929 Wall Street Crash, examining the speculative bubble, key financial mechanisms, government inaction, the ensuing Great Depression, and subsequent reforms.
The Roaring Twenties & Stock Market Boom
- Post-World War I America entered a period of economic prosperity and technological innovation.
- Consumer culture flourished, with increased use of credit and “buy now, pay later” mentality.
- The stock market became accessible and appealing to ordinary people, not just financial elites.
- Liberty Bonds introduced many Americans to investing, paving the way for stock market speculation.
- Charles Mitchell expanded access by opening brokerage offices nationwide.
- New technologies like ticker tape machines spread stock market news quickly.
Speculation & Financial Practices
- Buying on margin (purchasing stocks with borrowed money) became widespread; up to 90% of some stock purchases used borrowed funds.
- Stock prices skyrocketed as demand increased, creating a speculative bubble.
- Market manipulation and insider trading were common, with professional speculators rigging outcomes.
- Women and other new groups began participating in the market during this boom.
Government & Regulatory Environment
- Presidents Coolidge and Hoover followed a laissez-faire approach, refusing to regulate Wall Street.
- Elite bankers, like JP Morgan & Thomas Lamont, had immense influence over government policy.
- Warnings from respected bankers like Paul Warburg about a possible crash were ignored.
The Crash of 1929
- On October 23-24, 1929, shares plummeted on the New York Stock Exchange, beginning the crash.
- Crowds gathered outside the stock exchange, seeking news as panic spread.
- Bankers temporarily stabilized the market by pooling money to buy blue-chip stocks, but the recovery was short-lived.
- As prices fell, margin calls forced investors to sell at a loss, accelerating the collapse.
- Massive losses wiped out personal fortunes and decimated confidence.
Effects: Banking Crisis & Great Depression
- The crash undermined the banking system; thousands of banks failed due to lack of deposit insurance.
- Bank runs and loss of savings devastated ordinary Americans.
- Companies lost access to credit, leading to layoffs, bankruptcies, and widespread poverty.
- The economic downturn spread globally, fueling political instability and the rise of totalitarian regimes.
Recovery and Reform
- Democrat Franklin D. Roosevelt’s New Deal introduced banking reforms and deposit insurance.
- The Securities and Exchange Commission (SEC) was created to regulate Wall Street.
- Senate investigations exposed widespread abuse among bankers and financial elites.
- Despite reforms, economic recovery only arrived with the onset of World War II.
Key Terms & Definitions
- Buying on Margin — Purchasing stocks with a small down payment and borrowing the rest.
- Speculation — Risky investment in hopes of large profits.
- Margin Call — Demand by a broker for an investor to deposit more funds or sell assets to cover losses.
- Insider Trading — Trading based on confidential, non-public information.
- Bank Run — Mass withdrawal of deposits causing a bank to collapse.
- Securities and Exchange Commission (SEC) — Federal agency established to regulate the securities markets.
Action Items / Next Steps
- Review the causes and effects of speculative bubbles ahead of the next discussion.
- Read about New Deal financial reforms and their impact on banking regulations.
- Prepare for a quiz on the key terms defined above.