14. 4 Panic of 1929

Several Americans in the stock market worked as speculators. They bought when prices were low and sold when the prices shot up. The speculative demand for stocks was mainly responsible for the stock market boom of the 1920s. Prices of popular stocks rose to fantastic heights. Thousands of Americans entered the stock market hoping to make a fortune. All of them dreamed of instant money. Wall Street in the 20s had become a huge money-pumping machine. In other words, America was in a speculating frenzy. Due to mass speculation, prices touched dizzy heights and soon did not bear any relation to the actual performance of the companies.

The Bankers too went along with the speculation madness. They granted loans to brokers to finance the stock speculations. Though the Federal Reserve Bank Board had powers to limit unbridled speculation, it did not take action until March 1929. Finally, when it did try to check the speculation, it was too late. Between June 1927 and September 1929, the price of stocks had shot up from 115 to 225 points. Then onwards the prices declined. Initially the fall was gradual; later they began to fall at a greater speed so much so that Roger Babson, an economist predicted: "Sooner or later a crash is coming, and it may be terrific factories will be shut down...Men will be thrown out of work...the vicious circle will get in full swing and the result will be a serious business Depression."

His prophetic words were not given attention by the bankers, public officials and other economists. The crash of the stock market began in October. Some of the bankers in New York formed a pool in an attempt to make the market stable. They did succeed in stabilizing the market but only for a few days. On October 29th, their efforts to save the market failed, as 16 million shares were dumped on the market. For the next 2 weeks the market continued to drop. It is important note that most of the capital lost in the crash was largely cash reserves of small companies and savings of the middle-class in the country.

Exhibit 14.2
The Depression left individuals shattered.

The crash of the stock market was only the beginning. It was followed by an unparalleled business crisis. Slowly businessmen no longer found it profitable to invest in business and consumers began to buy lesser goods. Consequently, production of capital goods and consumer durables fell sharply. As Hicks and Money described the situation. "Prices dropped sharply; foreign trade fell off; factories curtailed production, many closed their doors never to reopen them; real estate values declined; new construction, except on government works practically ceased; banks went under; worst of all, wages were cut drastically, and unemployment began to mount."

The Depression spread to Europe and Latin America due to the contraction of American loans and purchases.

Index

14.0 - Introduction
14.1 Republican Ascendancy and World Politics
14.2 The Washington Conference
14.3 Republicanism at Home
14.4 Panic of 1929
14.5 Causes
14.6 Methods to alleviate the effects of Depression
14.7 The Effects of the New Deal
14.8 Impact of Great Depression
14.9 Dates & Events
14.10 Points to Remember

Chapter 15