Great depression buying stocks on margin

Author: ShNURoK Date of post: 07.07.2017

America seemed a capitalist paradise during the ls. Manufacturing productivity and output skyrocketed during the decade as Frederick W. Taylor convinced businessmen to apply his system of "scientific management" and more and more Americans demanded cheap automobiles as almost an inalienable right.

Consumption of automobiles, homes, radios, and appliances soared as installment buying "Buy now, pay later" achieved widespread acceptance for the first time. Employment, wages, and profits climbed steadily as consumers went on a buying binge and three consecutive Republican administrations cut taxes, raised protective tariff levels, and otherwise promoted the desires of the business community. The rising value of stocks and readily available credit for "margin buying" induced millions of new investors to take the plunge and play the market.

Men and women from all walks of life became rich - at least on paper - simply because they had dared to speculate that the bull market would continue. Things were so good in that presidential candidate Herbert Hoover issued a glowing prediction; one that would return to haunt him. The poor-house is vanishing from among us".

Within a year, however, the stock market collapsed and the Great Depression, which would last an entire decade, began. Hoover, who had been praised for helping produce the economic boom of the s in his capacity as Secretary of Commerce, now suffered one of the crueler fates of history when the boom turned to bust.

By when he left office, millions of his fellow citizens - having lost their jobs, their savings, their homes - struggled to survive in pitiful shantytowns known as "Hoovervilles". How had it all come to pass? How had the promise of inevitable as well as perpetual prosperity and growth collapsed seemingly overnight? Economists have been arguing since about the causes of the stock market crash and the global depression which ensued.

We shall concern ourselves only with one such explanation - that of John Kenneth Galbraith, an influential and active liberal advisor in the Democratic party. Galbraith cites the increasingly inequitable distribution of wealth in the United States during the s as an important weakness of the economy.

Almost all Americans benefitted to some degree from the boom - wages went up steadily, agriculture improved somewhat, etc. However, increased business profits far outdistanced all other sectors of the economy.

The Dangers of Buying Stocks on Margin

The various reductions in the federal income tax enacted at the urging of Secretary of the Treasury Andrew W. Mellon were greater at the upper income levels than at the middle or lower levels. Therefore, more and more of the nation's wealth was funnelled into the hands of fewer and fewer people.

By the wealthiest five percent of the population possessed one-third of all wealth. Galbraith argues that this was a problem because it left relatively few wealthy Americans disproportionately responsible for the health of the economy.

If for whatever reason the super-rich withdrew their money from circulation, it would have a disproportionately negative impact upon the economy. It was also a problem because it left the great mass of consumers with less ability to purchase automobiles, homes, appliances, etc.

Both of these consequences transpired in the final months of A second major economic trend of the s that proved disastrous according to Galbraith was the failure of the United States to adjust its trading policies once it ceased to be a debtor nation and became a creditor nation.

He argues that a creditor nation must be willing to accept an unfavorable balance of trade with nations it lends to if it wishes to see these loans repaid. If it continues to export more to than it imports from these nations as the United States did during the sit drains the debtor nations of wealth, reduces their ability in the long run to continue importing goods, and decreases their ability to repay outstanding debts to creditor nations.

World War I fundamentally altered America's economic relationship with Europe. We became a creditor nation during the war. In the aftermath, the United States demanded that European nations repay their debts at the same time that we continued to export more to them than we imported from them.

The United States attempted to simultaneously be the world's greatest banker and industrial manufacturer. Increasingly during the s this refusal to adjust our trading relationship drained the wealth of Europe.

By the end of the decade European nations could continue importing goods from the United States and repay World War I debts only by borrowing more and more money from American bankers. This created a very shaky economic relationship subject to collapse in the event of an economic downturn or European cancellation or reduction of debts. Galbraith contends that the increasing pyramiding of holding companies was a third major weakness of the American economy during the s.

The pyramidding of holding companies was an organizational technique designed to give investors inordinate control over a number of companies with a minimal investment. The technique also led to the creation of companies primarily so that speculation in their stocks could produce profits.

Galbraith argues that this was a weakness because it drained many "captured" companies of their capital assets and left them too weak to survive a significant economic downturn. Thus, when the economy nosedived inthe pyramiding of holding companies had a disproportionately negative impact.

These weren't totally separate companies but interconnected structures which now collapsed together. The final aspect of the economy that Galbraith cites as a problem area was the incredible speculation on the New York Stock Exchange and the credit aspect of that speculation. As the boom began in the early years of the decade, the trading of stocks on the exchange became more active and the value of those stocks began to increase quickly.

Increasingly, individual and institutional investors such as banks, trust funds, and businesses began to purchase immense volumes of stocks not for their security or dividend forex zarabianie na walutach but for relatively quick resale at inflated prices. Such investments were speculative - one was betting that a continued bull market would drive prices even higher and daily currency predictions new investors willing to buy at even forexgrail spreadsheet inflated prices.

Galbraith contends then that this speculative aspect of stock trading drove prices up to dizzying heights; people were paying three and four times what the stock was actually worth and sooner or later make money trading tennis betfair market correction had to take place.

This correction would be all the worse because a great deal of speculative trading was based on credit, what was known as "margin buying".

An investor during the s could purchase stock for cash or use his available cash as a ten percent downpayment or margin on a more sizeable purchase with ninety percent financed on loans from stockbrokers. This allowed investors to purchase ten times as much stock as they had money to pay for.

As long as the market continued to soar, stockbrokers didn't even demand payment on the debt because the value of their collateral apple backdating stock options increasing. With credit so easy to obtain and with the bull market showing no signs of slowing down, individuals, businesses, and banks risked more and more of their money on speculative trading of stocks on credit.

Speculation financed on credit drove prices higher and higher and some individuals who cashed in early enough realized incredible profits. The boom was based on credit great depression buying stocks on margin and when inevitably the market correction came there was a danger of economic binary options trading system 2013. When the market began to turn down in the fall ofstockbrokers market basket shareholders "margin calls", demanding that investors pay off their loans.

Many who had taken the speculative credit plunge couldn't pay and defaulted. This created an economic and psychological panic. Investors, facing debts they couldn't possibly pay off, began panic selling for whatever they could get. As more and more investors tried to liquidate, prices tumbled and tumbled as fewer and fewer buyers could be found. The mountain of credit thus came crumbling down. The crash was even more disastrous because it took down ncdex trading holidays 2011 people with it.

As economic panic ensued, consumers cut back on their purchases and manufacturers cut production and began laying off workers.

Many businesses, which had put profits into the speculative purchase of stocks, were now capital deprived and unable to weather the difference warrant stock option. As manufacturers went bankrupt, innocent laborers, who had never gambled in stocks, faced extended unemployment. Many banks which had speculatively invested their depositors' money in stocks also went bankrupt.

Depositors, in the pre-F. Because of various weaknesses, the collapse of the bull market of the s took the entire economy with it. Whats the best way to make money in hay day also maintains that political and governmental factors must be considered if forexgrail spreadsheet is to truly understand the economy of the Roaring Twenties, the crash of the stock market, as well as the onset, duration, and severity of the Great Depression.

These considerations boil down to two basic points. First, Galbraith charges prominent government officials with partial responsibility for the runaway boom of the latter s. Calvin Coolidge, Herbert Hoover, and Andrew W. Mellon all realized that there were dire economic problems and dangers emerging but refused to move forcefully against bail bonds how they make money. Secretary of the Treasury Mellon laughed at broker forex link list news who charged that the bull market was getting out of hand, in part perhaps because he personally was speculatively investing millions of dollars in stocks.

Warned by Harvard economist William Z.

Stock Market Crash of

Ripley about the inherent dangers of the credit-based bull market, Coolidge asked: Relieved, the President relaxed and put the incident out of his mind.

Not long before he left office, President Coolidge announced that stocks were "cheap at current prices". Galbraith's point is that while government officials knew dangers were prevalent, they did nothing to deal effectively with them. Indeed, he argues that they made matters worse. By asserting that the economy was in good shape and that speculative credit trading in securities was normal and that everything was inevitably improving, they kept the boom and the Great Bull Market going.

This prevented a mild correction and recession in the middle twenties and guaranteed a drastic slump when it inevitably came.

great depression buying stocks on margin

Second, Galbraith asserts that it was the nature of the American government itself, not just the actions of officials, that allowed the economic situation stock market notifiers roar out of control in the first place fn fal aftermarket stock then proved structurally incapable of limiting the depression once it began.

The nature of the government was totally different in the pre-Depression era from what it is today. Americans of the s favored a non-active, non-interventionary, laissez faire government and Presidents Harding, Coolidge, and Hoover delivered.

Therefore, many of the tools the government has at its disposal today to control and direct the economy were absent before There was no federal agency such as the Securities great depression buying stocks on margin Exchange Commission, as there is today, to regulate the New York Stock Exchange.

There was no federal program such as the Federal Deposit Insurance Corporation, as there is today, to prevent "bank runs" and collapses by insuring bank deposits. There was no federal program of unemployment relief, as there is today, to limit the financial ravages of unemployment. No government-sponsored housing programs. No expectation that the government serve as the employer of last resort. No government lending program to save home mortgages. No government programs to save farms from mortgage foreclosures.

All such programs are the product of the New Deal of President Franklin Roosevelt, enacted in the s after the economy had reached bottom. In order to understand why Americans abandoned laissez faire government in favor of large, interventionary, and expensive government during the s, one must have an appreciation of just how bad the Great Depression was. Just as the stock market had reflected the economic boom of the s, it reflected the collapse and depression which began in October, As panic selling began, stock values nosedived taking most speculative margin buyers with them.

The index of industrial stocks plummeted from in September to by mid-November; their value had been cut in half. The decline would continue in, and as the economy searched for bottom. On July 8,at the bottom of the depression, they would sink to 58 - worth just a little more than one-tenth of what they had been bought for at the peak of the bull market. In three years General Motors plunged from 73 to 8, U. Steel from to 22, Montgomery Ward from to 4!

Speculative investments and margin buyers were wiped out together. As the market collapsed, investors who had overbought on the margin and couldn't meet margin calls lost the stock and everything the stockbrokers could get their hands on to pay off the debt. Banks and businesses also suffered tremendously from the market collapse.

It will be remembered that they had risked their money on speculative investments in stocks. They were now in no shape to weather the collapse. By latein pre-FDIC days, many depositors feared for the security of their bank savings and franticly tried to withdraw their deposits. This guaranteed the failure of banks.

great depression buying stocks on margin

Inbanks failed; in1,; in2, Millions of Americans who in had regarded banks as the epitome of security withdrew their money and hid it under flagstones. By the fall ofa billion dollars had been taken from the banks and put in safe deposit boxes or stuffed in old mattresses.

Businesses also went under. The profits they had invested in the stock market were lost and many businesses were so drained of capital they were unable to weather the depression. The demand for industrial production plunged as consumers, fearing for the future, cut back on their purchases.

Industrial production by mid was only one-half of what it had been in Cutting production and prices failed to save many businesses; overwent under between and The failure of so many businesses and the severe curtailment of production was perhaps most clearly visible and painful in the resultant unemployment, underemployment, and wage reductions of the Great Depression. Unemployment figures were startling: By the bottom inone out of every four American laborers was unemployed.

In assessing these figures, its important to understand that in the s the two-income family was rare. Thus, one out of four families was without employment income. It's also important to remember that unemployment was not a temporary phenomenon.

great depression buying stocks on margin

Unprecedented unemployment would continue until the onset of World War II in late Underemployment was also widespread. Architects collecting garbage, stockbrokers sweeping streets, and fashion buyers supervising janitorial workers were common sights during the Great Depression.

And these individuals were the lucky ones, glad to have even these menial jobs. Those lucky enough to retain their jobs during the s had to accept massive wage cuts. Average manufacturing wages came down 60 percent, average salaries 40 percent. Luckily the massive deflation of the Great Depression - as more and more money was withdrawn from circulation - produced falling prices as well.

It cost less to survive. As unemployment skyrocketed, wages fell, and bank savings vanished into thin air, home and farm mortgage foreclosures soared. In empty lots on the edge of industrial cities, homeless men, sometimes with families, built crude shelters of packing crates and old pieces of metal. In the larger cities, whole colonies of these "Hoovervilles" were established. When municipal lodging houses became overcrowded, men huddled in empty freight cars or in shutdown factories.

In Arkansas, men were found living in caves. Byit was estimated that between one and two million men - once home buyers or proud family farmers - were roaming the country in search of work or relief.

At exactly the time that federal, state, and local governments desperately needed more revenue to try to cope with the ravages of the depression, tax revenue plummeted.

People who couldn't come up with the money to save their homes from mortgage foreclosure certainly couldn't afford to pay their property taxes. Furthermore, the value of property shrunk rapidly once the deflationary spiral of the depression began. Homes and farms had to be reassessed downward and thus shrinking tax bases were a fact of life for all governmental entities.

Governments, philosophically tied to balanced budgets or unable to borrow money from investors paralyzed with fear about the economic future of the nation, therefore slashed their budgets and services at exactly the moment when a majority of Americans were demanding unprecedented help from government at the local, state, and federal levels.

This was the Great Depressiona turning point in the history of the American people and government. John Kenneth Galbraith, The Great Crash:

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