Transcript

During the 1920’s the United States experienced unprecedented prosperity, in part because the United States emerged from World War I largely unscathed, both physically and financially, compared to Europe. And so the United States enjoyed a competitive advantage in the 1920’s over the European nations that were struggling to rebuild their economies after the prolonged and devastating war.

At the same time, during the 1920’s there developed an array of exciting new industries, products, and technologies: the airplane, automobile, radio, and the cinema. These were very fast-growing industries during the 1920’s. As a result, people began to invest in the stocks of these new industries. The problem was that the stock market was under-regulated. And as the stock market rose in value, more and more people invested in the stock market, thinking it was going to grow permanently. In fact, some of the leading economists in the nation talked about perpetual prosperity in the United States. As so often happens with the dynamics of a capitalist system, greed overtook reason. As people grew more and more greedy, as they saw their profits rising, they continued to invest more in the stock market.

Another factor was that taxes were very low in the 1920’s, so more and more consumers had more and more money to invest. They weren’t paying the high taxes that they had to pay during the war years, so they were putting that money in the stock market.

Finally, the unregulated stock market developed some practices that led Herbert Hoover, the president in 1929, to talk about an orgy of financial speculation taking over the stock market. What he meant by that was that people were able to buy stocks in the 1920’s on what was called “margin” (buy on margin) and what that simply meant was that instead of having to pay $100 for a $100 stock, people could buy that stock for $10 and the rest was on margin. In essence, they were borrowing against their stock under the assumption that its value would continue to rise and they could pay for it later with the profits the stock was accruing.

Unfortunately, all of that began to collapse in October of 1929 when suddenly the superstructure that was driving the stock market began to crumble and implode upon itself because it was built on fantasy rather than the reality of the American economy.

In the fall of 1929 as stock prices plummeted, stockbrokers had to call their customers and say, “You’ve got to pay me your margin.” Well, people didn’t have any cash with which to pay their margins. In other words, they had borrowed money to buy the stock in the first place, and now they didn’t have any money because their stocks had collapsed. This created a terrible financial pinch that began to radiate throughout the economy as people became cash-short because their stocks had lost so much in value. It was during that fall of 1929 that the stock market plummeted so fast and so far that many stockbrokers and stockowners jumped out of buildings and committed suicide because it was so bad.

Thus, when the stock market crashed, it didn’t create the Great Depression, but the crash did serve as a catalyst for the Great Depression because it revealed some of the fundamental problems with the American economy and American behavior during the 1920’s that would spawn the prolonged depression of the 1930’s.

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