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Stock Market Crash

Essay by review  •  November 9, 2010  •  Research Paper  •  1,350 Words (6 Pages)  •  1,351 Views

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In early 1928 the Dow Jones Average went from a low of 191 to a high of 300 in December of 1928 and peaked at 381 in September of 1929. 1929Ð'...) It was anticipated that the increases in earnings and dividends would continue. (1929Ð'...) Price to earnings ratio's rose from 10 to 12 to 20 and higher for the market's favorite stocks. (1929Ð'...) Observers believed that stock market prices in the first 6 months of 1929 were high, while others saw them to be cheap. (1929Ð'...) On October 3rd, the Dow Jones Average began to drop, declining through out the week of October 14th. (1929Ð'...) On the night of Monday, October 21st, 1929, margin calls were heavy and Dutch and German calls came in to sell overnight for the Tuesday morning opening. (1929Ð'...) On Tuesday morning, out of town banks and corporations called in $150 million of call loans, and Wall Street was in a panic before the New York Stock Exchange opened. (1929Ð'...) On Thursday, October 24th, 1929, people began to sell their stocks as fast as they could., sell orders flooded market exchanges. (1929Ð'...) This day became known as Black Thursday. (Black ThursdayÐ'...) On a normal day, only 750-800 members of the New York Stock Exchange started the exchange. (1929Ð'...) There were 1100 members on the floor for the morning opening. (1929Ð'...) Furthermore, the exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight, extra telephone staff was arranged at the member's boxes around the floor. (1929Ð'...) The Dow Jones Average closed at 299 that day. (1929Ð'...) On Tuesday, October 29th, 1929, the crash began. (1929Ð'...) Within the first few hours , the price fell so far as to wipe out all gains that had been made the entire previous year. (1929Ð'...) This day the Dow Jones Average would close at 230. (1929Ð'...) Between October 29th, and November 13 over 30 billion dollars disappeared from the American economy. (1929Ð'...) It took nearly 25 years for many of the stocks to recover. (1929Ð'...) By mid November, the value of the New York Stock Exchange listings had dropped over 40%, a loss of $26 billion. (1929-1931) At one point in the crash tickers were 68 minutes behind. (1929-1931) An average of about $50,000,000 was wiped out in a minute on the exchange. (1929-1931) A few investors that lost all of their money jumped to their deaths from office buildings. Others gathered in the streets outside the Stock Exchange to learn how much they lost.( Black ThursdayÐ'...) The Cause There are five proposed reason's why the stock market crashed. On of the reasons was that stocks were overpriced and the crash brought the share prices back to a normal level. Some studies using standard measures of stock value, such as Price/Earning ratios and Price/Dividend ratios, argue that the share prices weren't too high. Another reason is that there was massive frauds and illegal activity. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. (1929Ð'...) Margin buying is another reason that people believed that the crash happened. Though it is not the main reason, there was very little margin outstanding relative to the value of the market. The new President of the Federal Reserve Board, Adolph Miller, tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, in the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporations that financed brokers and dealers. Lastly, many public officials commented that the stock price was too high. Herbert Hoover publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover's statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the crash. (1929Ð'...) The Crash and The Depression After the crash, production fell nearly 50% from the business cycle peak in August 1929 to March 1933. Meanwhile, the overall price level dropped by about 1/3. Many people blamed the crash for the economical collapse. Some people held responsible were President Hoover, brokers, bankers, and businessmen. The cause of the depression cannot be linked to one individual or even a group of people. It is also unlikely that the crash of the market would have been large enough to lead the US economy into the depression and to sustain the downward spiral in business activity. (1929Ð'...) Why People Invested in the Stock Market During 1929, people invested in the stock market for 5 major reasons. The first was that the market was considered an easy way to get rich, quick. Although, about 4 million Americans,

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