The stock market has always been a fickle entity, undergoing surges and retreats in response to American and world events. At the end of the 1920s, the stock market underwent one of the greatest crashes to date, sparking the beginning of the Great Depression. The 1929 stock market crash was not caused by one issue, but rather was the culmination of many factors. However, asking ten different economists and/or historians to choose the exact causes of the crash would result in ten completely different lists. For the purposes of this paper, only the eight most commonly proposed causes will be analyzed. Among these are the unrecognized harbinger in the disguise of the Florida land boom and crash of the mid-twenties, changing American attitudes, unprepared and unconcerned governmental leaders, new legislative tariffs, mass speculation, overpricing of stocks, the Federal Reserve Board and loss of investor confidence.

            Prosperity was well and truly on the rise in America during the 1920s. “From 1922 to 1929 the gross national product (GNP) grew at an annual rate of 4.7 percent from $75.8 billion to $104.4 billion.”[1] The American people were displaying the need to take advantage of this situation. An opportunity presented itself in the state of Florida. Despite an imperfect landscape consisting of swamps, bogs and common scrubland, Florida had been a haven for the well-off who desired sun and sand during the harsh northern winters.  Soon, a plethora of sellers came to the forefront to offer land to the American people who believed that buying Florida real estate would help them accumulate wealth quickly. Plots of land were continuously changing hands on short time scales as sellers tried their utmost to procure a handsome profit before the public realized that the land was for the most part virtually worthless. As Maury Klein illustrates “…the real estate epidemic struck hardest at the remote backwater town of Miami in Dade County, where the assessed value of property mushroomed from $63.8 million to $421 million between 1922 and 1926…”[2] In addition, John Kenneth Galbraith writes:

 

Through 1925 the pursuit of effortless riches brought people to Florida in satisfactorily increasing numbers. More land was subdivided each week. What was loosely called seashore became five, ten or fifteen miles from the nearest brine. Suburbs became an astonishing distance from town. Values rose wonderfully. Within forty miles of Miami ‘inside’ lots sold from $8,000 to $20,000; waterfront lots brought from $15,000 to $25,000, and more or less bona fide seashore sites brought $20,000 to $75,000.[3]

           

“The Florida boom contained all of the elements of the classic speculative bubble.”[4] As with all bubbles, prosperity could not go on forever, and in the autumn of 1926 the bubble burst. This event was heralded by the arrival of “two hurricanes that killed over four hundred people, tore the roofs from thousands of houses and piled tons of water and a number of elegant yachts into the streets of Miami.”[5] Almost overnight, Americans realized that Florida was not the place to secure a fortune. Unfortunately, the idea of ‘get-rich-quick’ continued to flourish within American minds.

This example of the rising popularity of mass buyer speculation can be seen as a harbinger to what would occur just three years later with the stock market. Had Americans understood and been aware of the danger of self-deception and the ‘money-for-nothing’ mentality that illustrated the Florida land boom and crash episode, perhaps they could have spared themselves the devastation that resulted from one of the greatest stock market crashes in history, of which the American people played a major role.

Shifting American attitudes within 1920s society played a large part in the stock market crash. After World War I, Americans had an overabundance of confidence and optimism. After all, she had become, as she saw it, the savior of the Allies during the war. “Overnight, America turned from a conservative society guided by the old-fashioned principles of thrift, self-reliance, and independence to a nation of speculators…the primary purpose of industry was no longer the manufacture of products, but the making of money.”[6]

Americans bought whole-heartedly into the ‘get-rich-quick’ mindset. “The faith of Americans in quick, effortless enrichment in the stock market was becoming everyday more evident.”[7] As Eugene White points out, all reaches of society had become engrossed with the new pastime of stock market speculation:

 

Even before the boom began, many people who had never bought stock before entered the market. One identifiable group of new investors was women, whom brokers catered to with special programs and even their own rooms to watch the ticker tape.[8]

 

            As often as the government tries to blame society for economic troubles, unprepared and unconcerned government officials must take part of the blame for the 1929 stock market crash as well. “The twenties were dominated by the Republican Party…the political philosophy of this party advocated efficiency and economy in all phases of government and a minimum of governmental interference in the economic and industrial affairs of the nation. It was basically a conservative philosophy, yet the society as a whole was anything but conservative.”[9]

            President Warren Harding’s administration of the early 1920s fit nicely into this Republican niche. According to Klein, “Warren Harding was not a bad man so much as one who was in over his head and knew it. He was by his own admission ‘a man of limited talents from a small town…I don’t seem to grasp that I am President.’ Nor could he grasp the complexities of the issues that confronted him.”[10] When Harding died from a heart attack in 1923, Vice President Calvin Coolidge proceeded him as President.  

President Calvin Coolidge’s administration did not differ much from Warren Harding’s previous administration. John Rublowsky describes President Coolidge’s laissez-faire attitude towards government:

 

On the whole, Coolidge’s administration was marked by lack of serious crises, the absence of any spectacular or dramatic leadership and, most important, an exhilarating growth of prosperity. His aloofness from and lack of positive policy in regard to the economic life of the nation was simply a postponement – a sweeping under the carpet of serious problems. This lack of over-all policy, together with his complacent encouragement of the speculative boom in the stock market, produced serious predicaments for future administrations.[11]

 

Further illustrating Coolidge’s lack of foresight and superficial optimism, Gailbraith writes:

 

On December 4, 1928, President Coolidge sent his last message on the state of the Union to the reconvening Congress. Even the most melancholy congressman must have found reassurance in his words. ‘No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time… and the highest record of years of prosperity.’ He told the legislators that they and the country might ‘regard the present with satisfaction and anticipate the future with optimism’.[12]

 

This clearly shows that President Coolidge either did not see or did not completely care about what was on the horizon. As he was to leave office in just a matter of months, Coolidge chose instead to sit back and wait to pass the proverbial torch on to the incoming Hoover administration.

In addition to this laissez-faire government, many leading economists have cited the Smoot-Hawley tariff as one of the possible causes of the stock market crash, despite being passed after the crash had already occurred. Economists generally propose that by 1929 it had become clear that the tariff would pass, which in turn sparked fear among investors. Essentially, the Smoot-Hawley Tariff Act  imposed an effective tax rate of sixty percent on more than 3,200 products and materials imported into the United States, quadrupling previous tariffs, in order to “increase the protection afforded domestic farmers against foreign agricultural imports.”[13]

The U.S. Department of State bravely takes the stance that the tariff was not in fact a direct cause of the stock market crash and subsequent Great Depression, but that it just did not help the already unstable situation:

 

The Smoot-Hawley Tariff was more of a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the ‘beggar-thy-neighbor’ policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade.[14]

           

Eugene White produced evidence supporting this statement when he wrote:

 

…the stocks of all groups declined approximately the same percentage at the time when the tariff’s passage was assured. There is thus no evidence to support the view that the Smoot-Hawley tariff significantly contributed to the crash.[15]

 

            While the newly passed tariff act may not be universally accepted as a major contributing factor to the 1929 stock market crash, rampant speculation certainly was. As shown earlier with the Florida real estate boom, “speculation became the pastime of not only the wealthy industrialists, but of an ever-growing part of the population.”[16] One major difference between the wealthy and the working class American, however, was how they actually purchased the stock.

            Speculation in its purest form cannot be blamed for the stock market crash of 1929, yet the emergence in the 1920s of widespread margin buying can be. Rublowsky explains exactly how Americans bought securities ‘on margin’:

 

What this meant, simply, was that the buyer paid only about 25 percent of the price of the stock. Seventy-five percent of the price was extended to him in the form of credit. The buyer could, of course, be asked to cover the margin-to pay the remainder of the cost of the stock. So long as stock bought one day could be sold the next at a higher price, no one really worried about the margins.[17]

 

Anybody could invest in the stock market under this scheme. In fact, “because of the stock collateral, the broker was not concerned with the credit worthiness of the investor-borrower. Compulsive gamblers found margin buying to be a reasonable substitute for the race track.”[18]

            Americans quickly became obsessed with the stock market and saw it as an ever-increasing road to instant wealth. “Each year, each month, stock market news occupied more space in the newspapers and magazines. Business reports crept out of their usual place in the back financial pages and shared the front page with the latest crime.”[19] Furthermore, “the stock market became a kind of national game, a wonderful lottery in which nobody lost.”[20]

“Credit had become such a monster that by September 1929 more than $8,000,000,000 had been extended in the form of brokers’ loans that covered margin purchases of securities.”[21] However, the majority of speculators involved with margin investment did not have the foresight to think about what would happen should the market experience an economic downturn. “A fall in the price of the stock reduces the borrower’s margin or equity. If the margin declines below some minimum requirement, the lender makes a margin call to request more margin.”[22] Simply put, if the market slumps, the investor-borrower must pay money to the bank in order to offset the lower stock value.

While this was not much of a problem through most of the prosperous 1920s, speculators began to feel a difference by early 1929. Banks had begun to raise their loan rates in 1929 after pressure was placed on them by the Federal Reserve Board. This, in turn, required speculators to produce more than the standard 25 percent required to invest in securities.  When the money was not forthcoming, banks were allowed to sell the investor’s stocks in order to collect the money. By 1929, this was occurring on a wider scale than ever before.

             Along with the surge in speculation, overpricing of stocks inevitably followed. When a market becomes too congested with speculators, stock prices begin to rise to unrealistic new heights. By 1929, “the value had become mostly paper - stock prices represented the greed, hopes and dreams of investors and had almost nothing to do with real value as represented by the assets and earning potential of a particular company or firm.”[23] However, “…not all stocks were caught up in a wave of speculation. Railroad stocks were excluded from the boom, while utilities were the favorites of speculators.”[24]  As Harold Bierman Jr. points out:

 

The stocks that went up the most were in industries where the economic fundamentals indicated there was cause for large amounts of optimism. They included airplane, agricultural implements, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper and radio. These were reasonable choices for expectation of growth.[25]

 

While these choices would normally be considered good investments, 1920s speculators never saw the bigger picture or thought that the days of prosperity would not last forever. This would become their undoing.

            While speculators continued to drive up the price of stocks to astronomically nonsensical values towards the end of the 1920s, the Federal Reserve Board was attempting to limit the fallout. Prior to the late 1920s, the Federal Reserve Board had been accused of taking a non-interference stance with regards to the stock market, similar to the Republican Party’s platform. It was only towards the end of the 1920s that this position began to change drastically, and “by early 1929 the board had sent out a clear signal that it believed there was excessive speculation in stock, and it wanted the banks to decrease their broker loans.”[26] The Reserve Bank of New York had come to the decision that in order to curb speculation, the Federal Reserve Board must increase the rediscount rate from five to six percent. Bierman explains what the rediscount rate is and how it pertains to the customers:

 

A commercial bank which had made a loan, wanting to expand its ability to make more loans, would send the loan to the reserve bank in its district and receive in return federal reserve notes or the accounting entry equivalent. The rate paid by the commercial bank to the Federal Reserve Bank is called the rediscount rate, and represents a cost to the bank that defines the rate it must charge. (This bank loan rate must be larger than the rediscount rate.) An increase in the rediscount rate translates immediately into an increase in the rate the banks charge their customers.[27]

 

If the board increased this rediscount rate, the banks would be forced to charge the investors more, and therefore attempt to stem the tide of excessive speculation. Unfortunately, the Federal Reserve Board did not take this action until August 1929. By this time, the damage had been done and the stock market crash came just two months later.

            At the same time that the Federal Reserve Board was finally attempting to take control of the precarious position of the stock market, investor confidence, or lack thereof, began to come into play. Throughout the 1920s, the seemingly never-ending bull market was being fed by continuous optimism on the part of the speculators. While prosperity flourished, the speculators continued to invest heavily in the stock market. Something or someone was needed to shake the American speculators out of their euphoric investment state. “In 1929, a robust denunciation of speculators and speculation by someone in high authority and a warning that the market was too high would almost certainly have broken the spell. It would have brought some people back from the world of make-believe.”[28] This denunciation could easily have been made by the newly elected President, Herbert Hoover, in March 1929; Hoover had privately condemned the excess speculation occurring in the stock market since the mid-twenties. Regrettably, he never stepped up to the plate, so to speak. As much as he denounced speculation privately, publicly he took a much more reserved stance towards it. Hoover did not effectively react to the volatile state of affairs until it was much too late.

            In the fall of 1929, the stock market began to show signs of stress and investors started to get very nervous. “The market reached a peak on September 19, 1929, and then started to slide.”[29] “Confidence did not disintegrate at once…through September and into October, although the trend of the market was generally down, good days came with the bad. Volume was high.”[30] By the end of October, the market was on a serious downward slide and tension among investors was heavy. “Thursday, October 24, is the first of the days which history – such as it is on the subject – identifies with the panic of 1929…that day 12,894,650 shares changed hands, many of them at prices which shattered the dreams and the hopes of those who had owned them.”[31] The great stock market crash had finally happened. Galbraith writes about the stock market that day:

 

The panic did not last all day. It was a phenomenon of the morning hours. The market opening itself was unspectacular, and for a while prices were firm. Volume, however, was very large, and soon prices began to sag. Prices fell further and faster, and the ticker lagged more and more. By eleven o’clock the market had degenerated into a wild, mad scramble to sell. By eleven-thirty the market had surrendered to blind, relentless fear.[32]

           

Black Thursday, as this ominous day was to be called, had been the largest stock market crash to date. Large populations of Americans had lost everything in minutes. Fear and despair were high, but the stock market wasn’t finished quite yet. The market attempted to rally back through the weekend, but on Monday, October 28 the market again took a terrible hit, and this time there was no recovery. This second crash spilled over into the next day. “Tuesday, October 29, was the most devastating day in the history of the New York stock market.”[33] This day came to be known as Black Tuesday. What made this day even worse than Black Thursday was the shear volume of stocks sold: 16,410,030 sales had been recorded on the New York Stock Exchange.[34]  “The Times estimated the loss for Black Tuesday at between $8 and $9 billion.”[35]

Mass hysteria gripped the stock market that day. “Leading stocks had lost as much as 77 percent of their peak value. So drastic was the fall, that it affected everyone. Small speculators were wiped out along with some of the biggest and most experienced traders. So violent was the crash, that the entire financial structure of the nation was shaken to its foundations.”[36] Some $35,000,000,000 had vanished from the economy.[37] Ironically, just that morning, the New York Times wrote that “it was indicated that an irregular opening might be expected this morning, with some further liquidation carrying prices lower than at yesterday’s close. The expected investment buying would be likely to halt the decline before the day had gone very far, however.”[38] Lamentably, as it has been shown, this optimism was not well founded.

            “Such a sweeping smash always has widespread ramifications and because of the importance of this country in the scheme of international finance, reverberations from American markets resound loudly abroad.”[39] This indeed was the case, and the result was the Great Depression, which persisted through much of the 1930s and dragged a great deal of the world’s economy with it. America’s ‘get-rich-quick’ mentality had been shattered and optimism and prosperity became words of the past.

It can be seen that there is no single cause for the 1929 stock market crash, but rather an intricate weaving of many different aspects of American society in the 1920s. Shifting attitudes and mentalities of Americans coupled with an inability to recognize worrying foreshadows of the future, unconcerned presidential leaders, mass speculation enabled from margin buying, over-inflated stock prices, a sluggish Federal Reserve Board and loss of investor confidence all form the puzzle pieces which assemble to produce a clearer picture regarding how the crash occurred. Had any one of these factors been missing, history may not have unfolded as it had.

           

Bibliography

 

Primary Sources:

Unsigned, “Bankers Mobilize for Buying Today,” New York Times (Oct. 29, 1929), 1-2.

Unsigned, “Losses Recovered in Part,” New York Times (Oct. 25, 1929), 1-2.

Secondary Sources:

Bierman, Harold Jr., Causes of the 1929 Stock Market Crash: A Speculative Orgy or a

New Era? (Westport, 1998).

Bierman, Harold Jr., The Great Myths of 1929 and the Lessons to be Learned (New

York, 1991).

Galbraith, John Kenneth, The Great Crash of 1929 (London, 1955).

Klein, Maury, Rainbow’s End: The Crash of 1929 (Oxford, 2003).

Rappaport, Peter and Eugene N. White, “Was the Crash of 1929 Expected?” The

American Economic Review, 84(1) (Mar., 1994), 271-281 [accessed from Jstor on

Oct. 8, 2006].

Rublowsky, John, After the Crash: America in the Great Depression (London, 1970).

U.S. Department of State, “Smoot-Hawley Tariff,”

<http://www.state.gov/r/pa/ho/time/id/17606> (21 October 2006).

White, Eugene, “The Stock Market Boom and Crash of 1929 Revisited,” The Journal of

Economic Perspectives, 4(2) (Spring, 1990), 67-83 [accessed from Jstor on Oct. 8, 2006].