Sunday, October 2, 2011

The Great Depression: History for Dummies

With the demonstrations that have been occurring on Wall Street for the past week or so, I thought we would look at history. My family has been reading Abeka's America: Land I Love, which is their 8th grade history book. In an edition published in 1994, the causes of the Great Depression are highlighted. I don't understand everything about how our economy operates, but it sounds like history is repeating itself. Listen to what the writer had to say:

 Wall Street - 1920s

Although business boomed in the 1920s, much of this prosperity was based on easy credit. The Federal Reserve Bank kept interest rates low, making it easy for businesses and individuals to take out loans. This "loose money" policy encouraged people to go into debt. Modern advertising came of age in the 1920s, increasing consumer demand for products. Newspapers, magazines, and radio reached almost every home with the message of new products to buy Many ordinary people bought new homes, cars, and appliances on credit. Instead of paying the full price of these goods at the time of purchase, they paid only a small monthly payment on the installment plan. As long as people could buy on credit, factories kept busy and people had jobs.

The Stock Market
Most of the factories were owned by shareholders, people who held stocks (shares) in the corporation producing the goods. As business boomed in the 1920s, stock dividends (earnings on stocks) soared. On the New York Stock Exchange, people bought and sold stocks, driving the price of stocks even higher. For a time, dividends matched the true value of trading stock. Then some people began to practice speculation (risky investments for the chance of making a quick profit). Ignoring the true value of stocks, they tried to buy stock while it was going up and then sell it at the higher price. The rising market convinced many people that they could always sell at a higher price. Thus, people bought and traded stocks at far above their market value.

Let's skip ahead...

An influential few
Only 1 in every 100 Americans traded on the stock market in the 1920s, and less than half of these were speculators. However, some large banks became involved in careless trading; thus a few big traders could send stock prices rapidly upward. From 1927 through September 1929, the stock market soared ever higher. Then, a few big investors began to get nervous because stock prices were much higher than the actual value of the companies they represented. These investors began to sell their stocks.

The Great Crash
In late 1929, the economy began to slow down. As people bought fewer consumer goods and the supply of unsold goods, known as inventory, began to grow, some factories began to lay off workers. These developments sent stock prices down, but they really began to tumble when the margin buyers were forced to sell to pay off their loans. With prices plummeting, more and more people tried to sell their stocks, but no one wanted to buy.

The stock market crash began on Thursday, October 24, 1929. Within minutes of the ringing bell, signaling the start of trading, panic seized the market. Traders shouted wildly on the floor of the exchange as each tried to sell his shares before they skidded even lower. By the close of the day, exhausted ticker tape operators were hours behind in recording millions of sales. Alarmed, a few wealthy brokers stepped in and temporarily halted the slide. Then, on Black Tuesday, October 29, 1929, the bottom fell out of the market. In one day, many people went from riches to rags. As people became fearful and sold their sound stocks, prices plunged. Investors lost $30 billion in 3 weeks. The market continued its downward spiral for the next 3 years. By 1932, the price of U.S. Steel Corporation had gone from $265 to $22. Some stocks lost all their value.

Bank Failures
Although few people actually owned stocks, the stock market crash effectively shut off the supply of credit that had sustained the economic boom. Many banks had invested in the stock market and lost a great deal of money. More than 4,000 banks failed between 1929 and 1932. When a bank failed, many people lost all their savings. Thus few people could buy the cars and appliances rolling off the factory lines. Even the wealthy people who had not participated in the stock market cut back on their spending and investing...By 1932 -1933, the worst years of the depression, 1 in every 4 workers - 13 million - were out of work. The average yearly rate of unemployment in the 10 years of the Depression (1930-1940) was an average of 15%.

Government intervention
When, in 1930, many banks could not meet their obligations, the Federal Reserve decided to shrink the money supply. But this action only increased the number of bank failures. The Federal Reserve's handling of the money supply deepened and prolonged the Depression.

Three reasons can be given for the severity of the Great Depression:
  1. the desire of a few to get rich quick
  2. the widespread practice of buying goods on credit
  3. government interference in the free market economy
A worldwide depression
The economic disaster spread to Europe, Japan, and throughout the world. World trade was already at a low ebb because of high tariffs between the United States and foreign countries. Europe owed the United States large sums of money for WWI loans. During the Depression, the U.S. government canceled many of these debts, further weakening the banking system.

A glimpse of Great Britain

Closing Comment
We are presently watching an orchestrated collapse. As we watch the protests on Wall Street, and the rising number of arrests, you have to wonder where it will all lead. The trend has some analysts very concerned — particularly after reports claimed union bosses tied to the Obama administration were plotting to bring about chaos. And while the protests, which began on September 17, may be small now, supporters and critics alike say this may be only the beginning of something much bigger.[1] Is revolution and death to capitalism on their minds? Have those exposing the corrupt activities of the Federal Reserve and Wall Street bankers working on their side to assist in creating the New World Order? We'll have to see how it all plays out.

One voice from Wall Street

(YouTube link)

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