The Fragile Economy Of The 20's And 30's

Dylan Stone-Miller

1/22/07

The Fragile Economy of the 1920's and 30's

Post WWI and the Roaring Twenties

Prior to the roaring twenties the global economy was unstable. World War I had created fragile trading bonds between the U.S. and many countries, war reparations needed to be paid by the countries that lost the war, countries such as Germany and Great Britain were indebted to the United States, and, as we know well, wars cost money. The economy was weakened and the developments made in the 1920's didn't help to rebuild it.

The money that was earned during the twenties was poorly distributed with the top one percent of the population having about 32 percent of all the wealth. This meant that the rest of the population was extremely poor and had very little buying power. Approximately 70 million people out of the 105 million in America were classified as poor during the 1920's. The economy appeared to be booming but it was merely the rich getting richer and the poor struggling with debt.

The 1920's seemed to be a prosperous time with many innovative technologies being brought to light. The idea of credit began and with the already poor population the bills began to stack up. People were buying more than they could afford to pay for and as these "delinquent bills" stacked up the economy lost money. Assembly lines made mass production very easy and gave the U.S. an abundance of supplies. This abundance was added to the surplus of army provisions that the war had left behind thus putting the U.S. in a state of profusion. The small wealthy population invested largely in certain stocks. This caused overproduction of many supplies and the unsold goods piled up. We could not export these goods because other countries were too poor to be importing U.S. goods. Eventually the supply surpassed the demand and there was a sudden fall of prices that led to deflation.

And as if this deflation wasn't enough, the government joined England in participating in the Gold Standard. The Gold Standard was a system where multiple countries fix their currency on a certain amount of gold, and in 1925 it was reinstated. Ben strong, the governor of the New York Reserve Bank, played a major role in the participation of the U.S. in this reinstatement. Strong had been meeting with the governor of the Bank of England and had agreed to lessen the value of the dollar in order to help boost the value of the pound. This secret agreement was put into action when Strong lowered interest rates in the U.S. thus lowering the worth of the dollar. With less of the gold representing the dollar, more of the gold was able to back the pound so the pound increased in value.

Things were now cheaper in the U.S. so eager investors jumped right into the stock market. People began to borrow money because they could now afford the lower interest rates. They took the borrowed money and invested it on margin putting them more into debt. When they bought on margin they would get ten times the stock that they originally bought for and would owe money to the stock market for the 90% they didn't pay for yet. The market appeared to be doing extremely well but all that was invested was debt. Once Strong lowered interest rates again in 1927 to help the struggling England, another boom was set in motion in the stock market. A frenzy of margin investments brought the stock market to its peak on September 3rd, 1929.

The government stepped in to fight the heavy deflation by increasing interest rates in 1929. All this raise did was make it harder for the investors to pay off their debt. People were scraping by with their low interest rate payments but now that they were high again they were no longer able to pay and the delinquent bills stacked up. The poor population couldn't pay credit payments and many sunk further into debt. The banks were losing money because nobody was paying their bills. Many banks went into bankruptcy.

The Crash

On October 24, 1929, also known as "Black Thursday," the stock market felt a devastating downfall. The economy was in trouble but a key factor in this great crash was the rumors and confusion that were circling around Wall Street. The tickers had malfunctioned and were an hour behind causing investors to sell their stock without even knowing the actual price. People began to hear untrue estimation about the stock market's condition and started to practically throw their stock away. A record setting number of 12.9 million shares were traded. They were selling for absurdly low prices and in doing this they were losing themselves and the economy money. Many well-known investors had killed themselves and more were ready to follow. It seemed as though the stock exchange was doomed until five bankers from New York met and discussed possibilities to get the market out of its rut.

The mass hysteria that Wall Street was thrown into on Black Thursday was halted after the vice president of the New York Stock Exchange, Richard Whitney, walked out onto the exchange floor. Everyone was eager to hear what he had to say and was expecting to hear that the NYSE was closed, but instead he offered to buy 10,000 shares of U.S. Steel at higher than list price. He made several orders similar to this one with several different companies. Investors saw that all the confusion and the rumors weren't true and were relieved to see the market still functioning. They began to buy stock at normal prices again for fear of missing a new boom that was set into play by Whitney. It was a daring, successful move that Whitney made and it had saved the stock exchange. This safety was only temporary though and five days later the stock market ran into more problems.

People were optimistic to see that the stock market was capable of bouncing back from something as awful as Black Thursday. But there was no savior on Black Tuesday. The ticker tape had fallen two and a half hours behind and had started another panic and another record of shares traded. 16.4 million shares traded in one day and no calming, stock-exchange-saving words were spoken on the exchange floor. Rumors appeared once again and people high up in the NYSE attempted to calm the investors but to no avail. The stock market began its steep, three and a half year decline until in 1932 stock prices had fallen to around 20% of their original value in 1929.

The Depression

There was a strong theme for the depression: unemployment. No matter where you went there would be unemployed, homeless people living in small