The History Of The Stock Market
The Stock Market has become almost ubiquitous to our society – both as a driving force and a reflection of how well thing are going in our global economy. Everything from companies to raw materials such as grain and metals are sold in the Stock Market. Companies offer shares, which is like a piece of a company. People buy shares and hope that the value of those shares increase. For instance, is a company offers the public stock shares are $1 each, people buy them. If that company comes out with a revolutionary product, those shares which were purchased at $1 may increase in value to $5 per share, and even more people will be inclined to buy shares, which increases the total volume of stocks purchased in a given business day. On the other side of the coin, if there is economic stagnation, a rise in unemployment or debt, then people start selling their shares for actual money, and the Stock Market takes a turn downward. This can also happen within individual companies when they are bought out or go out of business. Very similar circumstances were forming right before the great Stock Market Crash of 1929.
Forces Leading Up To The 1929 Stock Market Crash
You may have heard the term “economic bubble” in reference to things as banks, real estate, and the dot com industry. A bubble occurs when everyone is focusing their money on a particular market, without much heed to future economic consequences. In the case of the Stock Market Crash of 1929, everyone was putting their money into buying stock from companies. After the end of World War I, the economy started to boom. People were coming home from the war and going back to work, and the new era of peace allowed for a surplus of spending money that people did not experience during wartime, when resources were being rationed. This was known as the Roaring Twenties. Industries were doing very well, and the value of stocks was rising, so everyone was investing. While this was seems like a very good thing, people were also taking loans out from their banks and using that money to buy stocks, or simply borrowing against the money they had already made form the stocks they owned in order to buy even more shares. Like all bubbles, this to would eventually burst.
In September of 1929, the London Stock Market experienced a crash when a number of top level financiers were jailed for fraud and forgery. Later, on October 28th (known as Black Thursday) the United States Stock Market experienced a crash of 11% of its value at the opening bell on Wall Street. Economic historians point to pending legislation that would have severely limited international trade (the Smoot-Hawley Tarriff Act) as a driving force behind the massive drop. But things did not stop there. In the following week, the stock market continued to plummet, and panic-stricken people were selling their stocks faster than they bought them, in hopes of recovering some of their financial losses cause by the crash. Such was not the case. People found themselves broke in the course of days, and (despite the folklore, no one was jumping out of skyscrapers) this was just the beginning.
The Great Depression
In the months (and years) that followed, America (and the world at large) found itself in entering a long period of economic depression. After the stock market crashed, companies across the board experienced very low profits, and no one was buying stock because there was little faith in those companies (and the economy). When profits are low, companies cannot afford to keep people employed, and thus America saw massive layoffs. With a large percentage of people out of work, no one was really earning money to put back into the economy. No one could make payments on houses. Banks were seizing property to cover their own losses, and a vicious cycle began and lasted until the late 1930s. This period is known as The Great Depression.
War! What Is It Good For?
We mentioned the Smoot-Hawley Tariff Act earlier, but that legislation caused other countries to pass retaliatory tariff laws against not only the United States, but other countries, as well. The Versailles Treaty saw to it that Germany could not produce armaments of any kind, and this did not sit well with them at all. With an economic depression, and international tensions on the rise, as well as the struggle between labor unions and business owners around the world, a storm was forming. Germany broke the stipulations of the Versailles Treaty and started to make arms and train a very well-regimented army. Japan was feeling a great economic strain in their shipping channels because of high tariffs and embargoes on their goods that they normally shipped to the Untied States. When Germany invaded Poland in 1939, the whole of Europe started to mobilize and England, in particular, started pouring economic resources into production. When Pearl Harbor was attacked in 1941, drawing the United States into a global conflict, industrial production started on a major upswing. Overall, historians and economists point to the advent of the Second World War as the end of the Great Depression. (It should be noted that a few economists would also point to a rise in entrepreneurs – because when big companies are not hiring, many people strike out on their own – and a slow rise in advertising and the standard of living, as contributing factors to turning around the Great Depression of the 1930s.)
To The 50s, And Beyond!
The end of World War II saw a complete recovery from the Great Depression, and the stock market was poised to enter another period of growth. With troops coming home, many industries saw a boom in post-war production, as factories switched form producing weapons to producing cars, home goods, appliances, and raw materials were no longer being used for the war effort, so the quality in consumer life was on the rise. With a more secure economy in peace time, there was also a growth in population (hence Baby Boomers). People were spending more on non-essentials, businesses were coming out with new and better products, and the introduction of television gave people a brand new way to have those goods marketed to them. Once again, people were investing in stocks without fear. This would continue well into the 1960s and 70s.
Steel & Oil: The 1970s
The automobile industry in the United States made up a large portion of the domestic economy. This went hand-in-hand with our reliance on the oil industry, and by the 1970s a good portion of our oil was being imported from the Middle East (as well as other regions, such as northern Europe). With the emergence of other industrialized countries exporting their automobiles, the United States car companies needed to restructure themselves, which then led to the steel industry hitting an economic slump. Between these issues, the conflict in Vietnam, and internal social conflicts, the United States economy was experiencing stagnation, while oil prices (real and perceived) continued to rise. Many today can still remember long lines at the gas pumps, and an increase in unemployment. There was a small dip in the stock market during the 1970s, but still nothing as bad as the Great Depression.
Living In A Material World: The 1980s
With the Vietnam conflict behind us (for the most part), and jobs on the rise, the United States had a new found faith in the economy (and the stock market). There were new highs in capitalism and consumerism, with new toys, new cars, and affordable personal computers paving the way for more jobs and new specialized industries. The United States was also fighting a war of ideals – one where capitalism was determined to out-perform the communism professed by Soviet Russia. The Baby Boomers born in the 1950s were becoming the captains of industry, and the rise of innovative electronics would mean new job markets were opening. People were freely investing in stocks, and reaping the benefits. But this too, was a bubble waiting to burst.
The 1990s: We Have Not Reached Nirvana
By the end of the 1980s and well into the 1990s, the United States was trying to resolve a recession caused by scandals involving the sale of junk bonds (bonds with a potentially high payoff sold by companies that have less than stellar rating, which most times end up being worth nothing because the company goes under), as well as the failure of Savings & Loans (S&L) banks. In the early 1980s, S&L Banks were limited on the interest they could offer, as well as the investments they could make with depositors’ money. Those regulations were loosened, and toward the end of the 80s S&L Banks were making very risky investments, which included the aforementioned junk bonds. As a result, the stock market was in a slump and the United States found itself in a recession.
War Is Not The Answer: The 2000s
The 2000s saw three consecutive down-ticks in the stock market. The first came when the Dot Com bubble burst. Many people and companies were putting faith in the future of online business, with companies designing web-based interfaces to deal with customers, other companies existing solely as online entities (eBay and the like), and other not-so-reputable entities creating fly-by-night internet “companies” which would simply disappear after they made money off of unsuspecting customers and investors. To add to this, the strikes on New York City on September 11, 2001 saw fear translated into numbers as the stock market dropped. People were afraid to invest. Gas prices rose while we were embroiled in a conflict in the very region where we were getting our oil supply from, and investors were taking very few risks. This was all compounded by the Economic Crisis of 2008, where the housing bubble collapsed. Banks were lending money to people with very low interest, based on the theory that the value of houses themselves would continue to rise, and short term deals based on long term value, with loose oversight by controlling agencies. There were also a lot of cases of “predatory lending,” where housing loans were offered to people at extremely low introductory rates, even though their financial standing would mean there was little chance of repayment of the loan’s principal, thereby keeping people in debt and eternally paying off the loan’s interest. Major financial institutions collapsed, there was a scarcity of credit, people were defaulting on mortgages, and securities were severely devalued by the crisis. Unemployment took a sharp upturn; businesses downsized; the automobile industry declared bankruptcy (but was bailed out); people could only afford the basics, and people were scared to invest in anything other than themselves. Hardly anyone was buying shares on the stock market.
We Will Survive: 2009 To 2015
We have seen a gradual recovery since the late 2000s, in part because unemployment caused a rise in small businesses and self-employment in niche markets. People took on multiple jobs, or wore multiple hats in their own businesses to maximize profits. The Dodd-Frank Wall Street Reform and Consumer Protection Act was put in place to prevent such a crisis from occurring in the future. In 2009, the Economic Recovery and Re-Investment Act was passed, which was a government created stimulation of the economy designed to create jobs, give tax incentives to people and companies, and encourage people to once again invest in products, homes, and the stock market.
To The Future
Will we never see another bubble or downturn in the stock market? The history of the past century has taught us that this is an improbability. However, given the track record of the stock market, and the (now evident) causes of the crashes and recessions of the past can help us take notice when bubbles are forming and when the market will “self correct.” By investing wisely and not taking advantage of current or future markets (feeding the bubble), we can prevent – or at least lessen – the repercussions of drastic market shifts in the years and decades to come.