Optimism Of The 1920s Essay

Ignorant of the future, the 1920s was a period of global optimism evoked by the thought that the great destruction and destitution of World War I would never reoccur. Mass-produced goods, such as automobiles, fridges, telephones, radios, and many more, stoked a new wave of industrialization (Colombo). Americans at the time believed that the economy was going to grow permanently. The president of America Herbert Hoover led the optimism as he stated in his acceptance speech for the Republican Party nomination for the presidency: “We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from us.” Get-rich-schemes widely spread across the country and people hoped to

earn large amount of money without much effort. This arrogant and unrealistic attitude soon led to the Florida real estate boom (Williamson). However, the Florida Real Estate boom was not the only trouble of America. Without many people noticing, uneven distribution of wealth, agricultural and industrial overproduction, and others were gradually causing problems in America. Disregarding these hidden problems, the stock market rose wildly encouraged by the mood of over-exuberance.
Stock prices swung up and down throughout 1925 and 1926, and formed a strong upward trend in 1927.

By 1928 stocks became the most common conversation topic everywhere. It did not take long for stock market trading to go wild. More than two million people began investing in the stock market. Yet only a few studied the finances and businesses of the companies that they invested in. Houses were mortgaged and life savings were invested in the stock market without knowing that the stock prices may drop (Mack). In the new investors’ experience, stock market had always gone up. However, weaknesses, such as overproduction of farms, overconfidence, bank failures, fraudulent companies, and low wages, soon proved the investors wrong. After stock price peaked on September 3, 1929, it began to sink and gradually picked up its falling speed. As the price dropped, more brokerages hiked margins, and “it was like yelling fire in a packed theater (Colombo).” Described as the nail in the coffin, Black Tuesday, October 29, 1929, was the most devastating day. The index fell 43 points and 4 to 5 times of the normal shares traded hands. Throughout the remaining of the year, investors lost $100 billion in assets (Williamson). The gradually built Great Crash had severe consequences on global economy and society. The following paper is going to discuss the causes of the stock market crash of 1929. People’s overconfidence led to the United States’ stock market crash in 1929 by ignoring the warning

signs, such as a small drop before the crash and admonishment from experts, buying on margin, and causing gap between real and stock market value of business.
Of the three reasons listed, the most insignificant one is the disregard of warning signs. People ignored the warning signs and admonishments from experts. However, their confidence was not unreasonable. The aftermath of World War I consisted of drastic political, cultural, and social changes across the whole world. The 1920s was a period filled with global optimism evoked by the idea that the tribulation and misery of the Great War would never happen again. People believed that through perseverance, the abilities of mankind could be devoted to the creativity of business instead of the devastation of warfare. As World War I came to an end, workforce returned to society and economy headed toward normalcy. In America, mass-produced goods, such as radios, cigarette lighters, automobiles, vacuum cleaners, fridges, telephones, and many others became available for the first time. The new wave of industrial advancement accumulated great wealth (Colombo). Spurred by the confidence created by this situation, experts expressed their optimistic view on the stock market which appeared to be never falling for most people at the time.
Optimism after World War I, return of workforce, increased industrialization, new technologies, and experts’ predictions resulted in people’s confidence. Overconfident people ignored the warning signs as authoritative economists who failed to foresee the crash further contributed to their confidence. “In a few months, I expect to see the stock market much higher than today,” stated Irving Fisher, America’s distinguished economist and Professor of Economics at Yale University, fourteen days before Black Tuesday. “A severe depression such as 1920-1921 is outside the range of probability. We are not facing a protracted liquidation,” analyzed the Harvard Economic Society (Sornette). As the two most renowned economic forecasting institutes continued with their optimistic views, the few people who predicted a crash were ignored. Fifty-five days before the crash, Roger Babson, businessman and investment analyst, expressed his prediction of an “inevitable crash”. But only 2 days later, Irving Fisher directly controverted Babson’s view. Thus, overconfident people and experts almost fully ignored warnings given by others. They did not realize the crisis even when the stock market experienced a small but sharp downturn on March 25, 1929. This incident proved the fragility of the bubble and signaled that mania could quickly turn to despair. However, when banker Charles Mitchell announced that his bank would keep lending, growth continued apace and panic stopped due to his reassurance.
By ignoring the warning signs, investors allowed stock prices to rise higher only to fall harder. Like the downturn on March 25, 1929, stock prices continued to grow after the crisis at that time was overcome. Beneath the prosperity of stock market, house construction slowed, steel production fell, and car sales declined. Stock growth far exceeded growth in the underlying industrial economy. Yet only a few studied the data which showed further doubtful signs (Colombo). Many remained confident and failed to realize the fact that business was actually declining because they were not experienced. Amateur speculators were playing the stock market high while old professional stock investors watched in horror (Des Moines Register, Iowa). Disregarding that several banks had failed and demand for homes waned, the market peaked on September 3, 1929. Those issuing warnings were ignored (Colombo). As people continued to ignore the warning signs and kept investing, stock prices were pushed higher and higher by confidence instead of actual business performance. This condition further enlarged the scale of the final fall and thus contributed to the crash. However, this factor is not very significant comparing to other fundamental problems, such as margin buying and mismatch between real and stock value of business.
Furthermore, margin buying performed by confident people also contributed to the crash. Confident investors chose to put all their savings into the stock market and invested even more through buying on margin. Margin buying was the action of borrowing 80%~90% of the investment value from brokers or banks. It was said there were many “margin millionaire” investors who made huge profits by buying on margin and watching share prices raise (Pettinger). Although margin buying enabled people to invest more money and earn more profits in the market, it may have disastrous consequences: when an account value depressed to a certain value, the broker would demand the investor to deposit additional money to maintain the minimum margin. If investors could not add more money to the account, they would usually sell their stock to make up their losses and pay back the brokers.
Abetted by an ever-richer idea, investors flooded financial markets with credit and encouraged the creation of new credit instruments. As the government failed to regulate newly evolved credit instruments, rapid expansion of credit permitted consumers to continue increasing their purchases (Wisman). The business of margin buying even grew to an extent that the New York Stock Exchange allowed two brokerage houses to establish offices with continuous stock quotations by radio on trans-Atlantic ships, enabling business man to travel around the world without stopping his transactions for a single day. As stated in the Report of the Committee on Banking and Currency in 1934, “During the year 1929 the total number of customers of 29 exchanges was 1,548,707. The transactions of 949,470, or 61.31 percent of the total number of customers, were of a cash character and the transactions of 599,237, or 38.69 percent, were of a margin character.” Moreover, 40.81 percent of New York Stock Exchange’s customers were based on margin buying (Fletcher). This report, which was published by the United States government as a resolution to investigate practices of stock exchanges before the crash of 1929, provided specific data that proved the high percentage of margin accounts during 1929. Buying on margin led to rising indebtedness while overconfident people were ignorant that the stock market may fall one day and they would have to pay down the debt.
Margin buying conducted by confident people resulted in the stock market crash of 1929. The number of margin accounts was not extremely large. Yet these margin purchasers, whose speculations were not regulated, affected the national economy and the stock market immensely disproportionate to their numbers. Their activities resulted in wide fluctuations in the price, which led to the establishment of their overshadowing position in the financial field. When prices picked up falling speed after it peaked on September 3, 1929, stockbrokers gradually raised margins and demanded more collateral from borrowers. As the political cartoon of Los Angeles Times in October 18, 1929 showed, a bear market represented by a bear was demanding margin calls while vulnerable small stockholders represented by a lamb wore only a tear and a barrel and failed to pay the bear market. Although some could sell stock to cover their losses, as more and more brokerages incremented margins, the situation was worsened. With greater numbers trying to sell, stocks became unwanted and prices fell further. In the final hours of trading on Thursday, October 23, 1929, stock prices began to plummet, but it was eased later as bankers invested a large sum. Yet, prices dropped by another 12% on October 28, 1929 and cries of “Sell! Sell! Sell!” burst out on the trading floor. Traders fainted and some got into fistfights (Colombo). Margin buying was a significant factor because margin calls led to the sudden outflow of stocks and thus contributing to the fall of stock price and the stock market crash.
Most importantly, people’s overconfidence raised stock prices high and created a gap between real and stock market value of business. People’s confidence, instead of the actual development of business, was the major factor that raised the stocks high. Several reasons resulted in the stagnant rising of real economy. The United States, with a population of 120,000,000 prosperous consumers, had one of the greatest domestic markets in the world. However, this market could not absorb the all the goods that the United States produced. The surpluses must be sold in foreign markets. If the surpluses were not sold, a period of super-competition would destroy profits, reduce wages, and result in widespread unemployment in the domestic market. As each worker produced more and the value of goods produced by American factories greatly increased, the profits of manufacturers had raised sky high. But meanwhile, the workers only received a little share of the profits. Due to the fact that the total value of products was greater while the total national wage was smaller, the employees failed to buy back their production. America’s wealth concentrated in fewer and fewer hands throughout the years. But the population of wealthy people was too small to consume enough goods to support the whole economy (Gordon). “Rockefeller, Ford, and Schwab and their brother multimillionaires cannot eat twenty beefsteaks a day, or ride in fifty Packards, or inhabit seventy villas each,” stated Irving Fisher, America’s distinguished economist and Professor of Economics at Yale University, while explaining profit system weaknesses of the 1920s in 1933. Economy was not able to grow, because the people who had the means could not consume all and the people who wanted to consume all did not have the means.
However, according to a political cartoon of the Los Angeles Times in 1928, Wall Street stock boom ran far ahead of national prosperity and economy. The speculation crazy public demanded more stocks and never had enough. Overconfident investors drove the stock prices higher and higher. Because the stocks were thought to be extremely safe, the new investors caused the Dow Jones Industrial Average to soar. The Dow went from 60 to over 400 from 1921 to1929 (Mack). The average earning per share rose by 400 percent between 1923 and 1929. The economy before the crisis of 1929 appeared to be healthier than ever. Growth of economic output averaged 5.9 percent per year between July 1921 and August of 1929. This growth was extraordinary comparing to the normal growth rate of 3.0 percent for the U.S. economy.
As several problems kept the real economy down and overconfident people raised the stock prices higher, the stock prices became divorced from the real earnings of the share prices.

Car sales fell, steel production lowered, housing construction slowed down. Worker’s wage stagnation restricted the investment in the real economy. Consumption demand lagged behind the output of consumption goods. The decline in household saving and the rapid spreading of installment credit permitted consumers to continue increasing their purchases, not noticing that rising indebtedness would soon result in the need to pay down the debt (Wisman). Thus, prices were not driven by economic fundamentals but the optimism and confidence of investors. Presented in Des Moines Register (news)’s political cartoon “It’s Fine as Long as You’re Going Up” in 1928, the stock market jumped high up in the air with a smile on his face while the actual earning value lied down on the ground with small stones. This cartoon shows the idea that due to the mismatch between actual value and stock market value of business, the stock market crash could not be saved in the middle but to fall to the very bottom. The gap created by overconfident people and stagnation of economy was a significant factor because it directly proved that the stock prices were not based on economic fundamentals and explained the reasons why the stock market crashed instead of just experienced a mild

recession.
Although some people believe that the agricultural recession caused the Great Crash of 1929, it is not a major factor. Before 1929, the agricultural sector of America struggled to maintain profitability. Many small farmers were driven out of business because of overproduction of food. Better technology increased supply, but demand for food was not increasing. Therefore, prices fell and farmers could not make any profit. It was difficult for unemployed farmers to get another job. According to the Des Moines Register in 1928, the farmers stood on the other side watching more and more Americans loaned to invest in the stock market. This news shows that farmers were not the major participants of the stock market. Even though some rural banks failed due to the agricultural recession, it was not completely the farmers’ fault. The policy of the banks during the 1920s lacked regulation on providing mortgages. Banks did not make careful observation and investigation of the borrower and his or her ability to pay back the banks. Although farmers did borrow money, the banks’ own policy were the major cause of bank failures. Therefore, banking policy was a more important cause for rural bank failures and the agricultural recession was not a significant cause comparing to the overconfidence of people.
In conclusion, people’s overconfidence was the most significant cause that led to the stock market crash of 1929. Several main points showed how overconfidence contributed to the crash. The most inconsequential factor was the disregard of warning signs. Return of workforce, new technologies, increased industrialization, optimism after World War I, and experts’ erroneous predictions accounted for people’s overconfidence. Overconfident people ignored the warning signs while authoritative economists’ inaccurate speeches further contributed to their confidence. The two most illustrious economic forecasting institutes, Yale University and the Harvard Economic Society, failed to predict the crash. Those who warned everyone of a possible crash were contradicted and their warnings were ignored. A small but sharp downturn revealed the fragility of the bubble, but banker Charles Mitchell saved the market by continuing to lend. Only a few studied the data which showed doubtful signs. By ignoring the warning signs, overconfident people allowed the stock market to rise higher only to fall harder.
Margin buying performed by confident people also contributed to the crash. Although the number of margin accounts was not extremely large, margin purchasers affected the national economy and the stock market inequitable to their numbers. As prices picked up falling speed, a wave of margin calls emerged. Margin calls led to great numbers of selling which made stocks unwanted and prices fell.
Most importantly, overconfidence pushed stock prices high and built up a huge gap between real and stock market value of business. Instead of the actual development of business, confidence supported the growing market. Surplus of goods and uneven distribution of wealth accounted for the stagnant rising of real economy. Due to the mismatch between actual value and stock market value of business, the stock prices were not based on economic fundamentals and experienced a great crash. Thus, people’s overconfidence led to the United States’ stock market crash in 1929 by ignoring the warning signs, such as a small drop before the crash and admonishment from experts, buying on margin, and causing gap between real and stock market value of business.
The stock market crash had severe consequences to the United States. 12 million people were out of work; 12,000 people became unemployed everyday; 20,000 companies had gone bankrupt; 1616 banks had gone bankrupt; 23,000 people committed suicide in one year, which is the highest number ever. Charities such as the Salvation Army provided free food and shelter for the unemployed while no system benefited the unemployed. People even starved to death and some set fire to forests to get temporarily employed as fire fighters. However, President Herbert Hoover, as a Republican, believed in “rugged individualism. He stated, “It is not the function of the government to relieve individuals of their responsibilities to their neighbors, or to relieve private institutions of their responsibilities to the public.” But he still used money to create jobs such as the building of Hoover Dam and gave three hundred million to the states to help the unemployed according to the Emergency Relief and Reconstruction Act. Unfortunately, only thirty million of the money was actually used.
85 years had passed since the Great Crash of 1929. It taught the world valuable economic lessons. Hundreds of banks became insolvent after the crash. The U.S. government created the FDIC and insurance deposits. Recapitalizing banks can be another efficient method to prevent bank closures and maintain liquidity. The Great Depression showed the importance of jobs in the maintenance of economic activity and encouraged the formation of employment programs. In order to prevent banks from engaging in high-risk financial transactions, the government set up financial regulations that provided higher transparency in stock trading (Conceicao). These lessons helped to prevent future crashes; however, a financial crisis occurred in 2008.
In July 2007, a loss of confidence in the value of sub-prime mortgages caused a liquidity crisis, leading to the injection of capital into financial markets by the US Federal Bank. By September 2008, the crisis worsened while stock markets around the world crashed and markets became greatly volatile. The collapse of Lehman Brothers marked the start of a new phase in the global financial crisis. Governments around the world attempted to rescue giant financial institutions. Meanwhile, the housing and stock market collapse worsened (Davies). The 2008 financial crisis is believed to be the worst financial crisis since the Great Depression of the 1930s, which the Great Crash of 1929 marked the beginning of. The stock market crash of 1929, caused by people’s overconfidence, was one of the most famous and influential crashes that had ever happened in history. It left not only the unforgettable panic, but also precious experiences to be studied and valuable lessons to be learned.