The Roaring Twenties and the Stock Market Crash of 1929

Posted by PITHOCRATES - April 23rd, 2013

History 101

The Roaring Twenties gave us the Modern World and one of the Greatest Economic Booms in History

When the steam engine hit the American farm it increased farm production.  By mechanizing the farm fewer farmers could farm more land.  Allowing American farmers to produce bumper crops.  Creating a boom in farm exports.  Especially during World War I.  As Europeans farmers exchanged their plows for rifles Europe had no one to grow their food.  So even though the mechanization of the American farm caused crop prices to fall the increase in sales volume brought in more farm revenue.  Life was good for the American farmer.  For businesses manufacturing all of that mechanized farm equipment.  And the banks making loans to farmers so they could mechanize their farms.

The1920 presidential election pitted a progressive Democrat against a conservative Republican.  The progressive promised to raise tax rates to pay down the war debt.  Andrew Mellon, Warren Harding’s treasury secretary, found that high tax rates were counterproductive.  They actually reduced tax revenue.  As wealthy people invested their money out of the country to avoid high tax rates.  So when Harding won the election they cut tax rates.  With no need to shelter their income the wealthy invested their money in the United States.  Pouring their money into the domestic economy caused great economic activity.  Great returns on investment.  And great income tax revenue.  The wealthy paid almost three times as much in tax revenue.  While the tax burden on the poor fell.  And the national debt fell by one third.

Harding died in office but Calvin Coolidge continued his policies.  He slashed government spending along with those tax cuts.  Pulling the government out of the private sector economy.  And the private sector economy responded.  Creating a lot of jobs.  Unemployment fell to as low as 2%.  And living standards soared.  For everyone.  Not just those in the unions.  In fact, this general rise in living standards weakened the unions.  For you didn’t need to belong to a union to live well.  It was the beginning of the modern world.  Brought about by a burst of innovation and manufacturing that lasted 8 years.  One of the greatest economic booms in history.  Henry Ford’s moving assembly line made the car affordable for the working man.  Auto registrations rose from 9 million in 1921 to 23 million by 1929.  An increase of 156%.  And keeping pace with the auto manufacturers were their suppliers.  Metal, steel, paint, lumber, leather, cotton, glass, rubber, etc.  And especially the oil industry.  That made lubricating oils and greases.  And the gasoline that powered all of these cars.  With so many jobs per capita income increased from $522 in 1921 to $716 in 1929.  An increase of 37%.  With people earning more home ownership soared.  And this boom in economic activity didn’t end there.

Herbert Hoover thought Government could better Manage the Economy than Messy Laissez-Faire Free Market Forces

Electric utilities were bringing the new electric power to industrial users and private homes during the Twenties.  Industry was using 300% more electric power than they were in 1899.  And it changed home life.  As electric clothes irons, vacuum cleaners, clothes washers, toasters and refrigerators became common household items by the end of the Twenties.  Households that had a telephone increased by 51% during the Twenties.  People were watching movies.  And saw the first talkies in the Twenties.  The radio also became a household fixture with some 7.5 million radio sets sold by 1928.   The economy was booming.  The middle class was expanding.  Consumer prices fell due to increases in productivity giving people more disposable income than they ever had before.  Causing an increase in consumer spending.  Allowing 1 in 5 Americans to own a car.  And increasing the number of people who could afford to fly from 40,000 in 1920 to 417,000 in 1930.  An increase of 943%.  So Americans were buying a lot.  But they were also saving a lot.  And investing.  Some 28% of American families owned stock.  Something once the exclusive privilege of the rich.  Wage earners were even buying life insurance policies to provide for their families in the event of their death.  Things were happening in the United States during the Twenties.  And the innovation and economic tsunami coming out of America had those in Europe worried.  So worried that they were discussing forming a United States of Europe to compete with the American system.

But all was not good.  During the Twenties those Europeans traded their rifles back for plows.  Reducing the export market for American farmers.  And when European governments threw up tariffs on America farm goods that export market disappeared.  Putting great surpluses into the American market.  Causing crop prices to fall further.  Crashing farm incomes.  Making some farmers unable to service their debt for all of that mechanized equipment they financed.  And when they defaulted on their loans en masse banks in the farming regions failed.  And when they did the money supply contracted.  The Federal Reserve made no effort to stop this contraction.  Which had a cooling effect.  Tapping the breaks on an expanding economy.

Coolidge chose not to run for a second term.  His successor, Herbert Hoover, was a progressive Republican.  And was everything Coolidge was not.  Hoover favored a big government perfecting the country.  He was a professional bureaucrat.  He loved bureaucracies.  And he loved paperwork and forms.  Which he wanted to bury private business in.  He thought the government could manage the economy better than messy laissez-faire free market forces.  Those very forces that created the Roaring Twenties.  He wanted to partner government with business.  With the emphasis on government.  (As president he increased the size of the Commerce Department and deepened its reach into the private sector economy.)

The Smoot-Hawley Tariff caused Investors to Dump their Stocks causing the Stock Market Crash of 1929

The Federal Reserve misjudged the stock market.  They thought it was nothing but speculation.  Citing radio maker RCA’s stock price’s meteoric rise.  So the Fed tapped the breaks further to cool this ‘speculative’ fervor.  Further contracting the money supply.  But this wasn’t speculation.  The rate of growth in radio sales actually was greater than the rate of growth in the stock price.  Making it more likely that the stock was undervalued.  Not overvalued.  But the Fed went ahead and contracted the money supply anyway.  Making it difficult for business to get funding for continued growth.  Despite there still being people out there who hadn’t bought a car, a house, electric appliances or a radio yet.  And wanted to.

In 1929 a new tariff bill was moving through Congressional committees.  The Smoot-Hawley Tariff.  Which would raise taxes on imports by up to 30%.  Which would greatly increase the cost of business.  Because most if not all of American manufacturing used some imported raw materials.  Which would increase their selling prices.  Making them less competitive.  Worse, if the U.S. slapped tariffs on imports it was certain their trading partners would respond with some retaliatory tariffs.  Which would just shut down their export markets.  Much like those tariffs shut down the export markets for American farmers.  Then in the autumn of 1929 the Smoot-Hawley Tariff passed critical votes in committee.  Sending the tariff bill on its way to becoming law.  This was not good news for investors.

It was all too much.  The coming expansion of government regulation over the private sector economy.  Higher taxes to pay for this bigger government.  The contraction of the money supply.  And then the Smoot-Hawley Tariff.  Investors could read the writing on the wall.  None of this would be good for business.  It would just smother the economic growth of the Twenties.  For if you increase businesses’ costs and decrease their markets you will slash their profits.  Which will reduce the value of these companies.  And reduce the value of their stock prices.  As investors live by the adage of “buy low, sell high” they’d want to sell those stocks fast before the Smoot-Hawley Tariff sent their prices into a tailspin.  Which they did.  Causing a great selloff starting in October.  That led to the Stock Market Crash of 1929.

Now contrast that with a true speculative bubble.  The dot-com bubble.  Where investors poured money into these dot-com companies eager to find the next Microsoft.  Aided and abetted by the Federal Reserve that was keeping interest rates artificially low.  To encourage all sorts of investment.  Including ones driven by irrational exuberance.  So investors were bidding those stock prices into the stratosphere.  For companies that had no profits.  For companies that didn’t have a product or service to sell.  But these investors were looking with great anticipation at their future profits.  Even though they really didn’t understand the Internet.  They just knew that computers were involved.  Which is what made Microsoft rich.  Producing software to run on computers.  And every investor was sure their dot-com was going to produce something to run on computers.  Making that company rich.  And their investors.  But when the start-up capital ran out there were no earnings to replace it.  And the speculative bubble burst beginning on March 11, 2000.  And those highly overvalued stock prices began to fall back to earth.  With the tech-laden NASDAQ losing 78% of its value before it was all over.  Now THAT is a speculative bubble that the Federal Reserve should have tried to prevent.  Not the economic boom of the Twenties where companies were building real things that real people were buying.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , ,