Roaring+Twenties+Stock+Bubble

Jack Schultz Drew Mackin Brian Sacks Mike Cherry Jon Rhome

The Roaring Twenties Stock Bubble

The Roaring Twenties Stock Bubble began in 1924 and ended with the Stock Market crash of 1929 and ultimately resulted in the great depression. In 1924, the U.S. stock market was hailed by many as a “new era” of economic fundamentals that was a result of the establishment of the Federal Reserve in 1913, Coolidge administration policies pertaining to free trade, anti-inflation measures, relaxation of anti-trust laws and corporate improvement regulations. In reality, the driving factor behind both the inflation and the bursting of the speculative bubble was the expanding use of leverage (i.e., debt) by individuals as well as corporations combined with the relaxed government polices surrounding economics. In short, the stock market boom was a response to non-existent government regulations. This opened the flood gates for a decade characterized by an expansion of consumer credit. As a result, Americans financed purchases of new products such as automobiles and radios; thus catalyzing the use of new techniques of mass production that additionally helped to drive down prices. Most dangerously however, was when consumers began to use credit to also purchase stocks. Investors would take out large amounts of money at high interest rates and rely on the stock market for a quick return on their investment. It seemed like a fool-proof way to gain massive amounts of money. As the stock market escalated, investors began to take advantage of margin loans provided by their brokers and resulted in the overvalue of stocks. This later contributed to the largest economic downturn in American history. Credit was essential in fueling the economic boom in the 1920s. Credit allowed businesses and corporations boost their profits and continue on their path to rapid growth. However, when the stock market crashed the businesses were unable to repay their loans. This excessive unpaid credit forced banks out of business and forced consumers into poverty as the banks lost peoples’ life saving. The economic bubble of the 1920’s marks a major shift in American major economic policy.The government before the 1920s had a hands off policy towards the markets. Regulations were almost non-existent, allowing for the rapid expansion that characterized the roaring 20s. Unfortunately, the lack of regulations is what brought the economy into a major depression. When the stock market collapsed then people began to take out money from the banks. Because there was no FDIC, peoples’ life savings were all lost. Banks were unable to shell out the cash to people with savings accounts. The FDIC now insures that your money is safe in the bank. The bubble was different because it occurred during a time of extreme optimism and cultural growth. But the bubble led to the Great Depression, one of the darkest times in U.S. history. That being said, the bubble had a huge impact on the way the US and the world conducts economics. After the bubble burst, Roosevelt enacted the New Deal, to speed up the recovery, but it was World War II that ultimately ended the depression. The SEC was created in 1934 to monitor the market and prevent future crisis. Most importantly, the bubble of the 1920’s is a cautionary tail, and serves as a warning, of the dangers of a completely unregulated economy. After the stock market crash of 1929 and the collapse of more than 40% of American banks by 1933, strict trading and banking regulations were put in place, as well as financial protections, enforced by the newly formed Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC). The FDIC was established by the Glass-Steagall Act in 1933. The FDIC provides deposit insurance, which ensures the safety of deposits in various banks. Another way America recovered from the Great Depression was Franklin D. Roosevelt’s New Deal which lowered the unemployment and poverty rate by establishing more job opportunities. The New Deal also increased the role of government in peoples’ lives which is still around today.The effects of the Great Depression were very strong on the citizens of America and many people were frightened by banks, the stock market, and scared to spend.The introduction of these new economic measures brought trust back to the American people and changed economics forever.

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