Long-term underlying causes sent the nation into a downward spiral of despair. First, American firms earned record profits during the 1920s and reinvested much of these funds into expansion. By 1929, companies had expanded to the bubble point. Workers could no longer continue to fuel further expansion, so a slowdown was inevitable. While corporate profits, skyrocketed, wages increased incrementally, which widened the distribution of wealth.
The richest one percent of Americans owned over a third of all American assets. Such wealth concentrated in the hands of a few limits economic growth. The wealthy tended to save money that might have been put back into the economy if it were spread among the middle and lower classes. Middle class Americans had already stretched their debt capacities by purchasing automobiles and household appliances on installment plans.
There were fundamental structural weaknesses in the American economic system. Banks operated without guarantees to their customers, creating a climate of panic when times got tough. Few regulations were placed on banks and they lent money to those who speculated recklessly in stocks. Agricultural prices had already been low during the 1920s, leaving farmers unable to spark any sort of recovery. When the Depression spread across the Atlantic, Europeans bought fewer American products, worsening the slide.
When President Hoover was inaugurated, the American economy was a house of cards. Unable to provide the proper relief from hard times, his popularity decreased as more and more Americans lost their jobs. His minimalist approach to government intervention made little impact . The economy shrank with each successive year of his Presidency. As middle class Americans stood in the same soup lines previously graced only by the nation's poorest, the entire social fabric of America was forever altered.
It was a boom time for the. soared to record levels. Millionaires were made overnight. Sound like the stock market of the 1990s? Try the New York Stock Exchange on the eve of the in 1929.
Although the 1920s were marked by growth in stock values, the last four years saw an explosion in the market. In 1925, the total value of thewas $27 billion. By September 1929, that figure skyrocketed to $87 billion. This means that the average stockholder more than tripled the value of the stock portfolio he or she was lucky enough to possess.
In hisarticle, "Everyone Ought to Be Rich," wealthy financier advised Americans to invest just $15 dollars a month in the market. After twenty years, he claimed, the venture would be worth $80,000. Stock fever was sweeping the nation, or at least those that had the means to invest.
Fueling the rapid expansion was the risky practice of buying stock on margin. Aallows an investor to borrow money, typically as much as 75% of the purchase price, to buy a greater amount of stock. Stockbrokers and even banks funded the reckless . Borrowers were often willing to pay 20% interest rates on loans, being dead certain that the risk would be worth the rewards. The lender was so certain that the market would rise that such transactions became commonplace, despite warnings by the Federal Reserve Board against the practice. Clearly, there had to be a limit to how high the market could reach.