Wall Street Crash

Wall Street Crash

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The United States entered the 1920's in a strong economic position. The economies of her European rivals had been severely disrupted by the First World War and the United States had been able to capture markets which had previously been supplied by countries like Britain, France and Germany.

However, some of the improvements in the American economy that had taken place could be traced back to changes that took place before the war. Henry Ford moved his operations to the specially built Highland Park Ford Plant. Over 120 acres in size it was the largest manufacturing facility in the world at the time of its opening. In 1913, the Highland Park Ford Plant became the first automobile production facility in the world to implement the assembly line. (1)

Ford had been influenced by the ideas of Frederick Winslow Taylor who had published his book, Scientific Management in 1911. Peter Drucker has pointed out: "Frederick W. Taylor was the first man in recorded history who deemed work deserving of systematic observation and study." (2) Ford took on Taylor's challenge: "It is only through enforced standardization of methods, enforced adoption of the best implements and working conditions, and enforced cooperation that this faster work can be assured. And the duty of enforcing the adoption of standards and enforcing this cooperation rests with management alone." (3)

Initially it had taken 14 hours to assemble a Model T car. By improving his mass production methods, Ford reduced this to 1 hour 33 minutes. This lowered the overall cost of each car and enabled Ford to undercut the price of other cars on the market. By 1914 Ford had made and sold 250,000 cars. Those manufactured amounted for 45% of all automobiles made in the USA that year. (4)

On 5th January 1914, on the advice of James Couzens, the Ford Motor Company announced that the following week, the work day would be reduced to eight hours and the Highland Park factory converted to three daily shifts instead of two. The basic wage was increased from three dollars a day to an astonishing five dollars a day. This was at a time when the national average wage was $2.40 a day. A profit-sharing scheme was also introduced. This high-production, generous wage system became known as Fordism. (5)

Henry Ford took the credit for this bold move calling it "the greatest revolution in the matter of rewards for workers ever known to the industrial world." (6) The Wall Street Journal complained about the decision. They accused Ford of injecting "Biblical or spiritual principles into a field where they do not belong" which would result in "material, financial, and factory disorganization." (7)

Other industrialists followed Henry Ford's example. Between 1919 and 1929 output per worker increased by 43%. This increase enabled America to produce items that were cheaper than those manufactured by her European competitors. This enabled employers to pay higher wages. One politician pointed out: "I think our people have long realized the advantages of large business operations in improving and cheapening the cost of manufacture and distribution…. The more goods produced, the more share there is to distribute." (8)

By 1926 the average daily wage of a Ford worker was $10 and the Model T sold for only $350. (9) The distribution of this new wealth was very unequal: "The average industrial wage rose from 1919's $1,158 to $1,304 in 1927, a solid if unspectacular gain, during a period of mainly stable prices... The twenties brought an average increase in income of about 35%. But the biggest gain went to the people earning more than $3,000 a year.... The number of millionaires had risen from 7,000 in 1914 to about 35,000 in 1928." (10)

The United States also pioneered techniques in persuading people to buy the latest products. The development of commercial radio meant that companies could communicate information about their goods to a mass audience. In order to encourage people to purchase expensive goods like motor cars, refrigerators and washing machines, the system of hire-purchase was introduced which allowed customers to pay for these goods by installments. This had first been introduced by Isaac Merritt Singer in an effort to sell expensive sewing machines. It was known as the Hire Purchase Plan: "By advancing a certain percentage of the total price of the machine, a customer could hire a sewing machine, make monthly payments to it, and eventually own it." Singer only charged $5 for the initial payment, but as soon as they failed to make the monthly payments, the machine was repossessed. This method of selling goods was a great success and sales soared. (11)

Andre Siegfried, a French visitor pointed out: "In America the daily life of the majority is conceived on a scale that is reserved for the privileged classes anywhere else... The use of the telephone, for instance, is very widespread. In 1925 there were 15 subscribers for every 100 inhabitants as compared with 2 in Europe, and some 49,000,000 conversations per day.... Wireless is rapidly winning a similar position for itself, for even in 1924 the farmers alone possessed over 550,000 radios.... Statistics for 1925 show that... the United States owned 81 per cent of all the automobiles in existence, or one for every 5.6 people, as compared with one for every 49 and 54 in Great Britain and France." (12)

The American economy appeared to be in such a healthy state that during the 1928 Presidential Election, the Republican candidate, Herbert Hoover, claimed that: "We in America are nearer to the financial triumph over poverty than ever before in the history of our land. The poor house is vanishing from among us. Under these impulses, and the Republican protective system our industrial output has increased as never before and our wages have grown steadily in buying power. Our workers, with their average weekly wages, can today buy two and even three times more bread and butter than any other earner in Europe." (13)

Herbert Hoover easily defeated Al Smith, the Democratic Party candidate (21,427,123 votes to 15,015,464) in the election. An editorial in the New York Times in January, 1929, quoted President Hoover as saying: "It has been twelve months of unprecedented advance, of wonderful prosperity. If there is any way of judging the future by the past, this New Year will be one of felicitation and hopefulness." (14)

One way of making money during the 1920's was to buy stocks and shares. Prices of these stocks and shares constantly went up and so investors kept them for a short-term period and then sold them at a good profit. As with consumer goods, such as motor cars and washing machines, it was possible to buy stocks and shares on credit. This was called buying on the "margin" and enabled "speculators" to sell off shares at a profit before paying what they owed. In this way it was possible to make a considerable amount of money without a great deal of investment. During the first week of December, 1927, "more shares of stock had changed hands than in any previous week in the whole history of the New York Stock Exchange." (15)

The share price of Montgomery Ward, the mail-order company, went from $132 on 3rd March, 1928, to $466 on 3rd September, 1928. Whereas Union Carbide & Carbon for the same period went from $145 to $413; American Telephone & Telegraph from $77 to $181; Westinghouse Electric Corporation from $91 to $313 and Anaconda Copper from $54 to $162. (16)

John J. Raskob, a senior executive at General Motors, published an article, Everybody Ought to be Rich in August, 1929, where he pointed out: "The common stocks of their country have in the past ten years increased enormously in value because the business of the country has increased. Ten dollars invested ten years ago in the common stock of General Motors would now be worth more than a million and a half dollars. And General Motors is only one of may first-class industrial corporations." He then went on to say: "If a man saves $15 a week, and invests in good common stocks, and allows the dividends and rights to accumulate, at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month. He will be rich. And because income can do that, I am firm in my belief that anyone not only can be rich, but ought to be rich." (17)

Cecil Roberts, a British journalist working in the United States, pointed out that the stock market hysteria reached its apex in the summer of 1929. "Everyone gave you tips for a rise. Every was playing the market. Stocks soared dizzily. I found it hard not to be engulfed. I had invested my American earnings in good stocks. Should I sell for a profit? Everyone said, 'Hang on - it's a rising market'. On my last day in New York I went down to the barber. As he removed the sheet he said softly, 'Buy Standard Gas. I've doubled. It's good for another double.' As I walked upstairs, I reflected that if the hysteria had reached the barber-level, something must soon happen." (18)

Alec Wilder, the songwriter, became concerned about the value of his shares: "I knew something was terribly wrong because I heard bellboys, everybody, talking about the stock market. In August 1929 I persuaded my mother in Rochester to let me talk to our family adviser. I wanted to sell stock which had been left me by my father.... I talked to this charming man and told him I wanted to unload this stock. Just because I had this feeling of disaster. He got very sentimental: 'Oh your father wouldn't have liked you to do that.' He was so persuasive, I said O.K. I could have sold it for $160,000. Four years later, I sold it for $4,000." (19)

On 3rd September 1929 the stock market reached an all-time high. In the weeks that followed prices began to slowly decline. Later that month, an incident took place in London that caused major problems on Wall Street. In April 1929 Clarence Hatry, the former owner of Leyland Motors, acquired control of United Steel by borrowing "£789,000 from banks on the security of forged Corporation and General scrip certificates ascribed to the municipalities of Gloucester, Wakefield, and Swindon. £822,000 was withheld from these three corporations and another £700,000 was raised by duplicating shares in other companies he had promoted. As rumours about the Hatry companies circulated in the City, he spent large sums vainly trying to support their share values." (20)

On 20th September Hatry voluntarily confessed his frauds to Sir Archibald Bodkin, director of public prosecutions. The economist John Kenneth Galbraith, described Hatry as "one of those curiously un-English figures with whom the English periodically find themselves unable to cope." (21) The news of this corrupt activity caused the London Stock Exchange to crash. This greatly weakened the optimism of American investment in markets overseas and caused further falls in the value of shares on Wall Street. (22)

Efforts were made to regain confidence in the state of the American economy. Irving Fisher, professor of political economy at Yale University, was considered the most important economist of the 1920s. His research on the quantity theory of money inaugurated the school of macroeconomic thought known as monetarism. On 17th October, 1929 he was reported as telling the Purchasing Agents Association that stock prices had reached "what looks like a permanently high plateau". He added that he expected to see the stock market, within a few months, "a good deal higher than it is today." (23)

Despite Fisher's prediction, on 24th October, over 12,894,650 shares were sold. Prices fell dramatically as sellers tried to find people willing to buy their shares. That evening, five of the country's bankers, led by Charles Edward Mitchell, chairman of the National City Bank, issued a statement saying that due to the heavy selling of shares, many were now under-priced. This statement failed to halt the reduction in demand for shares. (24)

The New York Times reported: "The most disastrous decline in the biggest and broadest stock market of history rocked the financial district yesterday.... It carried down with it speculators, big and little, in every part of the country, wiping out thousands of accounts. It is probable that if the stockholders of the country's foremost corporations had not been calmed by the attitude of leading bankers and the subsequent rally, the business of the country would have been seriously affected. Doubtless business will feel the effects of the drastic stock shake-out, and this is expected to hit the luxuries most severely." (25)

On the opening of the Wall Street Stock Exchange on 29th October, 1929, John D. Rockefeller, the American oil industry business magnate and successful industrialist, issued a statement which attempted to regain confidence in the state of the economy: "Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks." (26)

This did not have the desired impact on the market for that day over 16 million shares were sold. The market had lost 47 per cent of its value in twenty-six days. "Efforts to estimate yesterday's market losses in dollars are futile because of the vast number of securities quoted over the counter and on out-of-town exchanges on which no calculations are possible. However, it was estimated that 880 issues, on the New York Stock Exchange, lost between $8,000,000,000 and $9,000,000,000 yesterday. Added to that loss is to be reckoned the depreciation on issues on the Curb Market, in the over the counter market and on other exchanges." (27)

Although less than one per cent of the American people actually possessed stocks and shares, the Wall Street Crash was to have a tremendous impact on the whole population. The fall in share prices made it difficult for entrepreneurs to raise the money needed to run their companies. Frederick Lewis Allen pointed out: "Billions of dollars' of profits - and paper profits - had disappeared. The grocer, the window-cleaner, and the seamstress had lost their capital. In every town there were families which had suddenly dropped from showy affluence into debt. Investors who had dreamed of retiring to live on their fortunes now found themselves back once more at the very beginning of the long road to riches. Day by day the newspapers printed the grim reports of suicides." (28)

Within a short time, 100,000 American companies were forced to close and consequently many workers became unemployed. As there was no national system of unemployment benefit, the purchasing power of the American people fell dramatically. This in turn led to even more unemployment. Yip Harburg pointed out that before the Wall Street Crash, the American citizen thought: "We were the prosperous nation, and nothing could stop us now.... There was a feeling of continuity. If you made it, it was there forever. Suddenly the big dream exploded. The impact was unbelievable." (29)

It was later discovered that some Wall Street bankers had been partly responsible for the crash. It was pointed out that from September 1929, Albert H. Wiggin had begun selling short his personal shares in Chase National Bank at the same time he was committing his bank's money to buying. As Michael Perino pointed out: "In the midst of the 1929 crash, Wiggen was part of the group of Wall Street leaders who tried to prop up the market. Or at least that was what the public thought.... Wiggen was actually shorting Chase's stock (in effect betting that the price of the stock would continue to drop) on money borrowed from Chase". He shorted over 42,000 shares, earning him over $4 million. His earning were tax-free since he used a Canadian shell company to buy the stocks. (30)

As William E. Leuchtenburg, the author of Franklin D. Roosevelt and the New Deal (1963) pointed out: "At a time when millions lived close to starvation, and some even had to scavenge for food, bankers like Wiggin and corporation executives like George Washington Hill of American Tobacco drew astronomical salaries and bonuses. Yet many of these men, including Wiggin, manipulated their investments so that they paid no income tax at all. In Chicago, where teachers, unpaid for months, fainted in classrooms for want of food, wealthy citizens of national reputation brazenly refused to pay taxes or submitted falsified statements." (31)

Senator Burton Wheeler of Montana argued: "The best way to restore confidence in the bank would be to take these crooked presidents out of the banks and treat them the same way as we treated Al Capone when he failed to pay his income-tax." Senator Carter Glass of Virginia joked in bad taste: "There is a big scandal down in Georgia. The fact has just been discovered that a white woman is married to a banker." He added that in his state people usually lynched black men, but now they were "lynching bankers." (32)

After the Wall Street Crash, the leading utility magnate, Samuel Insull, fled the United States to France. Insull was the chairman of the boards of sixty-five companies that folded, wiping out the life savings of 600,000 shareholders. When the United States asked French authorities that he be extradited, Insull moved on to Greece, where there was not yet an extradition treaty with the United States. He later moved to Turkey where he was arrested and extradited back to the United States. He was defended by famous Chicago lawyer Floyd Thompson and found not guilty on all counts. (33)

In 1929 only 1.5 million people in the United States were out of work; by 1931 it had reached 8 million. In many areas the situation was even worse than these figures imply. In industrial cities like Chicago, for example, over 40% of the work-force was unemployed. Edmund Wilson observed: "There is not a garbage-dump in Chicago which is not diligently haunted by the hungry. Last summer the hot weather when the smell was sickening and the flies were thick, there were a hundred people a day coming to one of the dumps... a widow who used to do housework and laundry, but now had no work at all, fed herself and her fourteen-year-old son on garbage. Before she picked up the meat, she would always take off her glasses so that she couldn't see the maggots." (34)

At first President Herbert Hoover refused to take action, claiming that it was only a temporary problem that American businessmen would eventually solve. Hoover then decided to take dramatic action. He authorized the Mexican Repatriation program to force unemployed Mexican citizens to return home. Estimates of how many were repatriated range from 500,000 to 2,000,000, of whom perhaps 60% were US citizens by birth. As the forced migration was based on race, and ignored citizenship, Kevin Johnson has argued that today this policy would be classified as a form of "ethnic cleansing." (35)

In 1930 President Hoover attempted to give businessmen some help by raising custom duties to record levels. Europe retaliated by increasing its custom duties and this resulted in a further decline in world trade. By 1932 the number of people unemployed reached 12 million. America was in a deep depression and the Hoover administration seemed to have little idea how to solve it. These actions lost Hoover the support of progressive Republicans such as William Borah and undermined his authority in the party. (36)

Throughout 1927 speculation had been increasing. The amount of money loaned to brokers to carry margin accounts for traders had risen during the year from $2,818,561,000 to $3,558,355,000 - a huge increase. During the week of December 3, 1927, more shares of stock had changed hands than in any previous week in the whole history of the New York Stock Exchange. One did not have to listen long to an after-dinner conversation, whether in New York or San Francisco or the lowliest village of the plain, to realize that all sorts of people to whom the stock ticker had been a hitherto alien mystery were carrying a hundred shares of Studebaker or Houston Oil, learning the significance of such recondite symbols as GL and X and ITT, and whipping open the early editions of afternoon papers to catch the 1.30 quotations from Wall Street.

The stock market hysteria reached its apex in 1929. Everyone gave you tips for a rise. Should I sell for a profit? Everyone said, "Hang on - it's a rising market". As he removed the sheet he said softly, "Buy Standard Gas. It's good for another double." As I walked upstairs, I reflected that if the hysteria had reached the barber-level, something must soon happen.

The common stocks of their country have in the past ten years increased enormously in value because the business of the country has increased. And General Motors is only one of may first-class industrial corporations.

If a man saves $15 a week, and invests in good common stocks, and allows the dividends and rights to accumulate, at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month. And because income can do that, I am firm in my belief that anyone not only can be rich, but ought to be rich.

I knew something was terribly wrong because I heard bellboys, everybody, talking about the stock market. About six weeks before the Wall Street Crash, I persuaded my mother in Rochester to let me talk to our family adviser. I wanted to sell stock which had been left me by my father. He got very sentimental: "Oh your father wouldn't have liked you to do that." He was so persuasive, I said O.K. Four years later, I sold it for $4,000.

The most disastrous decline in the biggest and broadest stock market of history rocked the financial district yesterday. In the very midst of the collapse five of the country's most influential bankers hurried to the office of J. P. Morgan & Co., and after a brief conference gave out word that they believe the foundations of the market to be sound, that the market smash has been caused by technical rather than fundamental considerations, and that many sound stocks are selling too low.

Suddenly the market turned about on buying orders thrown into the pivotal issues, and before the final quotations were tapped out, four hours and eight minutes after the 3 o'clock bell, most stocks had regained a measurable part of their losses.

The break was one of the widest in the market's history, although the losses at the close were not particularly large, many having been recouped by the afternoon rally.

It carried down with it speculators, big and little, in every part of the country, wiping out thousands of accounts. Doubtless business will feel the effects of the drastic stock shake-out, and this is expected to hit the luxuries most severely.

The total losses cannot be accurately calculated, because of the large number of markets and the thousands of securities not listed on any exchange. However, they were staggering, running into billions of dollars. Fear struck the big speculators and little ones, big investors and little ones. Thousands of them threw their holdings into the whirling Stock Exchange pit for what they would bring. Losses were tremendous and thousands of prosperous brokerage and bank accounts, sound and healthy a week ago were completely wrecked in the strange debacle, due to a combination of circumstances, but accelerated into a crash by fear.

Under these circumstances of late tickers and spreads of 10, 20, and at times 30 points between the tape prices and those on the floor of the Exchange, the entire financial district was thrown into hopeless confusion and excitement. Wild-eyed speculators crowded the brokerage offices, awed by the disaster which had overtaken many of them. They followed the market literally "in the dark," getting but meager reports via the financial news tickers which printed the Exchange floor prices at ten-minute intervals.

Rumors, most of them wild and false, spread throughout the Wall Street district and thence throughout the country. One of the reports was that eleven speculators had committed suicide. A peaceful workman atop a Wall Street building looked down and saw a big crowd watching him, for the rumor had spread that he was going to jump off. Reports that the Chicago and Buffalo Exchanges had closed spread throughout the district, as did rumors that the New York Stock Exchange and the New York Curb Exchange were going to suspend trading. These rumors and reports were all found, on investigation, to be untrue.

Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks.

Stock prices virtually collapsed yesterday, swept downward with gigantic losses in the most disastrous trading day in the stock market's history. Billions of dollars in open market values were wiped out as prices crumbled under the pressure of liquidation of securities which had to be sold at any price.

There was an impressive rally just at the close, which brought many leading stocks back from 4 to 14 points from their lowest points of the day.

Efforts to estimate yesterday's market losses in dollars are futile because of the vast number of securities quoted over the counter and on out-of-town exchanges on which no calculations are possible. Added to that loss is to be reckoned the depreciation on issues on the Curb Market, in the over the counter market and on other exchanges.

Banking support, which would have been impressive and successful under ordinary circumstances, was swept violently aside, as block after block of stock, tremendous in proportions, deluged the market. Bid prices placed by bankers, industrial leaders and brokers trying to halt the decline were crashed through violently, their orders were filled, and quotations plunged downward in a day of disorganization, confusion and financial impotence.

Groups of men, with here and there a woman, stood about inverted glass bowls all over the city yesterday watching spools of ticker tape unwind and as the tenuous paper with its cryptic numerals grew longer at their feet their fortunes shrunk. Others sat stolidly on tilted chairs in the customers' rooms of brokerage houses and watched a motion picture of waning wealth as the day's quotations moved silently across a screen.

It was among such groups as these, feeling the pulse of a feverish financial world whose heart is the Stock Exchange, that drama and perhaps tragedy were to be found. The crowds about the ticker tape, like friends around the bedside of a stricken friend, reflected in their faces the story the tape was telling. There were no smiles. There were no tears either. Just the cameraderie of fellow-sufferers. Everybody wanted to tell his neighbor how much he had lost. Nobody wanted to listen. It was too repetitious a tale.

The New York Times averages for fifty leading stocks had been almost cut in half, falling from a high of 311.90 in September to a low of 164.43 on November 13th; and the Times averages for twenty-five leading industrials had fared still worse, diving from 469.49 to 220.95. The Big Bull Market was dead. Billions of dollars' of profits - and paper profits - had disappeared. Day by day the newspapers printed the grim reports of suicides.

We thought American business was the Rock of Gibraltar. We were the prosperous nation, and nothing could stop us now. A brownstone house was forever. You gave it to your kids and they put marble fronts on it. The impact was unbelievable.

I was walking along the street at that time, and you'd see the bread lines. The biggest one in New York City was owned by William Randolph Hearst. He had a big truck with several people on it, and big cauldrons of hot soup, bread. Fellows with burlap on their shoes were lined up all around Columbus Circle, and went for blocks and blocks around the park, waiting.

For years it has been an article of faith with the normal American that America, somehow, was different from the rest of the world. The smash of 1929 did not, of itself, shake this serene conviction. It looked, at the time, lust because it was so spectacular and catastrophic, like a shooting star disconnected with the fundamental facts. So the plain citizen, no matter how hard hit, believed. His dreams were shattered; but after all they had been only dreams; he could settle back to hard work and win out.

Then he found his daily facts reeling and swimming about him, in a nightmare of continuous disappointment. The bottom had fallen out of the market, for good. And that market had a horrid connection with his bread and butter, his automobile, and his installment purchases. Worst of all, unemployment became a hideous fact, and one that lacerated and tore at self-respect.

That is the trouble that lies at the back of the American mind. If America really is not "different," then its troubles, the same as those of Old Europe, will not be cured automatically. Something will have to be done - but what?

Darwin's theory that man can adapt himself to almost any new environment is being illustrated, in this day of economic change, by thousands of New Yorkers who have discovered new ways to live and new ways to earn a living since their formerly placid lives were thrown into chaos by unemployment or kindred exigencies. Occupations and duties which once were scorned have suddenly attained unprecedented popularity

Two years ago citizens shied at jury duty. John Doe and Richard Roe summoned to serve on a jury, thought of all sorts of excuses. They called upon their ward leaders and their lawyers for aid in getting exemption, and when their efforts were rewarded they sighed with relief But now things are different.

The Hall of Jurors in the Criminal Courts Building is jammed and packed on court days. Absences of talesmen are infrequent. Why? Jurors get $4 for every day they serve.

Once the average New Yorker got his shine in an established bootblack parlor paying 10 cents, with a nickel tip. But now, in the Times Square and Grand Central zones, the sidewalks are lined with neophyte "shine boys," drawn from almost all walks of life. They charge a nickel and although a nickel tip is welcomed it is not expected.

In one block, on West Forty-third Street, a recent count showed nineteen shoe-shiners. They ranged in age from a 16-year-old, who should have been in school, to a man of more than 70, who said he had been employed in a fruit store until six months ago. Some sit quietly on their little wooden boxes and wait patiently for the infrequent customers. Others show true initiative and ballyhoo their trade, pointing accusingly at every pair of unshined shoes that passes.

Shining shoes, said one, is more profitable than selling apples - and he's tried them both.

"You see, when you get a shine kit it's a permanent investment," he said, "and it doesn't cost as much as a box of apples anyway."

According to the Police Department, there are approximately 7,000 of these "shine boys" making a living on New York streets at present. Three years ago they were so rare as to be almost non-existent, and were almost entirely boys under 17.

To the streets, too, has turned an army of new salesmen, peddling everything from large rubber balls to cheap neckties. Within the past two years the number of these hawkers has doubled. Fourteenth Street is still the Mecca of this type of salesmen; thirty-eight were recently counted between Sixth Avenue and Union Square and at one point there was a cluster of five.

Unemployment has brought back the newsboy in increasing numbers. He avoids the busy corners, where news stands are frequent, and hawks his papers in the side streets with surprising success. His best client is the man who is "too tired to walk down to the corner for a paper."

Selling Sunday papers has become a science. Youngsters have found that it is extremely profitable to invade apartment houses between 11 and 12 o'clock Sunday morning, knock on each apartment door, and offer the Sunday editions. Their profits are usually between $1.50 and $2.

There is not a garbage-dump in Chicago which is not diligently haunted by the hungry. Last summer the hot weather when the smell was sickening and the flies were thick, there were a hundred people a day coming to one of the dumps. A widow who used to do housework and laundry, but now had no work at all, fed herself and her fourteen year old son on garbage. Before she picked up the meat, she would always take off her glasses so that she couldn't see the maggots.

Economic Prosperity in the United States: 1919-1929 (Answer Commentary)

Women in the United States in the 1920s (Answer Commentary)

Volstead Act and Prohibition (Answer Commentary)

The Ku Klux Klan (Answer Commentary)

Classroom Activities by Subject

(1) Victor Curcio, Henry Ford (2013) page 65

(2) Peter Drucker, Management: Tasks, Responsibilities, Practices (1974) page 181

(3) Frederick Winslow Taylor, Scientific Management (1911) page 83

(4) David L. Lewis, The Public Image of Henry Ford: An American Folk Hero and His Company (1976) page 49

(5) Allan Nevins, Ford, the Times, the Man, the Company (1954) page 533

(6) Harry Barnard, Independent Man: The Life of Senator James Couzens (1958) page 83

(7) The Wall Street Journal (12th January, 1914)

(8) Herbert Hoover, speech to the Western Society of Engineers (February, 1920)

(9) Alistair Cooke, America (1973) page 317

(10) Geoffrey Perrett, America in the 20's (1982)

(11) David Hounshell, From the American System to Mass Production, 1800-1932 (1985) page 89

(12) Andre Siegfried, America Comes of Age (1927)

(13) Herbert Hoover, speech (9th October, 1928)

(14) New York Times (1st January, 1929)

(15) Frederick Lewis Allen, Only Yesterday (1931)

(16) The Wall Street Journal (3rd March and 3rd September, 1928)

(17) John J. Raskob, Everybody Ought to be Rich, Ladies Home Journal (August, 1929)

(18) Cecil Roberts, The Bright Twenties (1974)

(19) Alec Wilder, interviewed by Studs Terkel in Hard Times: An Oral History of the Great Depression (1970) page 207

(20) Richard Davenport-Hines, Clarence Hatry : Oxford Dictionary of National Biography (2004-2014)

(21) John Kenneth Galbraith, The Great Crash 1929 (1954) page 91

(22) Harold Bierman, The Causes of the 1929 Stock Market Crash: A Speculative Orgy or a New Era? (1998) pages 19

(23) Irving Fisher, quoted in the New York Times (17th October, 1929)

(24) Robert Goldston, The Great Depression (1968) pages 39-40

(25) New York Times (25th October, 1929)

(26) John D. Rockefeller, statement (29th October, 1929)

(27) New York Times (30th October, 1929)

(28) Frederick Lewis Allen, Only Yesterday (1931) page 463

(29) Yip Harburg, interviewed by Studs Terkel in Hard Times (1970) page 35

(30) Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash forever changed American Finance (2010) page 292

(31) William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal (1963) page 20

(32) John Kenneth Galbraith, The Great Crash 1929 (1954) page 157

(33) Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash forever changed American Finance (2010) page 118

(34) Edmund Wilson, New Republic (February, 1933)

(35) Kevin Johnson, The Forgotten Repatriation of Persons of Mexican Ancestry and Lessons for the War on Terror (September, 2005)

(36) William E. Leuchtenburg, Herbert Hoover (2009) page 91

History Of The Wall Street Crash 1929 History Essay

The Wall Street Crash of October 1929, which is also known as the Stock Market Crash, the most devastating stock market crash in the history of the United States, considering the full extent and duration of its consequences. The crash began what was a ten year period of decreased economic activity that affected all the Western industrialized countries. At the October of 1929 crash happened which initially started with crashing of real states value after peaking on 1925 ,this reduction on price of real-estate was the begins of event that led to Great Depression, a period in history that noted for the economic crashes which unshared among the industrialized nation .The 1929 wall street crashes and great depression together caused a biggest financial crises at 20th century. The panic of October 1929 has come to serve as a mark of the economic reduction that absorbed the world during the next decade. The Wall Street Crash had a major impact on the U.S. and world economy and it has been the source of extreme academic debate historically, economically and politically from its aftermath until the present day.

The psychological effects of the crash persisted across the nation, as businesses became aware and were cautious of the difficulties in acquiring capital market investments for new projects and expansions. Employment and its job security was affected by this business uncertainty, therefore American workers faced to uncertainty on their incomes which naturally caused decline on their consume habited. All in all this is caused unemployment, firing workers and businesses closure which led to credit reduction, foreclosure and bank failures and at the same time reduction of stuck price caused decline of money supply and led to great economic depression event. The ensuing rise of mass unemployment has been viewed as a result of the crash, although the crash itself may not be the only event that contributed to the depression. The Wall Street Crash is usually said to have had the greatest impact on the events that followed and therefore, has been widely regarded as marking the downward economic slide that kicked off the Great Depression.

The Martin Luther King’s “I Have a Dream” Speech was delivered on August 28, 1963, from the steps of the Lincoln Memorial during the “Washington March for Jobs and Freedom.” Was defiantly It was clearly a define moment of the American Civil Rights Movement. Delivered to over two hundred thousand civil rights supporters, the speech is often considered to be one of the greatest and most renowned speeches in human history.

Martin Luter King released African American by violent free form of protest, and he believed his non violent approach to pursue his goal. His goal of violent free protest was a way to handle and mange accommodating interaction rid. His violent free approach put African Americans on a high etichal group and made clear all the violent toward racists. In this way Martin Luter King gained many followers which led to a passage of civil right bill on 1964 and 1965. The speech represented a huge responsibility to many individuals and the situation that they faced to secure the base of equal and rights of all resident If it were not for his passion to battle against inequalities, most probably, the men and women of color would still be slaves until this day. His words proved to be a hallmark for understanding the social and political turmoil of the time and gave the nation terms to express what was happening.

The assassination of John F. Kennedy, the thirty fifth President of the United States, happened on the dreadful day of Friday, November 22, 1963, in Dallas, Texas, at 12:30 p.m. Central Standard Time in Dealey Plaza. Kennedy was shot while he was riding Presidential motorcade, which caused his death. The assassination of President Kennedy and his death caused great confusion which led to political and historical outstanding tragedy and turning point and crash of American people in the political institution and political organization . the JFK murdered brought up a great society suspicions against the government the resulting. People have grown to doubt their government as a result to the lack of evidence, for instant officials tires to deviate and depart public attention from critical agenda that has great and long term affect on their lives. They have also learned a great lesson from politicians that not only influential on mass media but also in deceiving people against their won interests.

John F Kennedy was a hero for United States for his work on space program. Even though Kennedy was assassinated right before developing of space technology and cost sharing agreement between United States and Ukraine, NASA got funding and caused United States to land on the moon first and right before Russia, and Apollo’s goal realized first when a men landed on the moon , but six years after death of Kennedy.


Early years Edit

There are varying accounts about how the Dutch-named "de Waalstraat" [2] (literally: Walloon Street) got its name. Two conflicting explanations can be considered.

The first being that Wall Street was named after Walloons—the Dutch name for a Walloon is Waal. [3] Among the first settlers that embarked on the ship Nieu Nederlandt in 1624 were 30 Walloon families. Peter Minuit, the person who bought Manhattan for the Dutch, was a Walloon.

The other is that the name of the street was derived from a wall or rampart (actually a wooden palisade) on the northern boundary of the New Amsterdam settlement, built to protect against potential incursions from Native Americans, pirates, and the English. The wall was built of dirt and 15-foot (4.6 m) wooden planks, measuring 2,340 feet (710 m) long and 9 feet (2.7 m) tall. [4]

While the Dutch word "wal" can be translated as "rampart", it only appeared as "De Wal Straat" on some English maps of New Amsterdam, whereas other English maps show the name as "De Waal Straat". [2]

According to one version of the story:

The red people from Manhattan Island crossed to the mainland, where a treaty was made with the Dutch, and the place was therefore called the Pipe of Peace, in their language, Hoboken. But soon after that, the Dutch governor, Kieft, sent his men out there one night and massacred the entire population. Few of them escaped, but they spread the story of what had been done, and this did much to antagonize all the remaining tribes against all the white settlers. Shortly after, Nieuw Amsterdam erected a double palisade for defense against its now enraged red neighbors, and this remained for some time the northern limit of the Dutch city. The space between the former walls is now called Wall Street, and its spirit is still that of a bulwark against the people. [5]

In the 1640s, basic picket and plank fences denoted plots and residences in the colony. [6] Later, on behalf of the Dutch West India Company, Peter Stuyvesant, using both enslaved Africans and white colonists, collaborated with the city government in the construction of a more substantial fortification, a strengthened 12-foot (4 m) wall. [7] [8] In 1685, surveyors laid out Wall Street along the lines of the original stockade. [9] The wall started at Pearl Street, which was the shoreline at that time, crossing the Indian path Broadway and ending at the other shoreline (today's Trinity Place), where it took a turn south and ran along the shore until it ended at the old fort. In these early days, local merchants and traders would gather at disparate spots to buy and sell shares and bonds, and over time divided themselves into two classes—auctioneers and dealers. [10] Wall Street was also the marketplace where owners could hire out their slaves by the day or week. [11] The rampart was removed in 1699 [3] [4] and a new City Hall built at Wall and Nassau in 1700.

Slavery was introduced to Manhattan in 1626, but it was not until December 13, 1711, that the New York City Common Council made Wall Street the city's first official slave market for the sale and rental of enslaved Africans and Indians. [12] [13] The slave market operated from 1711 to 1762 at the corner of Wall and Pearl Streets. It was a wooden structure with a roof and open sides, although walls may have been added over the years and could hold approximately 50 men. The city directly benefited from the sale of slaves by implementing taxes on every person who was bought and sold there. [14]

In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. The benefit was being in proximity to each other. [15] [4] In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. [16] The idea of the agreement was to make the market more "structured" and "without the manipulative auctions", with a commission structure. [10] Persons signing the agreement agreed to charge each other a standard commission rate persons not signing could still participate but would be charged a higher commission for dealing. [10]

In 1789, Wall Street was the scene of the United States' first presidential inauguration when George Washington took the oath of office on the balcony of Federal Hall on April 30, 1789. This was also the location of the passing of the Bill Of Rights. Alexander Hamilton, who was the first Treasury secretary and "architect of the early United States financial system", is buried in the cemetery of Trinity Church, as is Robert Fulton famed for his steamboats. [17] [18]

19th century Edit

In the first few decades, both residences and businesses occupied the area, but increasingly business predominated. "There are old stories of people's houses being surrounded by the clamor of business and trade and the owners complaining that they can't get anything done," according to a historian named Burrows. [19] The opening of the Erie Canal in the early 19th century meant a huge boom in business for New York City, since it was the only major eastern seaport which had direct access by inland waterways to ports on the Great Lakes. Wall Street became the "money capital of America". [15]

Historian Charles R. Geisst suggested that there has constantly been a "tug-of-war" between business interests on Wall Street and authorities in Washington, D.C., the capital of the United States by then. [10] Generally during the 19th century Wall Street developed its own "unique personality and institutions" with little outside interference. [10]

In the 1840s and 1850s, most residents moved further uptown to Midtown Manhattan because of the increased business use at the lower tip of the island. [19] The Civil War had the effect of causing the northern economy to boom, bringing greater prosperity to cities like New York which "came into its own as the nation's banking center" connecting "Old World capital and New World ambition", according to one account. [17] J. P. Morgan created giant trusts John D. Rockefeller's Standard Oil moved to New York. [17] Between 1860 and 1920, the economy changed from "agricultural to industrial to financial" and New York maintained its leadership position despite these changes, according to historian Thomas Kessner. [17] New York was second only to London as the world's financial capital. [17]

In 1884, Charles Dow began tracking stocks, initially beginning with 11 stocks, mostly railroads, and looked at average prices for these eleven. [20] Some of the companies included in Dow's original calculations were American Tobacco Company, General Electric, Laclede Gas Company, National Lead Company, Tennessee Coal & Iron, and United States Leather Company. [21] When the average "peaks and troughs" went up consistently, he deemed it a bull market condition if averages dropped, it was a bear market. He added up prices, and divided by the number of stocks to get his Dow Jones average. Dow's numbers were a "convenient benchmark" for analyzing the market and became an accepted way to look at the entire stock market. In 1889 the original stock report, Customers' Afternoon Letter, became The Wall Street Journal. Named in reference to the actual street, it became an influential international daily business newspaper published in New York City. [22] After October 7, 1896, it began publishing Dow's expanded list of stocks. [20] A century later, there were 30 stocks in the average. [21]

20th century Edit

Early 20th century Edit

Business writer John Brooks in his book Once in Golconda considered the start of the 20th century period to have been Wall Street's heyday. [17] The address of 23 Wall Street, the headquarters of J. P. Morgan & Company, known as The Corner, was "the precise center, geographical as well as metaphorical, of financial America and even of the financial world". [17]

Wall Street has had changing relationships with government authorities. In 1913, for example, when authorities proposed a $4 stock transfer tax, stock clerks protested. [23] At other times, city and state officials have taken steps through tax incentives to encourage financial firms to continue to do business in the city.

A post office was built at 60 Wall Street in 1905. [24] During the World War I years, occasionally there were fund-raising efforts for projects such as the National Guard. [25]

On September 16, 1920, close to the corner of Wall and Broad Street, the busiest corner of the Financial District and across the offices of the Morgan Bank, a powerful bomb exploded. It killed 38 and seriously injured 143 people. [26] The perpetrators were never identified or apprehended. The explosion did, however, help fuel the Red Scare that was underway at the time. A report from The New York Times:

The tomb-like silence that settles over Wall Street and lower Broadway with the coming of night and the suspension of business was entirely changed last night as hundreds of men worked under the glare of searchlights to repair the damage to skyscrapers that were lighted up from top to bottom. . The Assay Office, nearest the point of explosion, naturally suffered the most. The front was pierced in fifty places where the cast iron slugs, which were of the material used for window weights, were thrown against it. Each slug penetrated the stone an inch or two and chipped off pieces ranging from three inches to a foot in diameter. The ornamental iron grill work protecting each window was broken or shattered. . the Assay Office was a wreck. . It was as though some gigantic force had overturned the building and then placed it upright again, leaving the framework uninjured but scrambling everything inside.

The area was subjected to numerous threats one bomb threat in 1921 led to detectives sealing off the area to "prevent a repetition of the Wall Street bomb explosion". [28]

Regulation Edit

September 1929 was the peak of the stock market. [29] October 3, 1929 was when the market started to slip, and it continued throughout the week of October 14. [29] In October 1929, renowned Yale economist Irving Fisher reassured worried investors that their "money was safe" on Wall Street. [30] A few days later, on October 24, [29] stock values plummeted. The stock market crash of 1929 ushered in the Great Depression, in which a quarter of working people were unemployed, with soup kitchens, mass foreclosures of farms, and falling prices. [30] During this era, development of the Financial District stagnated, and Wall Street "paid a heavy price" and "became something of a backwater in American life". [30]

During the New Deal years, as well as the 1940s, there was much less focus on Wall Street and finance. The government clamped down on the practice of buying equities based only on credit, but these policies began to ease. From 1946 to 1947, stocks could not be purchased "on margin", meaning that an investor had to pay 100% of a stock's cost without taking on any loans. [31] However, this margin requirement was reduced four times before 1960, each time stimulating a mini-rally and boosting volume, and when the Federal Reserve reduced the margin requirements from 90% to 70%. [31] These changes made it somewhat easier for investors to buy stocks on credit. [31] The growing national economy and prosperity led to a recovery during the 1960s, with some down years during the early 1970s in the aftermath of the Vietnam War. Trading volumes climbed in 1967, according to Time Magazine, volume hit 7.5 million shares a day which caused a "traffic jam" of paper with "batteries of clerks" working overtime to "clear transactions and update customer accounts". [32]

In 1973, the financial community posted a collective loss of $245 million, which spurred temporary help from the government. [33] Reforms were instituted the Securities & Exchange Commission eliminated fixed commissions, which forced "brokers to compete freely with one another for investors' business". [33] In 1975, the SEC threw out the NYSE's "Rule 394" which had required that "most stock transactions take place on the Big Board's floor", in effect freeing up trading for electronic methods. [34] In 1976, banks were allowed to buy and sell stocks, which provided more competition for stockbrokers. [34] Reforms had the effect of lowering prices overall, making it easier for more people to participate in the stock market. [34] Broker commissions for each stock sale lessened, but volume increased. [33]

The Reagan years were marked by a renewed push for capitalism and business, with national efforts to de-regulate industries such as telecommunications and aviation. The economy resumed upward growth after a period in the early 1980s of languishing. A report in The New York Times described that the flushness of money and growth during these years had spawned a drug culture of sorts, with a rampant acceptance of cocaine use although the overall percent of actual users was most likely small. A reporter wrote:

The Wall Street drug dealer looked like many other successful young female executives. Stylishly dressed and wearing designer sunglasses, she sat in her 1983 Chevrolet Camaro in a no-parking zone across the street from the Marine Midland Bank branch on lower Broadway. The customer in the passenger seat looked like a successful young businessman. But as the dealer slipped him a heat-sealed plastic envelope of cocaine and he passed her cash, the transaction was being watched through the sunroof of her car by Federal drug agents in a nearby building. And the customer — an undercover agent himself -was learning the ways, the wiles and the conventions of Wall Street's drug subculture.

In 1987, the stock market plunged, [15] and, in the relatively brief recession following, the surrounding area lost 100,000 jobs according to one estimate. [36] Since telecommunications costs were coming down, banks and brokerage firms could move away from the Financial District to more affordable locations. [36] One of the firms looking to move away was the NYSE. In 1998, the NYSE and the city struck a $900 million deal which kept the NYSE from moving across the river to Jersey City the deal was described as the "largest in city history to prevent a corporation from leaving town". [37]

21st century Edit

In 2001, the Big Board, as some termed the NYSE, was described as the world's "largest and most prestigious stock market". [38] When the World Trade Center was destroyed on September 11, 2001, the attacks "crippled" the communications network and destroyed many buildings in the Financial District, although the buildings on Wall Street itself saw only little physical damage. [38] One estimate was that 45% of Wall Street's "best office space" had been lost. [15] The NYSE was determined to re-open on September 17, almost a week after the attack. [39] During this time Rockefeller Group Business Center opened additional offices at 48 Wall Street. Still, after September 11, the financial services industry went through a downturn with a sizable drop in year-end bonuses of $6.5 billion, according to one estimate from a state comptroller's office. [40]

To guard against a vehicular bombing in the area, authorities built concrete barriers, and found ways over time to make them more aesthetically appealing by spending $5000 to $8000 apiece on bollards. Parts of Wall Street, as well as several other streets in the neighborhood, were blocked off by specially designed bollards:

. Rogers Marvel designed a new kind of bollard, a faceted piece of sculpture whose broad, slanting surfaces offer people a place to sit in contrast to the typical bollard, which is supremely unsittable. The bollard, which is called the Nogo, looks a bit like one of Frank Gehry's unorthodox culture palaces, but it is hardly insensitive to its surroundings. Its bronze surfaces actually echo the grand doorways of Wall Street's temples of commerce. Pedestrians easily slip through groups of them as they make their way onto Wall Street from the area around historic Trinity Church. Cars, however, cannot pass.

The Guardian reporter Andrew Clark described the years of 2006 to 2010 as "tumultuous", in which the heartland of America was "mired in gloom" with high unemployment around 9.6%, with average house prices falling from $230,000 in 2006 to $183,000, and foreboding increases in the national debt to $13.4 trillion, but that despite the setbacks, the American economy was once more "bouncing back". [42] What had happened during these heady years? Clark wrote:

But the picture is too nuanced simply to dump all the responsibility on financiers. Most Wall Street banks didn't actually go around the US hawking dodgy mortgages they bought and packaged loans from on-the-ground firms such as Countrywide Financial and New Century Financial, both of which hit a financial wall in the crisis. Foolishly and recklessly, the banks didn't look at these loans adequately, relying on flawed credit-rating agencies such as Standard & Poor's and Moody's, which blithely certified toxic mortgage-backed securities as solid . A few of those on Wall Street, including maverick hedge fund manager John Paulson and the top brass at Goldman Sachs, spotted what was going on and ruthlessly gambled on a crash. They made a fortune but turned into the crisis's pantomime villains. Most, though, got burned – the banks are still gradually running down portfolios of non-core loans worth $800bn.

The first months of 2008 was a particularly troublesome period which caused Federal Reserve chairman Ben Bernanke to "work holidays and weekends" and which did an "extraordinary series of moves". [43] It bolstered U.S. banks and allowed Wall Street firms to borrow "directly from the Fed" [43] through a vehicle called the Fed's Discount Window, a sort of lender of last reports. [44] These efforts were highly controversial at the time, but from the perspective of 2010, it appeared the Federal exertions had been the right decisions. By 2010, Wall Street firms, in Clark's view, were "getting back to their old selves as engine rooms of wealth, prosperity and excess". [42] A report by Michael Stoler in The New York Sun described a "phoenix-like resurrection" of the area, with residential, commercial, retail and hotels booming in the "third largest business district in the country". [45] At the same time, the investment community was worried about proposed legal reforms, including the Wall Street Reform and Consumer Protection Act which dealt with matters such as credit card rates and lending requirements. [46] The NYSE closed two of its trading floors in a move towards transforming itself into an electronic exchange. [17] Beginning in September 2011, demonstrators disenchanted with the financial system protested in parks and plazas around Wall Street. [47]

On October 29, 2012, Wall Street was disrupted when New York and New Jersey were inundated by Hurricane Sandy. Its 14-foot-high storm surge, a local record, caused massive street flooding nearby. [48] The NYSE was closed for weather-related reasons, the first time since Hurricane Gloria in September 1985 and the first two-day weather-related shutdown since the Blizzard of 1888.

Wall Street's architecture is generally rooted in the Gilded Age. [19] The older skyscrapers often were built with elaborate facades, which have not been common in corporate architecture for decades. There are numerous landmarks on Wall Street, some of which were erected as the headquarters of banks. These include:

    , a 50-story skyscraper built in 1929–1931 with an expansion in 1963–1965. It was previously known as the Irving Trust Company Building and the Bank of New York Building. [49] : 20 [50] , a 32-story skyscraper with a 7-story stepped pyramid, built in 1910–1912 with an expansion in 1931–1933. It was originally the Bankers Trust Company Building. [49] : 20 [51] , a four-story headquarters built in 1914, was known as the "House of Morgan" and served for decades as the J.P. Morgan & Co. bank's headquarters and, by some accounts, was considered an important address in American finance. Cosmetic damage from the 1920 Wall Street bombing is still visible on the Wall Street side of this building. [52] (26 Wall Street), built in 1833–1842. The building, which previously housed the United States Custom House and then the Subtreasury, is now a national monument. [49] : 18 [53] , a 71-story skyscraper built in 1929–1930 as the Bank of Manhattan Company Building it later became the Trump Building. [49] : 18 [54] , a 32-story skyscraper built in 1927–1929 as the Bank of New York & Trust Company Building. [49] : 18 [55] , erected in 1836–1841 as the four-story Merchants Exchange, was turned into the United States Custom House in the late 19th century. An expansion in 1907–1910 turned it into the eight-story National City Bank Building. [49] : 17 [56] , built in 1988. [49] : 17 It was formerly the J.P. Morgan & Co. headquarters [57] before becoming the U.S. headquarters of Deutsche Bank. [58] It is the last remaining major investment bank headquarters on Wall Street.

Another key anchor for the area is the New York Stock Exchange Building at the corner of Broad Street. It houses the New York Stock Exchange, which is by far the world's largest stock exchange per market capitalization of its listed companies, [59] [60] [61] [62] at US$28.5 trillion as of June 30, 2018. [63] City authorities realize its importance, and believed that it has "outgrown its neoclassical temple at the corner of Wall and Broad streets", and in 1998, offered substantial tax incentives to try to keep it in the Financial District. [15] Plans to rebuild it were delayed by the September 11 attacks. [15] The exchange still occupies the same site. The exchange is the locus for a large amount of technology and data. For example, to accommodate the three thousand people who work directly on the exchange floor requires 3,500 kilowatts of electricity, along with 8,000 phone circuits on the trading floor alone, and 200 miles of fiber-optic cable below ground. [39]

As an economic engine Edit

In the New York economy Edit

Finance professor Charles R. Geisst wrote that the exchange has become "inextricably intertwined into New York's economy". [38] Wall Street pay, in terms of salaries and bonuses and taxes, is an important part of the economy of New York City, the tri-state metropolitan area, and the United States. [64] Anchored by Wall Street, New York City has been called the world's most economically powerful city and leading financial center. [65] [66] As such, a falloff in Wall Street's economy could have "wrenching effects on the local and regional economies". [64] In 2008, after a downturn in the stock market, the decline meant $18 billion less in taxable income, with less money available for "apartments, furniture, cars, clothing and services". [64]

Estimates vary about the number and quality of financial jobs in the city. One estimate was that Wall Street firms employed close to 200,000 persons in 2008. [64] Another estimate was that in 2007, the financial services industry which had a $70 billion profit became 22 percent of the city's revenue. [67] Another estimate (in 2006) was that the financial services industry makes up 9% of the city's work force and 31% of the tax base. [68] An additional estimate from 2007 by Steve Malanga of the Manhattan Institute was that the securities industry accounts for 4.7 percent of the jobs in New York City but 20.7 percent of its wages, and he estimated there were 175,000 securities-industries jobs in New York (both Wall Street area and midtown) paying an average of $350,000 annually. [17] Between 1995 and 2005, the sector grew at an annual rate of about 6.6% annually, a respectable rate, but that other financial centers were growing faster. [17] Another estimate, made in 2008, was that Wall Street provided a fourth of all personal income earned in the city, and 10% of New York City's tax revenue. [69] The city's securities industry, enumerating 163,400 jobs in August 2013, continues to form the largest segment of the city's financial sector and an important economic engine, accounting in 2012 for 5 percent of private sector jobs in New York City, 8.5 percent (US$3.8 billion) of the city's tax revenue, and 22 percent of the city's total wages, including an average salary of US$360,700. [70]

The seven largest Wall Street firms in the 2000s were Bear Stearns, JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers. [64] During the recession of 2008–10, many of these firms, including Lehman, went out of business or were bought up at firesale prices by other financial firms. In 2008, Lehman filed for bankruptcy, [42] Bear Stearns was bought by JPMorgan Chase [42] forced by the U.S. government, [43] and Merrill Lynch was bought by Bank of America in a similar shot-gun wedding. These failures marked a catastrophic downsizing of Wall Street as the financial industry goes through restructuring and change. Since New York's financial industry provides almost one-fourth of all income produced in the city, and accounts for 10% of the city's tax revenues and 20% of the state's, the downturn has had huge repercussions for government treasuries. [64] New York's mayor Michael Bloomberg reportedly over a four-year period dangled over $100 million in tax incentives to persuade Goldman Sachs to build a 43-story headquarters in the Financial District near the destroyed World Trade Center site. [67] In 2009, things looked somewhat gloomy, with one analysis by the Boston Consulting Group suggesting that 65,000 jobs had been permanently lost because of the downturn. [67] But there were signs that Manhattan property prices were rebounding with price rises of 9% annually in 2010, and bonuses were being paid once more, with average bonuses over $124,000 in 2010. [42]

Versus Midtown Manhattan Edit

A requirement of the New York Stock Exchange was that brokerage firms had to have offices "clustered around Wall Street" so clerks could deliver physical paper copies of stock certificates each week. [15] There were some indications that midtown had been becoming the locus of financial services dealings even by 1911. [71] But as technology progressed, in the middle and later decades of the 20th century, computers and telecommunications replaced paper notifications, meaning that the close proximity requirement could be bypassed in more situations. [15] Many financial firms found that they could move to Midtown Manhattan, only four miles away, [19] and still operate effectively. For example, the former investment firm of Donaldson, Lufkin & Jenrette was described as a Wall Street firm but had its headquarters on Park Avenue in Midtown. [72] A report described the migration from Wall Street:

The financial industry has been slowly migrating from its historic home in the warren of streets around Wall Street to the more spacious and glamorous office towers of Midtown Manhattan. Morgan Stanley, J.P. Morgan Chase, Citigroup, and Bear Stearns have all moved north.

Nevertheless, a key magnet for the Wall Street remains the New York Stock Exchange Building. Some "old guard" firms such as Goldman Sachs and Merrill Lynch (bought by Bank of America in 2009), have remained "fiercely loyal to the Financial District" location, and new ones such as Deutsche Bank have chosen office space in the district. [15] So-called "face-to-face" trading between buyers and sellers remains a "cornerstone" of the NYSE, with a benefit of having all of a deal's players close at hand, including investment bankers, lawyers, and accountants. [15]

In the New Jersey economy Edit

After Wall Street firms started to expand westward in the 1980s into New Jersey, [73] the direct economic impacts of Wall Street activities have gone beyond New York City. The employment in the financial services industry, mostly in the "back office" roles, has become an important part of New Jersey's economy. [74] In 2009, the Wall Street employment wages were paid in the amount of almost $18.5 billion in the state. The industry contributed $39.4 billion or 8.4 percent to the New Jersey's gross domestic product in the same year. [75]

The most significant area with Wall Street employment is in Jersey City. In 2008, the "Wall Street West" employment contributed to one third of the private sector jobs in Jersey City. Within the Financial Service cluster, there were three major sectors: more than 60 percent were in the securities industry 20 percent were in banking and 8 percent in insurance. [76]

Additionally, New Jersey has become the main technology infrastructure to support the Wall Street operations. A substantial amount of securities traded in the United States are executed in New Jersey as the data centers of electronic trading in the U.S. equity market for all major stock exchanges are located in North and Central Jersey. [77] [78] A significant amount of securities clearing and settlement workforce is also in the state. This includes the majority of the workforce of Depository Trust Company, [79] the primary U.S. securities depository and the Depository Trust & Clearing Corporation, [80] the parent company of National Securities Clearing Corporation, the Fixed Income Clearing Corporation and Emerging Markets Clearing Corporation. [81]

Having a direct tie to Wall Street employment can be problematic for New Jersey, however. The state lost 7.9 percent of its employment base from 2007 to 2010 in the financial services sector in the fallout of the subprime mortgage crisis. [75]

Competing financial centers Edit

Of the street's importance as a financial center, New York Times analyst Daniel Gross wrote:

In today's burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion.

An example is the alternative trading platform known as BATS, based in Kansas City, which came "out of nowhere to gain a 9 percent share in the market for trading United States stocks". [17] The firm has computers in the U.S. state of New Jersey, two salespersons in New York City, but the remaining 33 employees work in a center in Kansas. [17]

In the public imagination Edit

As a financial symbol Edit

Wall Street in a conceptual sense represents financial and economic power. To Americans, it can sometimes represent elitism and power politics, and its role has been a source of controversy throughout the nation's history, particularly beginning around the Gilded Age period in the late 19th century. Wall Street became the symbol of a country and economic system that many Americans see as having developed through trade, capitalism, and innovation. [82]

The term "Wall Street" has become a metonym for the financial markets of the United States as a whole, the American financial services industry, or New York–based financial interests. [83] [84] Wall Street has become synonymous with financial interests, often used negatively. [85] During the subprime mortgage crisis from 2007 to 2010, Wall Street financing was blamed as one of the causes, although most commentators blame an interplay of factors. The U.S. government with the Troubled Asset Relief Program bailed out the banks and financial backers with billions of taxpayer dollars, but the bailout was often criticized as politically motivated, [85] and was criticized by journalists as well as the public. Analyst Robert Kuttner in the Huffington Post criticized the bailout as helping large Wall Street firms such as Citigroup while neglecting to help smaller community development banks such as Chicago's ShoreBank. [85] One writer in the Huffington Post looked at FBI statistics on robbery, fraud, and crime and concluded that Wall Street was the "most dangerous neighborhood in the United States" if one factored in the $50 billion fraud perpetrated by Bernie Madoff. [86]

When large firms such as Enron, WorldCom, and Global Crossing were found guilty of fraud, Wall Street was often blamed, [30] even though these firms had headquarters around the nation and not in Wall Street. Many complained that the resulting Sarbanes-Oxley legislation dampened the business climate with regulations that were "overly burdensome". [87] Interest groups seeking favor with Washington lawmakers, such as car dealers, have often sought to portray their interests as allied with Main Street rather than Wall Street, although analyst Peter Overby on National Public Radio suggested that car dealers have written over $250 billion in consumer loans and have real ties with Wall Street. [88]

When the United States Treasury bailed out large financial firms, to ostensibly halt a downward spiral in the nation's economy, there was tremendous negative political fallout, particularly when reports came out that monies supposed to be used to ease credit restrictions were being used to pay bonuses to highly paid employees. [89] Analyst William D. Cohan argued that it was "obscene" how Wall Street reaped "massive profits and bonuses in 2009" after being saved by "trillions of dollars of American taxpayers' treasure" despite Wall Street's "greed and irresponsible risk-taking". [90] Washington Post reporter Suzanne McGee called for Wall Street to make a sort of public apology to the nation, and expressed dismay that people such as Goldman Sachs chief executive Lloyd Blankfein hadn't expressed contrition despite being sued by the SEC in 2009. [91] McGee wrote that "Bankers aren't the sole culprits, but their too-glib denials of responsibility and the occasional vague and waffling expression of regret don't go far enough to deflect anger." [91]

But chief banking analyst at Goldman Sachs, Richard Ramsden, is "unapologetic" and sees "banks as the dynamos that power the rest of the economy". [42] Ramsden believes "risk-taking is vital" and said in 2010:

You can construct a banking system in which no bank will ever fail, in which there's no leverage. But there would be a cost. There would be virtually no economic growth because there would be no credit creation.

Others in the financial industry believe they've been unfairly castigated by the public and by politicians. For example, Anthony Scaramucci reportedly told President Barack Obama in 2010 that he felt like a piñata, "whacked with a stick" by "hostile politicians". [42]

The financial misdeeds of various figures throughout American history sometimes casts a dark shadow on financial investing as a whole, and include names such as William Duer, Jim Fisk and Jay Gould (the latter two believed to have been involved with an effort to collapse the U.S. gold market in 1869) as well as modern figures such as Bernard Madoff who "bilked billions from investors". [92]

In addition, images of Wall Street and its figures have loomed large. The 1987 Oliver Stone film Wall Street created the iconic figure of Gordon Gekko who used the phrase "greed is good", which caught on in the cultural parlance. [93] Gekko is reportedly based on multiple real-life individuals on Wall Street, including corporate raider Carl Icahn, disgraced stock trader Ivan Boesky, and investor Michael Ovitz. [94] In 2009, Stone commented how the film had had an unexpected cultural influence, not causing them to turn away from corporate greed, but causing many young people to choose Wall Street careers because of the film. [93] A reporter repeated other lines from the film: "I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, Buddy. A player." [93]

Wall Street firms have, however, also contributed to projects such as Habitat for Humanity, as well as done food programs in Haiti, trauma centers in Sudan, and rescue boats during floods in Bangladesh. [95]

In popular culture Edit

    's classic short story "Bartleby, the Scrivener" (first published in 1853 and republished in revised edition in 1856) is subtitled "A Story of Wall Street" and portrays the alienating forces at work within the confines of Wall Street.
  • Many events of Tom Wolfe's 1987 novel The Bonfire of the Vanities center on Wall Street and its culture.
  • The film Wall Street (1987) and its sequel Wall Street: Money Never Sleeps (2010) exemplify many popular conceptions of Wall Street as a center of shady corporate dealings and insider trading. [96]
  • In the Star Trek universe, the Ferengi are said to make regular pilgrimages to Wall Street, which they worship as a holy site of commerce and business. [97]
  • On January 26, 2000, the band Rage Against the Machine filmed the music video for "Sleep Now in the Fire" on Wall Street, which was directed by Michael Moore. [98] The New York Stock Exchange closed early that day, at 2:52 p.m. [99]
  • In the 2012 film The Dark Knight Rises, Bane attacks the Gotham City Stock Exchange. Scenes were filmed in and around the New York Stock Exchange, with the J.P. Morgan Building at Wall Street and Broad Street standing in for the Exchange. [100]
  • The 2013 film The Wolf of Wall Street is a dark comedy about Jordan Belfort, a New York stockbroker who ran Stratton Oakmont, a firm from Lake Success, New York, that engaged in securities fraud and corruption on Wall Street from 1987 to 1998.

Personalities associated with the street Edit

Many people associated with Wall Street have become famous although in most cases their reputations are limited to members of the stock brokerage and banking communities, others have gained national and international fame. For some, like hedge fund manager Ray Dalio, [101] their fame is due to skillful investment strategies, financing, reporting, legal or regulatory activities, while others such as Ivan Boesky, Michael Milken and Bernie Madoff are remembered for their notable failures or scandal. [102]

With Wall Street being historically a commuter destination, a plethora of transportation infrastructure has been developed to serve it. Pier 11 near Wall Street's eastern end is a busy terminal for New York Waterway, NYC Ferry, New York Water Taxi, and SeaStreak. The Downtown Manhattan Heliport also serves Wall Street.

The “Black Friday” Gold Scandal

If any pair of investors had the financial clout and lack of scruples required to engineer the bedlam of Black Friday, it was Jay Gould and Jim Fisk. As president and vice president of the Erie Railroad, the duo had won a reputation as two of Wall Street’s most ruthless financial masterminds. Their rap sheets boasted everything from issuing fraudulent stock to bribing politicians and judges, and they enjoyed a lucrative partnership with Tammany Hall power player William 𠇋oss” Tweed. Gould in particular had proven an expert at devising new ways to game the system, and was once dubbed the “Mephistopheles of Wall Street” for his preternatural ability to line his own pockets. “[Gould’s] nature suggested survival from the family of spiders,” historian Henry Adams later wrote. “He spun huge webs, in corners and in the dark…he seemed never to be satisfied except when deceiving everyone as to his intentions.”

In early 1869, Gould spun a web aimed at conquering what was perhaps the most audacious target in the American financial system: the gold market. At the time, gold was still the official currency of international trade, but the United States had gone off the gold standard during the Civil War, when Congress authorized $450 million in government-backed “greenbacks” to fund the Union march to war. Competing currencies—gold and greenbacks—had been in circulation ever since, and Wall Street had formed a special “Gold Room” where brokers could trade them. Since there was only around $20 million in gold in circulation at any given time, Gould wagered that a speculator with deep enough pockets could potentially buy up huge amounts of the precious metal until they had 𠇌ornered” the market. From there, they could drive up the price and sell for astronomical profits.

Gould’s gold ploy faced one very significant hurdle: President Ulysses S. Grant. Since the beginning of Grant’s tenure as chief executive, the U.S. Treasury had continued a policy of using its massive gold reserves to buy back greenbacks from the public. This meant that the government effectively set the value of gold: when it sold its supply, the price went down when it didn’t, the price went up. If a speculator like Gould tried to corner the market, Grant could simply order the Treasury to sell off huge amounts of gold and drive the price through the floor. For his gold scheme to work, Gould needed President Grant to keep a tight grip on his purse strings.

Jim Fisk (Credit: Archive Photos/Getty Images)

“The Mephistopheles of Wall Street” found an elegant solution to the government problem in the form of Abel Corbin, a former Washington bureaucrat who happened to be married to Ulysses Grant’s sister, Jennie. In the spring of 1869, Gould befriended Corbin and persuaded him to help with his secret plan to corner the gold market. As a quid pro quo, he deposited a cool $1.5 million in gold in an account under Corbin’s name. The president’s brother-in-law sprang into action that summer. To ensure Gould would have an ear on the government’s actions, Corbin used his political influence to help install General Daniel Butterfield as the U.S. sub-treasurer in New York. In exchange for providing advance notice of any government gold sales, Butterfield was given a $1.5 million stake in the scheme and a $10,000 loan. Corbin also used his family connections to cozy up to Grant and try to persuade him that high gold prices would benefit U.S. farmers who sold their harvest overseas. He arranged for Gould to meet with Grant to discuss the matter, and even helped anonymously author an editorial in the New York Times claiming that the president had reversed his financial policy. The constant wheedling eventually paid off. During a meeting with Corbin on September 2, Grant confided that he had changed his mind on gold and planned to order the treasury not to sell over the next month.

Jay Gould and a few other conspirators had been secretly stockpiling gold since August, but upon learning that the fix was in, they disguised their identities behind an army of brokers and proceeded to gobble up all the gold they could. Gould also enlisted the help of his fellow financial buccaneer Jim Fisk, who promptly dropped $7 million on gold and became one of the cabal’s leading members. As the Gould-Fisk ring increased its stake, gold’s value climbed to dizzying heights. In August, a $100 gold piece had sold for around $132 in greenbacks, but only a few weeks later, the price spiked as high as $141. In Wall Street’s Gold Room, distraught speculators and gold short-sellers suddenly found themselves caught in a vise. Rumors spread about a nefarious group of investors who were trying to 𠇋ull,” or drive up, the gold market, and many began calling for the Treasury to intervene by selling its gold reserves. Fisk and Gould kept mum, but by that point, they personally owned a combined $60 million in gold—three times the amount of the public supply in New York.

Gould’s shopping spree continued unabated until September 22, when he learned from Abel Corbin that the president was on to them. Corbin had written Grant a letter looking for assurance that he remained firm on his new, non-interventionist gold stance, and the note had finally aroused the president’s suspicions that his brother-in-law might be involved in a gold scheme. Furious at having been manipulated, the president had gotten his wife to write a response chastising Corbin and warning that Grant would not hesitate to 𠇍o his duty to the country” and break the corner. Gould was stunned, but in true robber baron fashion, he neglected to divulge the new information to Fisk or his other partners. Instead, when the buying bonanza resumed on September 23, he began secretly selling off as much of his own gold as he could.

By September 24, 1869—the day that would become known as 𠇋lack Friday”—the hubbub over gold had reached a fever pitch. Mobs of spectators and reporters gathered near Wall Street, and many of the Gold Room’s indebted speculators walked to work like men on their way to the gallows. Gold had closed the previous day at $144 ½, but shortly after trading resumed, it took a tremendous leap to $160. Unaware that the game might soon be up, Fisk continued buying like a madman and bragged that gold would soon top $200.

In Washington, D.C., Ulysses S. Grant resolved to bust Gould and Fisk’s corner on the gold market. Shortly before noon, he met with Treasury Secretary George Boutwell, who had been following the chaos via telegraph. After a brief conversation, Grant ordered Boutwell to open his vaults and flood the market. A few minutes later, Boutwell wired New York and announced the Treasury would sell a whopping $4 million in gold the following day.

Along with finally loosening Gould and Fisk’s grasp on the gold market, the news sent Wall Street into a tailspin. “Possibly no avalanche ever swept with more terrible violence,” the New York Herald later wrote. Within minutes, the inflated gold prices plummeted from $160 to $133. The stock market joined in on the plunge, dropping a full 20 percentage points and bankrupting or inflicting severe damage on some of Wall Street’s most venerable firms. Thousands of speculators were left financially ruined, and at least one committed suicide. Foreign trade ground to a halt. Farmers may have felt the squeeze most of all, with many seeing the value of their wheat and corn harvests dip by 50 percent.

The 2008 Crash: What Happened to All That Money?

A trader works on the floor of the New York Stock Exchange on September 15, 2008 in New York City. In afternoon trading the Dow Jones Industrial Average fell over 500 points as U.S. stocks suffered a steep loss after news of the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection.

Spencer Platt/Getty Images

The warning signs of an epic financial crisis were blinking steadily through 2008𠅏or those who were paying close attention.

One clue? According to the ProQuest newspaper database, the phrase "since the Great Depression" appeared in The New York Times nearly twice as often in the first eight months of that year�out two dozen times𠅊s it did in an entire ordinary year. As the summer stretched into September, these nervous references began to noticeably accumulate, speckling the broadsheet columns like a first, warning sprinkle of ash before the ruinous arrival of wildfire.

In mid-September catastrophe erupted, dramatically and in full public view. Financial news became front-page, top-of-the-hour news, as hundreds of dazed-looking Lehman Brothers employees poured onto the sidewalks of Seventh Avenue in Manhattan, clutching office furnishings while struggling to explain to the swarming reporters the shocking turn of events. Why had their venerable 158-year-old investment banking firm, a bulwark of Wall Street, gone bankrupt? And what did it mean for most of the planet?

The superficially composed assessments that emanated from Washington policymakers added no clarity. The secretary of the treasury, Hank Paulson, had—reporters said—"concluded that the financial system could survive the collapse of Lehman." In other words, the U.S. government decided not to engineer the firm&aposs salvation, as it had for Lehman’s competitor Merrill Lynch, the insurance giant American International Group (AIG) or, in the spring of 2008, the investment bank Bear Stearns.

Lehman, they thought, was not too big to fail.

Then-President George W. Bush had no explanations. He could only urge fortitude. "In the short run, adjustments in the financial markets can be painful𠅋oth for the people concerned about their investments and for the employees of the affected firms,” he said, attempting to quell potential panic on Main Street. “In the long run, I&aposm confident that our capital markets are flexible and resilient and can deal with these adjustments." Privately, he sounded less sure, saying to advisors, "Someday you guys are going to need to tell me how we ended up with a system like this.… We&aposre not doing something right if we&aposre stuck with these miserable choices."

And because that system had become a globally interdependent one, the U.S. financial crisis precipitated a worldwide economic collapse. So…what happened?

The American Dream was sold on too-easy credit

The 2008 financial crisis had its origins in the housing market, for generations the symbolic cornerstone of American prosperity. Federal policy conspicuously supported the American dream of homeownership since at least the 1930s, when the U.S. government began to back the mortgage market. It went further after WWII, offering veterans cheap home loans through the G.I. Bill. Policymakers reasoned they could avoid a return to prewar slump conditions so long as the undeveloped lands around cities could fill up with new houses, and the new houses with new appliances, and the new driveways with new cars. All this new buying meant new jobs, and security for generations to come.

Fast forward a half-century or so, to when the mortgage market was blowing up. According to the Final Report of the National Commission on the Causes of the Financial and Economic Crisis of the United States, between 2001 and 2007, mortgage debt rose nearly as much as it had in the whole rest of the nation&aposs history. At about the same time, home prices doubled. Around the country, armies of mortgage salesmen hustled to get Americans to borrow more money for houses—or even just prospective houses. Many salesmen didn’t ask borrowers for proof of income, job or assets. Then the salesmen were gone, leaving behind a new debtor holding new keys and perhaps a faint suspicion that the deal was too good to be true.

Mortgages were transformed into ever-riskier investments

The salesmen could make these deals without investigating a borrower&aposs fitness or a property&aposs value because the lenders they represented had no intention of keeping the loans. Lenders would sell these mortgages onward bankers would bundle them into securities and peddle them to institutional investors eager for the returns the American housing market had yielded so consistently since the 1930s. The ultimate mortgage owners would often be thousands of miles away and unaware of what they had bought. They knew only that the rating agencies said it was as safe as houses always had been, at least since the Depression.

The fresh 21-century interest in transforming mortgages into securities owed to several factors. After the Federal Reserve System imposed low interest rates to avert a recession after the September 11, 2001 terrorist attacks, ordinary investments weren’t yielding much. So savers sought superior yields.

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This has made Wall Street one of the most important financial centers in the world.

The truth is, the origins of Wall Street’s name is still debated among historians. It most likely began with a defensive position carved out by Dutch settlers.

When Manhattan was owned by the Dutch, they grew concerned that England would invade their small colony. (At the time what we know today as New York was called New Amsterdam.) To repel attackers, the Dutch built a wall between 9 and 12 feet high and 2,300 feet long around their settlement. It ran approximately along the area we know as Wall Street today, with gates approximately at the modern intersections of Wall Street and Pearl Street, and Wall Street and Broadway.

It is possible that this led the future wave of English settlers to name the place Wall Street, after the wall which ran along the road.

Other historians believe that the name came from the Walloons, French-speaking Dutch who were early settlers of Manhattan. This population became known simply as the Waal, and the main entrance to their settlement became known as the Waal Straat.

Wall Street’s history as a financial center began with slavery. The Dutch settlers of New Amsterdam conducted much of their trading outside, building a large outdoor marketplace for even financial transactions. This carried over after the English took over the land and turned it into New York.

In 1711, New York named Wall Street the location of the city’s slave market. Given the significant role that slavery played in the economics of the thirteen colonies, this quickly established the financial center of gravity in the young city. Men made fortunes trading slaves on the auction blocks of Wall Street, a practice that would not end for over 100 years.

Yet while the slave block made Wall Street important to New York City, it was a sycamore tree which made this little road nationally important.

By the late 18th century the young United States already had a financial center in Philadelphia, where stock and commodity traders did most of their work. Traders in New York wanted to compete with that market. Just as importantly, they wanted to keep out both government interference and any potential competitors. (This would echo the sentiment of even today’s self-styled free market capitalists.)

The result was the Buttonwood Agreement, named for the sycamore (or 𠇋uttonwood”) tree on Wall Street under which New York’s traders often met. As we wrote in a related piece:

In 1792, 24 stockbrokers — in a power play against the freewheeling auctioneers they competed against — signed the two-sentence "Buttonwood Agreement," named for a local Buttonwood tree at 68 Wall St. where they set up shop in good weather (in bad weather, they used a local coffee shop, then a rented space), to trade only with each other and for a 0.25% commission… "The new market would be more structured, conducted without manipulative actions," and would also draw business away from a formalized exchange already profitable in Philadelphia.

The Buttonwood Agreement helped begin the modern practice of limiting securities trading to registered brokers. Under this deal, no member would trade securities with someone who was not an approved broker under the agreement. Not long after, the Buttonwood traders built the New York Stock and Exchange Board, modeling it after the successful Philadelphia Merchants Exchange.

This laid the foundation for what Wall Street would become. Over the next century, Wall Street and New York City would build on each other. As New York became an increasingly prominent part of the American economy, the companies and traders attracted to the city brought their business to the financiers on Wall Street rather than those in Philadelphia.

Developments such as the opening of the Erie Canal, the nation’s first power plant on Pearl Street, and the first telegraph drove business to New York. Meanwhile the financiers on Wall Street pioneered financial innovations that made it easier to do business with them than with their competitors in Philadelphia, such as Charles Dow’s stock tracking system and the first stock tickers.

By the 20th century, the center of U.S. commerce had long since shifted to Wall Street. By the end of World War I, it had even surpassed the trading floors of London.

Wall Street Crash - History

1929 The Crash

Crowd gathering on Wall Street after the 1929 crash

The Wall Street Crash of 1929, also known as Black Tuesday or the Stock Market Crash of 1929, began in late October 1929 and was the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its fallout. The crash signaled the beginning of the 10-year Great Depression that affected all Western industrialized countries.

The Roaring Twenties, the decade that followed World War I and led to the Crash, was a time of wealth and excess. Building on post-war optimism, many rural Americans migrated to the cities in vast numbers throughout the decade with the hopes of finding a more prosperous life in the ever growing expansion of America’s industrial sector. While the American cities prospered, the vast migration from rural areas and continued neglect of the US agriculture industry would create widespread financial despair among American farmers throughout the decade and would later be blamed as one of the key factors that led to the 1929 stock market crash.

Despite the dangers of speculation, many believed that the stock market would continue to rise indefinitely. On March 25, 1929, however, a mini crash occurred after investors started to sell stocks at a rapid pace, exposing the market’s shaky foundation. Two days later, banker Charles E. Mitchell announced his company the National City Bank would provide $25 million in credit to stop the market’s slide. Mitchell’s move brought a temporary halt to the financial crisis and call money declined from 20 to eight percent. However, the American economy was now showing ominous signs of trouble. Steel production was declining, construction was sluggish, car sales were down, and consumers were building up high debts because of easy credit.

The market had been on a nine-year run that saw the Dow Jones Industrial Average increase in value tenfold, peaking at 381.17 on September 3, 1929. Shortly before the crash, economist Irving Fisher famously proclaimed, “Stock prices have reached what looks like a permanently high plateau.” The optimism and financial gains of the great bull market were shaken on September 18, 1929, when share prices on the New York Stock Exchange (NYSE) abruptly fell.

On September 20, the London Stock Exchange (LSE) officially crashed when top British investor Clarence Hatry and many of his associates were jailed for fraud and forgery. The LSE’s crash greatly weakened the optimism of American investment in markets overseas. In the days leading up to the crash, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. Economist and author Jude Wanniski later correlated these swings with the prospects for passage of the Smoot–Hawley Tariff Act, which was then being debated in Congress.

On October 24 (“Black Thursday”), the market lost 11% of its value at the opening bell on very heavy trading. Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont, acting head of Morgan Bank Albert Wiggin, head of the Chase National Bank and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.

With the bankers’ financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other “blue chip” stocks. This tactic was similar to one that ended the Panic of 1907. It succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day however, unlike 1907, the respite was only temporary.

The trading floor of the New York Stock Exchange in 1930, six months after the crash of 1929

Over the weekend, the events were covered by the newspapers across the United States. On October 28, “Black Monday,” more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 13%.

The next day, “Black Tuesday”, October 29, 1929, about sixteen million shares were traded, and the Dow lost an additional 30 points, or 12%, amid rumors that U.S. President Herbert Hoover would not veto the pending Smoot–Hawley Tariff Act. The volume of stocks traded on October 29, 1929 was a record that was not broken for nearly 40 years.

On October 29, William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the large decline in prices. Due to the massive volume of stocks traded that day, the ticker did not stop running until about 7:45 p.m. that evening. The market had lost over $30 billion in the space of two days which included $14 billion on October 29 alone.

Dow Jones Industrial Average on Black Monday and Black Tuesday

Date Change % Change Close
October 28, 1929 −38.33 −12.82 260.64
October 29, 1929 −30.57 −11.73 230.07

After a one-day recovery on October 30, where the Dow regained an additional 28.40 points, or 12%, to close at 258.47, the market continued to fall, arriving at an interim bottom on November 13, 1929, with the Dow closing at 198.60. The market then recovered for several months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28, and reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930. After the Smoot–Hawley Tariff Act was enacted in mid-June, the Dow dropped again, stabilizing above 200. The following year, the Dow embarked on another, much longer, steady slide from April 1931 to July 8, 1932 when it closed at 41.22—its lowest level of the 20th century, concluding an 89% loss rate for all of the market’s stocks. For most of the 1930s, the Dow began slowly to regain the ground it lost during the 1929 crash and the three years following it, beginning on March 15, 1933, with the largest percentage increase of 15.34%, with the Dow Jones closing at 62.10, with a 8.26 point increase. The largest percentage increases of the Dow Jones occurred during the early and mid-1930s, but it would not return to the peak closing of September 3, 1929 until November 23, 1954.

Analysis – Economic Fundamentals

The crash followed a speculative boom that had taken hold in the late 1920’s. During the later half of the 1920s, steel production, building construction, retail turnover, automobiles registered, even railway receipts advanced from record to record. The combined net profits of 536 manufacturing and trading companies showed an increase, in fact for the first six months of 1929, of 36.6% over 1928, itself a record half-year. Iron and steel led the way with doubled gains. Such figures set up a crescendo of stock-exchange speculation which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S. at the time.

The rising share prices encouraged more people to invest people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. Because of margin buying, investors stood to lose large sums of money if the market turned down—or even failed to advance quickly enough. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929, clearly above historical norms.

Good harvests had built up a mass of 250,000,000 bushels of wheat to be ‘carried over’ when 1929 opened. By May there was also a winter-wheat crop of 560,000,000 bushels ready for harvest in the Mississippi Valley. This oversupply caused a drop in wheat prices so heavy that the net incomes of the farming population from wheat were threatened with extinction. Stock markets are always sensitive to the future state of commodity markets and the slump in Wall-street predicted for May by Sir George Paish, arrived on time. In June 1929 the position was saved by a severe drought in the Dakotas and the Canadian West, plus unfavorable seed times in Argentina and Eastern Australia. The oversupply would now be wanted to fill the big gaps in the 1929 world wheat production. From 97c per bushel in May wheat rose to $1.49 in July. When it was seen that at this figure the American farmers would get rather more for their smaller crop than for that of 1928, up went stocks again and from far and wide orders came to buy shares for the profits to come.

Then in August the wheat price fell when France and Italy were bragging of a magnificent harvest and the situation in Australia improved. This sent a shiver through Wall Street and stock prices quickly dropped, but word of cheap stocks brought a fresh rush of ‘stags,’ amateur speculators and investors. Congress had also voted for a 100 million dollar relief package for the farmers, hoping to stabilize wheat prices. By October though, the price had fallen to $1.31 per bushel. The falling commodity markets in other countries told upon even American self-confidence, and the stock market started to falter.

On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market finally turned down, and panic selling started.

The president of the Chase National Bank said at the time “We are reaping the natural fruit of the orgy of speculation in which millions of people have indulged. It was inevitable, because of the tremendous increase in the number of stockholders in recent years, that the number of sellers would be greater than ever when the boom ended and selling took the place of buying.”

Subsequent Actions

In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of the crash. The following year, the U.S. Congress passed the Glass–Steagall Act mandating a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.

After the experience of the 1929 crash, stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. However, the one-day crash of Black Monday, October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, was worse in percentage terms than any single day of the 1929 crash.

World War II

The American mobilization for World War II at the end of 1941 moved approximately ten million people out of the civilian labor force and into the war. World War II had a dramatic effect on many parts of the economy, and may have hastened the end of the Great Depression in the United States. Government-financed capital spending accounted for only 5 percent of the annual U.S. investment in industrial capital in 1940 by 1943, the government accounted for 67 percent of U.S. capital investment.

Effects and Academic Debate – Causes of the Great Depression

Crowd at New York’s American Union Bank during a bank run early in the Great Depression

Together, the 1929 stock market crash and the Great Depression formed the largest financial crisis of the 20th century. The panic of October 1929 has come to serve as a symbol of the economic contraction that gripped the world during the next decade. The falls in share prices on October 24 and 29, 1929 were practically instantaneous in all financial markets, except Japan.

The Wall Street Crash had a major impact on the U.S. and world economy, and it has been the source of intense academic debate—historical, economic and political—from its aftermath until the present day. Some people believed that abuses by utility holding companies contributed to the Wall Street Crash of 1929 and the Depression that followed. Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market.

The 1929 crash brought the Roaring Twenties to a shuddering halt. As tentatively expressed by economic historian Charles Kindleberger, in 1929 there was no lender of last resort effectively present, which, if it had existed and were properly exercised, would have been key in shortening the business slowdown[s] that normally follows financial crises. The crash marked the beginning of widespread and long-lasting consequences for the United States. Historians still debate the question: did the 1929 Crash spark The Depression, or did it merely coincide with the bursting of a loose credit-inspired economic bubble? Only 16% of American households were invested in the stock market within the United States during the period leading up to the depression, suggesting that the crash carried somewhat less of a weight in causing the depression.

However, the psychological effects of the crash reverberated across the nation as business became aware of the difficulties in securing capital markets investments for new projects and expansions. Business uncertainty naturally affects job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, naturally the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economic depressing events.

The resultant rise of mass unemployment is seen as a result of the crash, although the crash is by no means the sole event that contributed to the depression. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression. True or not, the consequences were dire for almost everybody. Most academic experts agree on one aspect of the crash: It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying.

The failure set off a worldwide run on US gold deposits (i.e., the dollar), and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 banks and other lenders ultimately failed. Also, the uptick rule, which allowed short selling only when the last tick in a stock’s price was positive, was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear raid.

Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. The Economist argued in a 1998 article that the Depression did not start with the stock market crash. Nor was it clear at the time of the crash that a depression was starting. They asked, “Can a very serious Stock Exchange collapse produce a serious setback to industry when industrial production is for the most part in a healthy and balanced condition?” They argued that there must be some setback, but there was not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression.

But The Economist also cautioned that some bank failures are also to be expected and some banks may not have any reserves left for financing commercial and industrial enterprises. They concluded that the position of the banks is the key to the situation, but what was going to happen could not have been foreseen.”

Academics see the Wall Street Crash of 1929 as part of a historical process that was a part of the new theories of boom and bust. According to economists such as Joseph Schumpeter and Nikolai Kondratiev and Charles E. Mitchell the crash was merely a historical event in the continuing process known as economic cycles. The impact of the crash was merely to increase the speed at which the cycle proceeded to its next level.

Milton Friedman‘s A Monetary History of the United States, co-written with Anna Schwartz, advances the argument that what made the “great contraction” so severe was not the downturn in the business cycle, protectionism, or the 1929 stock market crash in themselves – but instead, according to Friedman, what plunged the country into a deep depression was the collapse of the banking system during three waves of panics over the 1930–33 period.

Wall Street, a Hollywood beginning

In the 17th century, at the southern tip of the Manhattan Island, Dutch settlers established New Amsterdam, a fortified settlement that would later become New York. To defend themselves against the attacks of the Lenape Indians and the British, the colonists built a wooden wall along the northern boundary of the settlement, and named the adjoining street ‘Waal Straat.’ Today, the street that owes its name to this palisade, Wall Street, is the home to the New York Stock Exchange, or NYSE, and ‘Wall Street’ has become a metonym used to refer to New York’s financial district and the U.S. financial markets as a whole.


Background Edit

From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) rose from 776 to 2,722, including a 44% year-to-date rise as of August 1987. The rise in market indices for the nineteen largest markets in the world averaged 296% during this period. The average number of shares traded on the New York Stock Exchange rose from 65 million shares to 181 million shares. [9]

In late 1985 and early 1986, the United States economy shifted from a rapid recovery from the early 1980s recession to a slower expansion, resulting in a brief "soft landing" period as the economy slowed and inflation dropped.

On the morning of Wednesday, October 14, 1987, the United States House Committee on Ways and Means introduced a tax bill that would reduce the tax benefits associated with financing mergers and leveraged buyouts. [10] [11] Also, unexpectedly high trade deficit figures announced by the United States Department of Commerce had a negative impact on the value of the US dollar while pushing interest rates upward and also put downward pressure on stock prices. [10]

However, sources questioned whether these news events led to the crash. Nobel-prize winning economist Robert J. Shiller surveyed 889 investors (605 individual investors and 284 institutional investors) immediately after the crash regarding several aspects of their experience at the time. Only three institutional investors and no individual investors reported a belief that the news regarding proposed tax legislation was a trigger for the crash. According to Shiller, the most common responses were related to a general mindset of investors at the time: a "gut feeling" of an impending crash, perhaps brought on by "too much indebtedness". [12]

On Wednesday, October 14, 1987, the DJIA dropped 95.46 points (3.81%) to 2,412.70, and it fell another 58 points (2.4%) the next day, down over 12% from the August 25 all-time high. On Friday, October 16, the DJIA fell 108.35 points (4.6%) to close at 2,246.74 on record volume. [13] Though the markets were closed for the weekend, significant selling pressure still existed. The computer models of portfolio insurers continued to dictate very large sales. [14] Moreover, some large mutual fund groups had procedures that enabled customers to easily redeem their shares during the weekend at the same prices that existed at the close of market on Friday. [15] The amount of these redemption requests was far greater than the firms' cash reserves, requiring them to make large sales of shares as soon as the market opened on the following Monday. Finally, some traders anticipated these pressures and tried to get ahead of the market by selling early and aggressively Monday, before the anticipated price drop. [14]

The crash Edit

Before the New York Stock Exchange (NYSE) opened on Black Monday, October 19, 1987, there was pent-up pressure to sell stocks. When the market opened, a large imbalance immediately arose between the volume of sell orders and buy orders, placing considerable downward pressure on stock prices. Regulations at the time permitted designated market makers (also known as "specialists") to delay or suspend trading in a stock if the order imbalance exceeded that specialist's ability to fulfill orders in an orderly manner. [16] The order imbalance on the 19th was so large that 95 stocks on the S&P 500 Index (S&P) opened late, as also did 11 of the 30 DJIA stocks. [17] Importantly, however, the futures market opened on time across the board, with heavy selling. [17]

On Black Monday, the DJIA fell 508 points (22.6%), accompanied by crashes in the futures exchanges and options markets. [18] This was the largest one-day percentage drop in the history of the DJIA. Significant selling created steep price declines throughout the day, particularly during the last 90 minutes of trading. [19] The S&P 500 Index dropped 20.4%, falling from 282.7 to 225.06. The NASDAQ Composite lost only 11.3%, not because of restraint on the part of sellers, but because the NASDAQ market system failed. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts during the day. [20] The NASDAQ market fared much worse. Because of its reliance on a "market making" system that allowed market makers to withdraw from trading, liquidity in NASDAQ stocks dried up. Trading in many stocks encountered a pathological condition where the bid price for a stock exceeded the ask price. These "locked" conditions severely curtailed trading. Trading in Microsoft shares on the NASDAQ lasted a total of 54 minutes. Total trading volume was so large that the computer and communications systems in place at the time were overwhelmed, leaving orders unfilled for an hour or more. Large funds transfers were delayed for hours and the Fedwire and NYSE SuperDot systems shut down for extended periods of time, further compounding traders' confusion. [21]

De-linked markets and index arbitrage Edit

Under normal circumstances the stock market and those of its main derivatives–futures and options–are functionally a single market, given that the price of any particular stock is closely connected to the prices of its counterpart in both the futures and options market. [22] Prices in the derivative markets are typically tightly connected to those of the underlying stock, though they differ somewhat (as for example, prices of futures are typically higher than that of their particular cash stock). [23] During the crisis this link was broken. [24]

When the futures market opened while the stock market was closed, it created a pricing imbalance: the listed price of those stocks which opened late had no chance to change from their closing price of the day before. The quoted prices were thus "stale" and did not reflect current economic conditions they were generally listed higher than they should have been [25] (and dramatically higher than their respective futures, which are typically higher than stocks). [25]

The decoupling of these markets meant that futures prices had temporarily lost their validity as a vehicle for price discovery they no longer could be relied upon to inform traders of the direction or degree of stock market expectations. This had harmful effects: it added to the atmosphere of uncertainty and confusion at a time when investor confidence was sorely needed it discouraged investors from "leaning against the wind" and buying stocks since the discount in the futures market logically implied that investors could wait and purchase stocks at an even lower price and it encouraged portfolio insurance investors to sell in the stock market, putting further downward pressure on stock prices. [26]

The gap between the futures and stocks was quickly noted by index arbitrage traders who tried to profit through sell at market orders. Index arbitrage, a form of program trading, [27] added to the confusion and the downward pressure on prices: [17]

. reflecting the natural linkages among markets, the selling pressure washed across to the stock market, both through index arbitrage and direct portfolio insurance stock sales. Large amounts of selling, and the demand for liquidity associated with it, cannot be contained in a single market segment. It necessarily overflows into the other market segments, which are naturally linked. There are, however, natural limits to intermarket liquidity which were made evident on October 19 and 20. [28]

Although arbitrage between index futures and stocks placed downward pressure on prices, it does not explain why the surge in sell orders that brought steep price declines began in the first place. [29] Moreover, the markets "performed most chaotically" during those times when the links that index arbitrage program trading creates between these markets was broken. [30]

Portfolio insurance hedges Edit

Portfolio insurance is a hedging technique which attempts to manage risk and limit losses by buying and selling financial instruments (for example, stocks or futures) in reaction to changes in market price rather than changes in market fundamentals. Specifically, they buy when the market is rising, and sell when the market is falling, without regard for any fundamental information about why the market is rising or falling. [31] Thus it is an example of an "informationless trade" [32] that has the potential to create a market-destabilizing feedback loop. [33]

This strategy became a source of downward pressure when portfolio insurers whose computer models noted that stocks opened lower and continued their steep price. The models recommended even further sales. [17] The potential for computer-generated feedback loops that these hedges created has been discussed as a factor compounding the severity of the crash, but not as an initial trigger. [34] Economist Hayne Leland argues against this interpretation, suggesting that the impact of portfolio hedging on stock prices was probably relatively small. [35] Similarly, the report of the Chicago Mercantile Exchange found the influence of "other investors - mutual funds, broker-dealers, and individual shareholders - was thus three to five times greater than that of the portfolio insurers" during the crash. [36] Numerous econometric studies have analyzed the evidence to determine whether portfolio insurance exacerbated the crash, but the results have been unclear. [37] Markets around the world that did not have portfolio insurance trading experienced as much turmoil and loss as the U.S. market. [38] More to the point, the cross-market analysis of Richard Roll, for example, found that markets with a greater prevalence of computerized trading (including portfolio insurance) actually experienced relatively less severe losses (in percentage terms) than those without. [39]

Noise trading Edit

The crisis affected markets around the world however, no international news event or change in market fundamentals has been shown to have had a strong effect on investor behavior. [40] Instead, contemporaneous causality and feedback behavior between markets increased dramatically during this period. [41] In an environment of increased volatility, confusion and uncertainty, investors not only in the US but also across the world [42] were inferring information from changes in stock prices and communication with other investors [43] in a self-reinforcing contagion of fear. [44] This pattern of basing trading decisions largely on market psychology is often referred to as one form of "noise trading", which occurs when ill-informed investors "[trade] on noise as if it were news". [45] If noise is misinterpreted as bad news, then the reactions of risk-averse traders and arbitrageurs will bias the market, preventing it from establishing prices that accurately reflect the fundamental state of the underlying stocks. [46] For example, on October 19 rumors that the New York Stock Exchange would close created additional confusion and drove prices further downward, while rumors the next day that two Chicago Mercantile Exchange clearinghouses were insolvent deterred some investors from trading in that marketplace. [47]

A feedback loop of noise-induced-volatility has been cited by some analysts as the major reason for the severe depth of the crash. It does not, however, explain what initially triggered the market break. [48] Moreover, Lawrence A. Cunningham has suggested that while noise theory is "supported by substantial empirical evidence and a well-developed intellectual foundation", it makes only a partial contribution toward explaining events such as the crash of October 1987. [49] Informed traders, not swayed by psychological or emotional factors, have room to make trades they know to be less risky. [50]

Margin calls and liquidity Edit

Frederic Mishkin suggested that the greatest economic danger was not events on the day of the crash itself, but the potential for "spreading collapse of securities firms" if an extended liquidity crisis in the securities industry began to threaten the solvency and viability of brokerage houses and specialists. This possibility first loomed on the day after the crash. [51] At least initially, there was a very real risk that these institutions could fail. [52] If that happened, spillover effects could sweep over the entire financial system, with negative consequences for the real economy as a whole. [53]

The source of these liquidity problems was a general increase in margin calls after the market's plunge, these were about 10 times their average size and three times greater than the highest previous morning variation call. [54] Several firms had insufficient cash in customers' accounts (that is, they were "undersegregated"). Firms drawing funds from their own capital to meet the shortfall sometimes became undercapitalized 11 firms received margin calls from a single customer that exceeded that firm's adjusted net capital, sometimes by as much as two-to-one. [52] Investors needed to repay end-of-day margin calls made on the 19th before the opening of the market on the 20th. Clearinghouse member firms called on lending institutions to extend credit to cover these sudden and unexpected charges, but the brokerages requesting additional credit began to exceed their credit limit. Banks were also worried about increasing their involvement and exposure to a chaotic market. [55] The size and urgency of the demands for credit placed upon banks was unprecedented. [56] In general, counterparty risk increased as the creditworthiness of counterparties and the value of collateral posted became highly uncertain. [57]

The Black Monday decline was, and currently remains, the biggest drop on the List of largest daily changes in the Dow Jones Industrial Average. (Saturday, December 12, 1914, is sometimes erroneously cited as the largest one-day percentage decline of the DJIA. In reality, the ostensible decline of 24.39% was created retroactively by a redefinition of the DJIA in 1916. [58] [59] )

Federal Reserve response Edit

The Federal Reserve acted as the lender of last resort to counter the crisis. [60] The Fed used crisis management via public pronouncements, supplied liquidity through open market operations, [61] [B] persuading banks to lend to securities firms, and intervening directly. [63]

On the morning of October 20, Fed Chairman Alan Greenspan made a brief statement: "The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system". [64] Fed sources suggested that the brevity was deliberate, in order to avoid misinterpretations. [61] This "extraordinary" [65] announcement probably had a calming effect on markets [66] that were facing an equally unprecedented demand for liquidity [56] and the immediate potential for a liquidity crisis. [67]

The Fed then acted to provide market liquidity and prevent the crisis from expanding into other markets. It immediately began injecting its reserves into the financial system via purchases on the open market. This rapidly pushed the federal funds rate down by 0.5%. The Fed continued its expansive open market purchases of securities for weeks. The Fed also repeatedly began these interventions an hour before the regularly scheduled time, notifying dealers of the schedule change on the evening beforehand. This was all done in a very high-profile and public manner, similar to Greenspan's initial announcement, to restore market confidence that liquidity was forthcoming. [68] Although the Fed's holdings expanded appreciably over time, the speed of expansion was not excessive. [69] Moreover, the Fed later disposed of these holdings so that its long-term policy goals would not be adversely affected. [61]

The Fed successfully met the unprecedented demands for credit [70] by pairing a strategy of moral suasion that motivated nervous banks to lend to securities firms alongside its moves to reassure those banks by actively supplying them with liquidity. [71] As economist Ben Bernanke (who was later to become Chairman of the Federal Reserve) wrote:

The Fed's key action was to induce the banks (by suasion and by the supply of liquidity) to make loans, on customary terms, despite chaotic conditions and the possibility of severe adverse selection of borrowers. In expectation, making these loans must have been a money-losing strategy from the point of view of the banks (and the Fed) otherwise, Fed persuasion would not have been needed. [72]

The Fed's two-part strategy was thoroughly successful, since lending to securities firms by large banks in Chicago and especially in New York increased substantially, often nearly doubling. [73]

Rebound Edit

Despite fears of a repeat of the Great Depression, the market rallied immediately after the crash, gaining 102.27 points the very next day and 186.64 points on Thursday October 22. It took two years for the Dow to recover completely and by September 1989, the market had regained all of the value it had lost in the 1987 crash. The DJIA gained 0.6% during calendar year 1987.

On Friday, October 16, all the markets in London were unexpectedly closed due to the Great Storm of 1987. After they re-opened, the speed of the crash accelerated, partially attributed by some to the storm closure. By 9:30AM, the FTSE 100 Index had fallen over 136 points. [74] It was down 23% in two days, roughly the same percentage that the NYSE dropped on the day of the crash. Stocks then continued to fall, albeit at a less precipitous rate, until reaching a trough in mid-November at 36% below its pre-crash peak. Stocks did not begin to recover until 1989. [75]

In Japan, the October 1987 crash is sometimes referred to as "Blue Tuesday", in part because of the time zone difference, and in part because its effects after the initial crash were relatively mild. [4] In both places, according to economist Ulrike Schaede, the initial market break was severe: the Tokyo market declined 14.9% in one day, and Japan's losses of US$421 billion ranked next to New York's $500 billion, out of a worldwide total loss of $1.7 trillion. However, systemic differences between the US and Japanese financial systems led to significantly different outcomes during and after the crash on Tuesday, October 20. In Japan the ensuing panic was no more than mild at worst. The Nikkei 225 Index returned to its pre-crash levels after only five months. Other global markets performed less well in the aftermath of the crash, with New York, London and Frankfurt all needing more than a year to achieve the same level of recovery. [76]

Several of Japan's distinctive institutional characteristics already in place at the time, according to economist David D. Hale, helped it dampen volatility. These included trading curbs such as a sharp limit on price movements of a share of more than 10–15% restrictions and institutional barriers to short-selling by domestic and international traders frequent adjustments of margin requirements in response to changes in volatility strict guidelines on mutual fund redemptions and actions of the Ministry of Finance to control the total shares of stock and exert moral suasion on the securities industry. [77] An example of the latter occurred when the ministry invited representatives of the four largest securities firms to tea in the early afternoon of the day of the crash. [78] After tea at the ministry, these firms began to make large purchases of stock in Nippon Telegraph and Telephone. [78]

The crash of the New Zealand stock market was notably long and deep, continuing its decline for an extended period of time after other global markets had recovered. [79] Unlike other nations, moreover, for New Zealand the effects of the October 1987 crash spilled over into its real economy, contributing to a prolonged recession. [80]

The effects of the worldwide economic boom of the mid-1980s had been amplified in New Zealand by the relaxation of foreign exchange controls and a wave of banking deregulation. Deregulation in particular suddenly gave financial institutions considerably more freedom to lend, though they had little experience in doing so. [81] The finance industry was in a state of increasing optimism that approached euphoria. [82] This created an atmosphere conducive to greater financial risk taking including increased speculation in the stock market and real estate. Foreign investors participated, attracted by New Zealand's relatively high interest rates. From late 1984 until Black Monday, commercial property prices and commercial construction rose sharply, while share prices in the stock market tripled. [81]

New Zealand's stock market fell nearly 15% on the first day of the crash. [83] In the first three-and-a-half months following the crash, the value of New Zealand's market shares was cut in half. [84] By the time it reached its trough in February 1988, the market had lost 60% of its value. [83] The financial crisis triggered a wave of deleveraging with significant macro-economic consequences. Investment companies and property developers began a fire sale of their properties, partially to help offset their share price losses, and partially because the crash had exposed overbuilding. Moreover, these firms had been using property as collateral for their increased borrowing. Thus when property values collapsed, the health of balance sheets of lending institutions was damaged. [83] The Reserve Bank of New Zealand declined to loosen monetary policy in response to the crisis, however, which would have helped firms settle their obligations and remain in operation. [7] As the harmful effects spread over the next few years, major corporations and financial institutions went out of business, and the banking systems of New Zealand and Australia were impaired. [84] Access to credit was reduced. [83] The combination of these contributed significantly to a long recession running from 1987 until 1993. [83]

No definitive conclusions have been reached about the reasons for the 1987 crash. Stocks had been in a multi-year bull run and market price–earnings ratios in the U.S. were above the post-war average. The S&P 500 was trading at 23-times earnings, a postwar high and well above the average of 14.5-times earnings. [85] Herd behavior and psychological feedback loops play a critical part in all stock market crashes but analysts have also tried to look for external triggering events. Aside from the general worries of stock market overvaluation, blame for the collapse has been apportioned to such factors as program trading, portfolio insurance and derivatives, and prior news of worsening economic indicators (i.e. a large U.S. merchandise trade deficit and a falling United States dollar, which seemed to imply future interest rate hikes). [86]

One of the consequences of the 1987 crash was the introduction of the circuit breaker or trading curb, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes. Based upon the idea that a cooling off period would help dissipate panic selling, these mandatory market shutdowns are triggered whenever a large pre-defined market decline occurs during the trading day. [87] These trading curbs were used multiple times during the 2020 stock market crash. [88]

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