Chapter 22 Section 1 Critical thinking #4

4) Judging from the events of the late 1920s and early 1930s, how important do you think public confidence is to the health of the stock market?
-What happened when overconfidence in the stock market led people to speculate and buy on margin
-how confidence affects consumer borrowing

I think that the public confidence in the stock market is very important in its success and good for it, but not good for the nation always. In the 1920s, the phenomenon of buying on credit made it seem that people were much wealthier than they really were, and the economy was booming after World War I. People who had the money started investing in stocks; stock prices had been rising steadily, and many Americans hurried to invest in stocks and bonds as the Dow Jones Industrial Average was 300 points higher than it had been 5 years ago (it was at 318 points, a record), and it seemed that it would be a good idea to invest. Although some economists in 1929 warned that there were weaknesses in the stock market, many Americans continued to do this due to their huge confidence in the economic health of the U.S. However, since people were so confident in this, they started speculating and buying on margin (when people would invest in stocks and bonds in the hope of getting rich quick while ignoring the risks, and paying a small percentage of a stock's price and loaning the rest). Investors could easily get money, so uninhibited buying and selling caused the market to grow more and more successful. This confidence was obviously great for the market, but bad for the nation: in 1929, stock prices fell, and many investors sold their stocks as quickly as possible, their confidence in the market shaken. In October, though, the prices fell much more, which resulted in panic (pages 672-673). On Black Tuesday, October 29th, the bottom fell out of the market, and investors and shareholders desparately tried to sell their stocks before prices were lowered further, and 16.4 million shares were dumped. People who had bought stocks on credit were now in huge debts and had no way of repaying their loans, and many people lost their savings (page 674). When people freaked out after the stock market crashed, they flocked to banks to withdraw their savings. However, the banks had much of the money invested in the stock market, and when everybody came in at once to get their money out, the banks couldn't repay many of them. Because the government didn't insure of protect accounts, millions lost their savings. By 1933, 11,000 of the U.S.'s banks had closed out of 25,000 (page 675). If people hadn't had such great confidence in the market, it wouldn't have done so well as it did before the crash, but after the crash, people's confidence in the nation's economic health hurt it. If people hadn't been so sure that everything would go well, they wouldn't have taken out loans to buy stocks and bonds, or engaged in speculation and buying on margin. Altogether, the nation was hurt by the people's lack of reservation and obstinate belief that nothing would go wrong.