US Economic Boom and the 1929 Stock Market Crash
The Roaring Twenties: A Period of US Economic Prosperity
The 1920s, often referred to as the Roaring Twenties, were a period of significant economic prosperity in the United States. Following World War I, the US emerged as a major global economic power, supplying capital goods and accelerating industrial production. Increased exports allowed the US to penetrate markets previously dominated by European powers, resulting in a trade surplus. This economic expansion was fueled by technological innovation and changes in work organization, leading to a profound transformation of production.
Technological Advancements and Industrial Growth
The energy sector experienced a high turnover, with a substantial increase in the use of electricity and oil. The use of telephones, automobiles, and household appliances like radios, irons, and refrigerators became widespread. The automobile industry, in particular, became a landmark of this booming sector, pioneering mass production through assembly lines. This had a positive ripple effect on related sectors such as iron, steel, electrical equipment, and glass. Major cities like Chicago saw the construction of towering skyscrapers, all amidst a process of industrial concentration.
These advancements led to a significant increase in productivity, surpassing that of the European economy and allowing the US to reduce production costs. This had positive effects on employment, leading to increased demand. Consequently, between 1922 and 1929, the US experienced a period of great prosperity.
The Rise of Consumerism
This era also witnessed a significant change in trading systems. Specialized, small-scale businesses had to compete with chain stores that introduced new sales methods, stimulating consumption through hire purchases or credit. Advertising and marketing played a major role in driving sales, leading to a consumer revolution and the dawn of the so-called consumer society. The confidence of a large portion of the population grew, and consumption increased at a rate higher than that of England, leading to high household indebtedness.
Overproduction and Agricultural Struggles
However, not all population groups benefited equally. The purchasing power of workers did not keep pace with increased production, leading to the problem of overproduction. Agriculture was the hardest-hit sector. Agricultural producers, who had taken on debt during the war years to increase production, saw their revenues decline due to lower exports and prices. Agricultural prices remained significantly higher than industrial prices, causing the ruin of millions of farmers.
Stock Market Fever and the 1929 Crash
From 1925 onwards, corporate profits were increasingly invested in credit and the stock market rather than in productive sectors. Initially, the stock market boom reflected the strong business environment, but it eventually gave way to a speculative bubble. The value of shares increased primarily due to the belief that the sooner one bought, the greater the profit would be, resulting from the difference between the purchase price and the selling price (stock surplus). This generated strong demand for securities, further increasing their market value.
Small investors, many of whom borrowed money to buy stocks, were drawn to the stock market, believing they could easily profit by selling shares. As long as stock prices continued their upward trend, the euphoria persisted. However, the problem began in 1929 when stock values started to decline.
Causes of the New York Stock Exchange Crash
To understand the causes of the crash, it is essential to consider the differences between the real economy (which reflects the smooth running of businesses, i.e., their productivity and market acceptance) and the financial economy (which represents the share prices of companies on the stock exchange). A balance between the two is necessary, but this was not always the case. Shares can become overvalued due to speculation, which provides a rapid means of obtaining money by buying shares whose prices are increasing rapidly.
There was a decrease in capital investments in productive activities because the stock market offered greater returns. Companies experienced reduced sales and liquidity, forcing them to seek bank loans. Banks requested that the Federal Reserve lend at 5%, while they granted loans at 12% to invest in the stock market. Individuals, convinced that the benefits outweighed the interest, took out loans to invest.
Economic Imbalances
US economic growth showed significant imbalances. The most productive sector was consumer goods due to strong demand, along with agriculture, thanks to new production techniques and mechanization. However, this led to overproduction as more was produced than could be sold, resulting in lower incomes for farmers. In the energy sector, coal, steel, and textile industries saw decreased productivity.
There were imbalances between the incomes of farmers and urban dwellers, with farmers being significantly worse off. Employers’ profits grew by 65%, while wages only increased by 17%. This led to a drop in consumption in both agriculture and urban areas, with many resorting to borrowing or hire purchase loans.