The 1920s were the original national era of irrational exuberance. In this decade, huge numbers of Americans believed that they could earn enormous fortunes in the stock markets. They ignored the fact that the markets could be volatile. This allowed them to justify investing all of their life savings in stocks. Those who did not have savings were able to get in on the action as well.
They purchased stocks on margin or credit. This worked well until the markets dove on Black Thursday, Black Monday, and Black Tuesday on October 29 of 1929. At this point the country was grossly unprepared for the stock market crash of 1929. The ensuing economic devastation that the crashes caused proved to be a critical element in kick starting the Great Depression.
The conclusion of World War I changed the national mood in the U.S. Americans were jubilant, confident, and optimistic about the future. They saw new inventions appear like radio and the airplane and everything seemed to be possible. The stock market already had earned its reputation for risk by this time. In the 1920s it no longer seemed risky. The country’s mood encouraged this as the stock market for once appeared to be an investment in a bright future that could not lose.
With more and more individuals piling into the stock market, prices naturally started going higher. This first became noticeable in 1925. The rest of the year and in 1926 stocks trended higher and lower. In 1927 they put in a strong upward trend and showing. The powerful bull market fed on itself and lured still more individuals to invest in the markets.
A full fledged boom had started by 1928. This resulting boom altered investors’ perceptions of the stock market. No one saw this as a place for long term investment at this time. Instead in 1928 the stock market represented a venue in which ordinary Americans felt that they could actually become wealthy quickly.
At this point the enthusiasm for the stock market turned feverish. Everybody all over the country talked about stocks. These discussions over stocks occurred everywhere ranging from barber shops to parties. Newspapers told stories about regular Americans like teacher, maids, and chauffeurs who had made millions of dollars in the markets. This only increased the enthusiasm to invest more.
Not every person could afford to purchase stocks. They solved this problem by allowing regular people to buy stocks on margin. When they could not front enough money to purchase them, their broker would take a 10% to 20% deposit of the price and loan them the additional 80% to 90% to purchase the stocks. This worked well while stocks were rising but in practice was very risky.
When stock prices fell below the amount loaned, brokers would demand that borrowers find the cash to cover the loan immediately in a margin call. Speculators who hoped they could make huge amounts of money in the stock markets ignored this risk and purchased the stocks on margin whenever they could. They felt confident that the practically never ending increase in prices would only continue. They ignored the risks that they were taking.
In early 1929, the race was on across the U.S. to invest in the stock market. Even companies were putting their corporate money into stocks as profits seemed to be a sure thing. Most dangerously, banks began investing customer monies into stocks and did not tell them about it. As long as stocks continue to roar ahead, everything appeared perfect. As the great crash approached in October, these businesses, banks, and speculators had a devastating lesson coming and were caught completely off guard.