Herbert Hoover could not have been more wrong.
Easy Money
With stock market prices continuing to skyrocket, an overwhelming sense of optimism ruled over the country in the late 1920s. But no one realized how fragile that optimism really was.
Investing in the stock market had never produced such large profits. Here is how it worked.
When a company needs money, it goes public and sells shares of stock in the company. Each shareholder becomes part owner of the company. The number of shares are limited and governed by the law of supply and demand.
If a company is doing exceptionally well, people will pay inflated prices for each share of stock. For example, someone could buy 10 shares of stock at $100 each, and then turn around and sell those 10 shares for $200 each and make a profit.
Buying Stocks On Margin
In the 1920s, people could borrow money to buy stock. That means you could pay just $100 for 10 shares of stock ($1000 worth), sell the stock for $200 each, pay back the money you borrowed to purchase the original stock, and still make a nice profit. (Today laws restrict buying stock "on margin," which is another word for borrowing money to buy stock.)
There were usually high interest rates associated with borrowing the money, but no one worried about that because the stock market continued to rise.
It seemed like "easy money," so even the middle class began investing. "Some people are buying stock in anything," writes historian Joy Hakim. "It doesn't matter if the company has any real worth or not. No one seems to care. Just give me stock and more stock, I want to get rich. The stock balloon grows bigger and bigger and bigger."
"Black Thursday"
And then what? The balloon pops and deflates even faster than it was inflated. Stock prices begin to fall, and stockholders start to panic. People have invested their life savings to get rich in the stock market. They probably still owe money that they borrowed to buy even more stock than they could afford. The market becomes flooded with brokers selling off stock.
By noon on October 24, 1929 -- a day forever known as "Black Thursday" -- the stock market had crashed. Ordinary Americans who couldn't pay back their loans were forced to sell homes, cars, and other valuables. By day's end, eleven financiers had committed suicide.
No Money in the Banks
Banks were also in trouble because they had loaned money to brokers and investors. After the market crashed and no one could pay back their loans, banks were out of money and closed their doors. Even people who did not buy stock but had money in accounts with the bank lost everything.
The stock market crash triggered the collapse of the entire US economy and brought on the Great Depression.
This poem from the November 2, 1929 edition of the New York Times sums up the mood of the nation:
As fall the leaves by
Autumn blown,
So fell those lovely
shares I own.
Forlorn, disconsolate
I sing,
Goodbye, goodbye to
everything!
To car and plane and
gleaming yacht
And rather ducal
country cot
That all seemed surely
mine by Spring,
Goodbye, goodbye to
everything!
Sources:
Daily Life in the United States, 1920-1940 by David E. Kyvig
The 1920s by Kathleen Drowne and Patrick Huber
