"The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it."
~John Steinbeck
Depression is an event that doesn't just snatch your job, it gulps in your food, makes your children cry for basic needs, drowns your confidence, and blurs every kind of hope that might be visible. Unfortunately, we've experienced one such depression, the indelible Great Depression of 1929.
Wednesday 23rd October 1929, share prices plummeted in the New York Stock Exchange. People were astonished, in the last 5 years the stock prices had always gone up. What caused this change? Was it really so big to cause depression? If stocks caused depression then why are people still interested in investing?
It all started after World War 1, the United States of America had emerged victorious and considered itself invincible. People believed that they had entered into a new era of boundless prosperity and there was nothing to stop them. To strengthen their beliefs further, electrification took place, new inventions were made, including airplanes, radios, automobiles, etc., and luxurious goods started becoming necessities for the common public. While Americans were busy playing the music, the world was already dancing to America's tune.
During these glorious times only, a concept was introduced, it was of installment buying. People could now buy items and pay money later in installments, this allowed them to buy big-ticket consumer items without worrying about the payment. This raised consumer confidence and demand started increasing at a rate never seen before. It was all like a dream, in which people believed that being rich was their birthright.
Now moving to another dimension of this thriving era, since World War 1, the government of the USA was issuing liberty bonds. People became investors for the first time, at first they were a bit reluctant but when the government assured them about the high returns that they could expect, they started purchasing these bonds and earning interest. At this time, there was another group of people waiting to capture this huge chunk of the optimistic public, this group was of Wall Street bankers.
Earlier, Wall Street was known for an elite group of people who conducted business among themselves but as the demand of the public changed, there was one man in the group who didn't wait to take advantage of this behaviour change, and he was Charles Mitchell, president of National City Bank. he thought if people were so excited to invest in liberty bond so why not take advantage of this investing culture that has been developed. He concluded that they just had to introduce lucrative financial products in the market and people would be willing to buy them. So, they came up with corporate bonds and common shares, Mitchell was an excellent salesman, and it didn't take long for people to fall in love with these products.
Now, the general public was under its spell, they had stocks in breakfast and stocks in dinner. Everyone started playing with shares, from photographers to shoeshine boy, from engineers to drivers. New technology made it even easier, ticker tape machines were available everywhere. Stocks were considered to be safe, reliable, and respectable. If you saw everyone in your affinity investing and taking home huge profits, you would be tempted to do that as well, a similar was the case here. Stocks were considered a new way to make money and no one wanted to miss the show. To make this even more exciting, people started borrowing to invest. They could now put a part of the money in stocks and own them, brokers were ready to put the other half. This got even more people to the market, people could now own a $1 stock by just paying one-tenth of the amount, the rest was paid by their broker, this was known as buying on margin.
Slowly and gradually the elites of Wall Street who knew the business started making profits illegally. They used to get together, buy shares of a particular company, hype up its prices, and then dump the shares as soon as the public bought them, taking all the profits and leaving losses for the public. During those times, the stock market was a big casino, it was neither fair nor democratic. Some of these elites started seeing signs of a collapse and started warning others about the possibility of a depression. But when everyone's enjoying, no one stops to see an approaching disaster.
On 29th October 1929, which is commonly known as the 'Black Thursday', the crash finally began. It was known that this kind of unstable foundation won't last for long for none of them knew that the fall would be so dramatic. People were stunned as the prices went down and down and down. It seemed like there was no end to this decrease, to get a better picture of the disaster, thousands of people had gathered near NYSE, unable to understand what led to this. But the scene was quite calm inside the exchange, as Winston Churchill later described, it was a slow-motion picture of a disturbed ant heap offering each other enormous blocks of securities, he didn't know that he would lose a fortune this day. Later that day, an afternoon meeting was held at JP Morgan Bank, where all the people key players got together and decided to inject 250 million dollars into the market. It worked! Situations became better afterwards and they thought that the worst was over, without naively realizing that it was just the beginning.
On 28th October, Monday, the fall was even steeper. People were looking grimly at each other, unable to decipher how to control this situation. This time there was no afternoon meeting, even the elites had realized that no amount of money would save them from this catastrophe. People couldn't pay back their loans, in return brokers panicked and started selling their shares in case of non-repayment. Also, banks were not insured at that time, and if they made wrong decisions then they had to bear the consequences. This caused a domino effect, the shares of companies were sold; the general public, banks, and companies, all lost money; companies cut down the number of employees, and demand decreased even further. It was a vicious cycle with no escape, even if you didn't own a dollar's worth of stock at that time, you weren't safe from getting affected. There was hopelessness and despair in the air and no matter what you do, you can't stop breathing in that air.
The government was quiet earlier, they didn't have the courage to go against the businessmen in 'Capitalist America'. When Franklin D. Roosevelt came to power, his first task was to return people's confidence, banks were insured, strict government laws were imposed on the stock exchange, and the Securities and Exchange Commission came into existence. An investigation was carried out that took more than 3 years to find exactly what had happened.
Not only America, this mistake engulfed the whole world. The Great Depression affected all the countries socially, economically, and politically. It later led to World War 2, in many countries, people lost trust in the free market economy and demanded an authoritarian government. But this whole event led to one conclusion, that history repeats itself, people don't stop themselves from making the same mistakes, and when it comes to money, people prefer the path of greed and folly rather than that of reason and self-control.