BLACK THURSDAY

BLACK THURSDAY

We remember that the allied powers won the World War - I and USA was a part of the allied powers. After World War - I there was optimism in the US economy and it was all bullish. The industries grew and there was a huge demand for white goods. People were buying more and more.

It was because of the policy of USA which was “Buy now pay later” that has put a large chunk of disposable income in the hands of consumers. Since World War 1, the USA government has raised a lot of money from the citizens of USA through bonds. For reference (if you have watched the movie “Captain America-The First Avenger” in that when Steve got his powers and the colonel Chester Phillips didn’t want him to fight in the war so he started doing stage shows, he was basically trying to popularize and sell the US Bonds). As the US bonds were highly liquid and also earned a lot of interest income for the consumers, the consumers were in a habit of buying them.

Since the war was over the companies also started issuing shares and raised money. The optimism in stocks increased and now the people who knew nothing about the stock market also started investing in stocks as they wanted to live the “American Dream”.

In those days the people only needed to invest roughly 20% of the investment price and the rest of the investment money was given as a loan to them by the stock broking firms, in layman terms if somebody wanted to invest $100000 than he just need to put in roughly $20000 and the rest $75000 will be given as a loan to him by stock broking companies. So, people started investing huge money. It was like the financial derivative trading of that time and it was called buying on margin.

We all understand that there is a regulating authority which regulates stock market, in India it is SEBI (Securities and Exchange Board of India) and in USA it is called Securities and Exchange Commission (SEC) and in those times there was no stock market regulator or SEC in USA.  During that phase an incident occurred where Joseph Kennedy spoke with a shoe shining boy and got to know that the boy knew about stocks as much as he did, so he understood that it's time for him to leave the stock market.

The stocks became highly overvalued. The crash happened on 26th of October also known as Black Thursday. And to revive it the leading bankers with the VP and chairman of the NYSE came up to put together a pool of 250 million dollars to revive a key list of stocks and bought those stock at a very high price to induce back confidence.

Because some stocks went down on Thursday the people who owned it, suffered losses, since they bought the stocks on margin and the price went down, then they were supposed to infuse more cash. And it was difficult for people to do so, or else their rest of the stocks will be sold by the brokers and that's why on Monday, stock market went down even further. Even the prices of some of the biggest American companies like General Motors went down to a great extent.

As stock prices went down and lot of companies also suffered losses, lots of people lost jobs, their only hope for spending being their savings in banks. And since huge number of people started withdrawing money from the banks simultaneously, banks started suffering cash crunch and because of this a time came when people stopped showing faith in banks. They tried to withdraw all their savings from banks and banks failed. The whole financial system of USA became unstable. Companies also got shut down because of lack of short-term credit availability with bank.

Resolution - Franklin D. Roosevelt took charge as the new president of USA. He restored confidence by signing the Securities Exchange Act, which created the (SEC) as a regulator to stock market. He also restored the people’s faith in banking by insuring all the deposits in the banks. In 1970-80 optimism came back and markets got fully recovered. And USA got ready for the next financial crisis. Guess which was that crisis?