The stock market boom (AQA GCSE History): Revision Notes
The stock market boom
The stock market became one of the primary ways Americans generated wealth during the economic boom of the 1920s. This period saw unprecedented growth in share trading and investment, fundamentally changing how ordinary people participated in the economy.
How the stock market operated
The American stock market system worked through a partnership between businesses and investors. When companies needed capital to expand their operations, they would seek investment from the public. In exchange for providing this funding, investors received ownership stakes in these businesses, making them shareholders.
These shareholders earned money through dividends - their portion of the company's annual profits distributed among all owners. The beauty of this system was that successful companies with growing profits became increasingly valuable, making their shares worth more money. Shareholders could then sell their ownership stakes for more than they originally paid, generating significant profits.
The stock market system created a mutually beneficial relationship: companies received the capital they needed to grow, while investors gained the opportunity to share in the profits of successful businesses.
The heart of this trading activity was the stock exchange in New York, where shares (also known as stocks) were bought and sold daily. This marketplace allowed investors to trade their ownership stakes in companies whenever they wished.
The spectacular growth of share trading
During the 1920s, purchasing shares became extraordinarily popular among Americans from all walks of life. Stock prices climbed steadily upward, and it seemed as though anyone could become wealthy simply by investing in the right companies. This wasn't limited to wealthy businesspeople - millions of ordinary Americans joined the rush to buy shares, convinced they could make easy money from rising share values.
The excitement around stock trading led to a particularly risky practice called buying on the margin. This involved investors borrowing money to purchase shares, typically paying only a 10% deposit of the total cost. Their plan was to sell the shares for a profit and repay the loan with interest, keeping the remaining gains.
The Danger of Margin Buying
While buying on the margin could multiply profits when share prices rose, it also dramatically increased the potential for devastating losses. If share prices fell, investors still owed the full amount of their loans, even if their shares were now worth less than what they had borrowed.
Government policies that fuelled the boom
The Republican administrations during this period - Warren G. Harding (1921-1923), Calvin Coolidge (1923-1929), and Herbert Hoover (1929-1933) - all embraced a laissez-faire economic philosophy. They believed government should minimise interference in business operations, allowing free markets to create prosperity.
Laissez-faire is a French term meaning "let it be" or "leave it alone." This economic philosophy advocates for minimal government intervention in business and market activities.
This approach manifested in several key policies:
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Low taxation: The government kept taxes as minimal as possible, enabling businesses to retain more profits for expansion and giving ordinary citizens extra money to spend or invest.
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Easy credit access: Authorities made borrowing money simpler and more affordable, encouraging both business investment and consumer spending.
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Relaxed lending rules: Banks were permitted to lend money more freely, with the American public borrowing a staggering $4 billion during this period. Much of this borrowed money flowed directly into share purchases.
The absence of market regulation
The government's laissez-faire approach extended to stock market oversight, creating an environment with virtually no controls or restrictions. Anyone could establish a company and begin selling shares to the public, regardless of whether the business had genuine value or prospects.
Some companies operated purely as speculation vehicles - they produced nothing tangible but simply bought and sold shares in other companies. Many of these businesses lacked any real assets or fixed value, yet their share prices continued climbing simply because demand remained high.
The Risk of Unregulated Markets
The complete lack of government regulation in the stock market created a dangerous situation. Despite rising prices and increasing speculation, authorities made no attempt to establish rules or oversight mechanisms to protect investors or ensure market stability. This lack of oversight would prove catastrophic when the market eventually collapsed.
Timeline of key events
- 1921: Warren G. Harding becomes president, begins laissez-faire policies
- 1923: Calvin Coolidge assumes presidency, continues hands-off approach
- 1920s: Stock prices rise consistently throughout the decade
- 1920s: American companies achieve record profits, boosting share values
- 1920s: Millions of ordinary Americans begin buying shares
- 1929: Herbert Hoover becomes president
- Late 1920s: Buying on margin becomes widespread practice
Key Points to Remember:
- Shareholders owned pieces of businesses and received dividends from company profits
- Buying on the margin allowed people to purchase shares with just 10% down payment, using borrowed money for the rest
- Government laissez-faire policies kept taxes low, made credit easy, and avoided market regulation
- Republican presidents from 1921-1933 (Harding, Coolidge, Hoover) all supported minimal government interference
- $4 billion was borrowed by Americans during this period, much of it invested in shares