The Stock Market in the 1920s: Boom and Bust

This section looks at the stock market boom and Wall Street Crash that occurred during the 1920’s. During the 1920s, the stock market became a symbol of the economic boom in the United States. The rapid rise in share prices and the increasing popularity of stock market investments created a sense of optimism that seemed to suggest endless prosperity. However, this growing confidence and speculative behaviour ultimately set the stage for the dramatic collapse of the stock market at the end of the decade.

The Rise of Confidence in the Economy

When Herbert Hoover became president in 1929, he was full of optimism for the future of America. He famously declared:

"I have no fears for the future of our country… It is bright with hope."

The economic boom during the 1920s created widespread optimism. The US economy appeared to be on a solid footing, with businesses thriving, workers’ wages rising, and economic policies under the Republican administration contributing to strong growth. The sense of prosperity led many to believe that this economic success would continue indefinitely.

This confidence in the economy was reflected in the rapid growth of the stock market, where many people saw an opportunity to increase their wealth by buying shares in thriving companies.

The Stock Exchange: A New Era of Investment

The New York Stock Exchange (NYSE), located on Wall Street in New York City, was the centre of the American stock market. A stock exchange is a marketplace where investors can buy and sell shares—small parts of a company that represent ownership and a share in its profits. In the 1920s, the stock market became increasingly popular as an investment opportunity. As businesses expanded and profits soared, many investors were eager to buy shares in companies that were seen as successful.

• By 1927, the number of shares being traded had risen to an astonishing 577 million. This was a significant increase from previous years and reflected the growing excitement surrounding the market. People from various walks of life, not just the wealthy, were getting involved in the stock market, believing that investing in shares would bring great returns.

Buying on the Margin: A Risky Strategy

One of the key factors that made the stock market more accessible to the average person was the practice of buying on the margin. This practice allowed investors to purchase shares with only a small down payment, often around 10 per cent of the value of the shares, while borrowing the remaining amount from a broker or lender. Essentially, investors were using credit to fund their investments.

• For example, if a share was worth $1,000, an investor would only need to pay $100 upfront, borrowing the remaining $900. They could then sell the shares when the price rose and pay off the loan, pocketing the difference as profit. This method of borrowing to invest was particularly attractive during the 1920s, as many believed the prices of shares would continue to rise, making it easy to repay loans with the profits from selling the shares.
• This speculative behaviour created a bubble in the stock market, as more and more people bought shares using borrowed money, pushing up share prices further. People were not investing based on the actual value or earnings of companies, but on the assumption that share prices would continue to increase. This kind of speculation, where people were essentially gambling on the market’s rise, helped to drive prices higher and higher.

The Impact of Speculation on the Stock Market

The growing practice of speculation; buying shares with the hope that their price would increase soon had a huge impact on the stock market. As more investors bought shares in the hope of making quick profits, demand for stocks surged. This led to an inflated stock market, where the prices of shares became disconnected from the true value of the companies they represented.

• As share prices rose, more people became attracted to the idea of making easy money through the stock market. This created a self-fulfilling cycle: rising share prices encouraged more speculation, which led to even higher prices. Investors felt confident that the market would continue to grow, and they were eager to get in on the action.
• The fact that so many people were buying shares using borrowed money (buying on the margin) meant that they were essentially betting on the market continuing to rise. If share prices suddenly started to fall, however, many people would be unable to repay the loans they had taken out to buy the shares. This risky practice helped to create an unstable market, one that was vulnerable to a sharp correction.

The Growing Inequality: Speculation vs. Reality

While many people were making large profits from speculating in the stock market, others were left out of the excitement. The prosperity of the 1920s was not shared equally across American society. As the stock market boomed, the wealth of the richest Americans soared, while much of the rest of the population, particularly farmers and industrial workers, continued to struggle. The rise of the stock market was not a reflection of overall economic health; it was largely driven by speculation, rather than long-term investments in productive industries.

Moreover, the average American could increasingly be seen as viewing the stock market as an easy way to make money. The idea that anyone could participate and get rich by buying shares—regardless of their understanding of the companies involved—became a dangerous belief. This created widespread overconfidence and a distorted view of how the economy worked.

The Crash: The End of the Boom

Despite the soaring optimism and widespread participation in the stock market, the rapid rise in stock prices could not last forever. In the late 1920s, the bubble in the stock market began to show signs of strain. Speculation reached unsustainable levels, and investors became more cautious. In October 1929, panic set in, and the stock market crashed. This event, known as the Wall Street Crash, marked the beginning of the Great Depression.

The crash was caused by a combination of factors, including over-speculation, excessive borrowing, and a general sense of panic among investors. As share prices began to fall, many investors rushed to sell their shares, creating a domino effect that led to even more dramatic declines. Those who had bought shares on the margin were left with massive debts that they could not repay, further deepening the crisis.

The stock market in the 1920s was both a symbol of America’s economic prosperity and a reflection of the dangers of speculative investment. While many Americans made fortunes from buying shares and the market appeared to be thriving, the overconfidence and reckless practices of buying on credit led to an eventual collapse. The optimism of the 1920s was not based on sustainable economic growth, and when the stock market crashed in 1929, it triggered a chain of events that would plunge the United States into the Great Depression. The stock market boom, driven by speculation and overconfidence, demonstrated the risks of relying on short-term profits rather than long-term stability.