5 June 2015
The Rise and Fall of the Roaring 20s
The period referred to as the “Roaring 20’s” was created by a unique set of circumstances in American History. The euphoria after World War I, the economy starting to boom because Americans could see progress and the short sightedness that stocks had a guaranteed return.
The 1920’s was a decade when America focused on itself. This was really the beginning of the modernization of America as we know it today. The sense of joy after the end of the war to end all wars (World War 1) helped create a nationwide atmosphere of extreme optimism. Americans looked forward to the future with a greater sense of well being, individualism, and overwhelming confidence in the country’s economic future.
The decade was jump started as industries quickly transitioned from wartime to peacetime production. A primary example was the Ford Motor Company. It began to mass produce automobiles via an assembly line that was previously used to build military equipment. Henry Ford paid workers $5 day when most were earning $2 a day. More cars meant that there was an increased need for construction of all-weather roads. Increased traffic on the roads required more gas stations, which lead to greater need for restaurants, hotels and other retail shops. Americans, wanting to keep up with their neighbors, bought new appliances, lighting and heating for their homes and thanks to America’s appetite for alcohol, illegal bootlegging was one of the most notorious endeavors that grew uncontrollably. Things were booming and Americans enjoyed this new way of life.
To say that the 1920’s stock market experienced a boom is stating the obvious. It was like a new gold rush. Stocks more than quadrupled in value and the average earning per share rose by 400 percent between 1923 and 19291. Those who warned about the value increasing so rapidly were often called doom-mongers2. Many investors became convinced that stocks were a sure thing and borrowed heavily to invest more money in the market. Some American’s buying on credit didn’t realize that buying a share of a company did not guarantee a return. But the Twenties was a decade where people had money to spend and weren’t afraid to spend it. No longer was the stock market for long-term investment. Rather the stock market had become a place where everyday people truly believed that they could become rich.
With all of this purchasing US companies boomed and so did the company shares on the stock market. Prices of the shares went up, year after year. Some bought shares in hopes of making easy money. Some borrowed money to buy shares and others bought on the margin (paying only 10 percent of the value) hoping to get rich quick and pay the full price at a later date. Buying stock was the thing to do in the 1920s. It was considered modern, and only smart, sophisticated people participated.
The market got caught up in a speculative bubble. The problem was that stock prices became separated from the real earning of a share price and overall company. Prices were not being driven by economic fundamentals but by the optimism of the investors. To make matters worse, initially there were no controls on buying and selling shares. Company shares could be purchased on the street. There were no controls on setting up companies and while many people were putting their entire life savings and what they could borrow into the stock market, fraudsters were selling shares to companies that manufactured nothing and only existed to buy and sell shares. Companies sold