Politics and Market Speculation

1. Politics and Market Speculation (TOK)

2. Politics • The new freedom of economy and lifestyle allowed politicians to focus on social and cultural issues • People wanted to end labor problems and racial strife, they wanted less immigration, conservative politics, and less government interference • Elections- 1924 republicans won by a landslide and again in 1928, republicans were given credit for the economic boom

3. Presidents in the 1920s • Woodrow Wilson (1913-1921) • Warren G. Harding (1921-1923) • Calvin Coolidge (1923-1929) • Herbert Hoover (1929-1933)

4. Key Government Politics • April 29, 1926- the United States and France reached an agreement about World War I payments • March 28, 1929- President Hoover created the SOCAL Act, allowing 16 oil wells to be opened in Bahrain • June 15 1929-President Hoover passes the Agricultural Marketing Act of 1929(TOK) establishing the Federal Farm Board • Intended to stop the downward spiral of crop prices by buying crop surpluses and by lending money to farm organizations • Money was loaned out to the farmers in order to buy seed and food for their livestock • The Federal Farm Board's purchase of surplus could not keep up with the production because farmers realized that they could just sell the government their crops, they boosted production

5. Social issues • Prohibition- liberals and non-obeying leaders • Isolationism- desire to keep other countries distant, people had an xenophobic fear especially in rural where the KKK was active • Communism- people were hostile especially after the Red Scare • Ku Klux Klan- white supremacy and nationalism, no immigration

6. The Dawes Plan • Origin- a treaty enacted in September of 1924 • Purpose- to allow the Triple Entente to collect war reparation debts from Germany (TOK) • Value- gives factual documentation as to what the world was expecting from Germany as far as war reparations • Limitation- it was written without concern to Germany's livelihood and therefore fails to encapsulate the actual situation in Germany

7. Proposed by the Dawes Committee in 1924 • Relied on money lent to Germany by a consortium of American investment bankers • Went into effect in September 1924 • In the mid-twenties German business rebound, Germany was able to make prompt payments • Since this plan solved an international crisis, Dawes won a Nobel Peace Prize in 1925 • Unfortunately the plan did not work and was replaced, in 1929, by the Young Plan • Allies purposely set payments at to high (TOK)

8. Background • Germany was required to pay twenty billion gold marks, then in 1921 told to pay 132 billion gold marks • 1923- Germany defaulted on their ability to give more coal, timber, and steel • French and Belgian troops went into Germany to occupy the Ruhr River Valley, • This infuriated Germans, they tried to resist, which led to inflation • Hyper inflation in Germany • Allied occupation of the Ruhr • Crazy amount of demanded money • Just got out of a war

9. Main Points • The Ruhr area would be evacuated by Allied troops • Reparation payments begin at one billion for the first year, increasing annually to two and a half billion after five years • The Reichsbank would be recognized under Allied supervision • Sources for reparation money would include transportation, excise, and custom taxes • The total loan from the Unites states would equal 800 million dollars

10. Young Plan • Program for settling German reparation debts • Written in 1929 and enacted at second Hague Conference in January of 1930 • Committee head- Owen D Young

11. Reduced payments to 112 billion gold marks and divided annual payment into two • Unconditional part- one third of the sum • Postpone able part- two thirds that, if not paid, would gain interest and be and financed by American investment banks • Called for international bank of settlements to handle reparations • The Bank for International Settlements was established • International organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks" (www.bis.org) • Since it is an international institution, it is not accountable to any single national government

12. And then… • The Crash of 1929 occurred and the American banking system was forced to recall their money from Europe and cancel credits which had made the Young Plan possible • The downfall in imports and exports affected the entire world • 1933- two thirds of all world trade was gone • German unemployment increased to33.7 percent

13. Rise of Materialism • Materialism- tendency to consider material possessions and physical comfort as more important than other values • 1920s- culture grew from the enormous material abundance • Increased wages for middle class • Fabulous profits for investors • Machines transform conditions of everyday life

14. Culture became a commodity • Radio and television become huge- everyone could hear and see the same things, this led to advertising as crucial industry, which led to a mass demand for products of mass consumption • People saw no need to save, companies allowed payment in installment plans • Borrowers overextend

15. Market Leverage • Margin buying- the buying of securities with cash borrowed from a broker using other securities as collateral • Net value- the difference between the value of the securities and the loan equals the amount of one’s cash used • Margin requirement was incredibly loose • Many investors received margin calls, they had to deliver more money to their brokers or their shares would be sold • People could not afford to pay, so their shares were sold which lead to more market declines, which lead to more margin calls (TOK)

16. Role of Income Distribution • “The distribution of income lies at the heart of an enduring issue in political economy—the extent to which government should redistribute income from those with more income to those with less.” • Should the government redistribute income? (TOK) • No one person distributes income, it is done by decisions in people make in work, savings, and investment

17. Most of the money in the United States was distributed between a few really rich people, this unbalance of wealth led to an unstable economy • Increased manufacturing output • Production costs quickly falling, wages slowly rising, and prices remaining constant- profit went to the bosses

18. Vocabulary • Dow Jones Industrial Average- indicator of stock market prices, based on 30 blue-chip stocks (stock market index) • Point system- weighted average price of 30 blue-chip stocks • Speculation- practice of engaging in risky finance transactions in an attempt to profit from short or medium-term fluctuations in the mark value of a tradable good • Market value- whatever people will pay

19. Basics of the Stock Market • Companies sell stocks in order to raise money • When one owns a share of stock, they have claim to the company • As company earnings go up, investors become willing to pay more for a share • As the economy grows, cooperate earnings grow, and stock prices go up • The stock market grows at an average of ten percent per year • The stock market is a long-term investment (TOK) • People liked the stock market because if a company failed, one person, founder, investor, or stockholder wouldn’t loose it all.

20. Crash of 1929 • Beginning in late October, most devastating in American history • Signified the beginning of the ten year Great Depression (TOK) • The Great Depression affected all Western industrialized countries (TOK) • Post war optimism brought floods of people moving from rural areas into the city in the hope to find a more prosperous life in growing expansion of industrial sector • Neglect in the agriculture industry, financial despair among farmers (TOK)

21. People thought the stock market would always go up • Steel product, construction, and car sales were down • Consumers were building enormous debt because credit was so easy • Market had been on a nine year run, the Dow increased by ten times reaching a peak of 381.17 on September third • September 18th- share prices in the New York Stock Exchange fell • The Market was unstable, switching between ridiculous amounts of selling and trading to rising prices and recovery

22. “Black Days” • October 24- Black Thursday, the stock market lost eleven percent of its value • Wall Street Bankers meet to find a solution • Richard Whitney acted on their behalf • October 28- Black Monday, more investors wanted out (TOK), lead to another slide and a record loss of thirteen percent

23. October 29- Black Tuesday, sixteen million shares were traded and the Dow went down twelve percent more • William C. Durant, the Rockefeller family, and other financial giants bought enormous amounts of stock to demonstrate their confidence in the stock market • The market lost over thirty billion dollars in two days

24. October 30, the stock market regained twelve percent • November 13, the stock market hit interim bottom • The stock market would not return to the September third peak until November twenty-third, 1954

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