In this, the final article of a 4 part series examining the history of American financial crises, we'll examine the mother of all financial busts, the Great Depression. In part 3, we detailed the boom of the Roaring Twenties and the introduction of consumer credit, which caused American's to buy many more luxuries than they could actually afford, ultimately helping lead America into the greatest single financial crisis that it has ever known..
Ready credit also made it easy for speculators who were out to make a quick buck. Real Estate suddenly became an attractive and luring potential. Many believed that the value of land would continue to grow and that whoever would buy property would acquire a large profit when it was sold. The allure of this speculation and the availability of fast credit fanned the flames of the "get rich quick" mentality, enabling these speculators to borrow whatever they needed to put into motion this illusion. Many speculators were drawn to ventures in Florida real estate where the population more than doubled from 1920-1925. They worked quickly and furiously as they built homes, resorts and businesses all over the coastal areas of Southern Florida. Word was getting around quick, and people had money in their pockets to burn. The more they built, the greater the population grew as thousands kept flocking to the resorts and the warmth of sunny Florida. It was an immense multitude growing every minute. Meanwhile, Florida's bureaucrats and bankers assumed a nonchalant position and were quite pleased, enjoying every minute of it. Life was wonderful. They watched their coffers fill up with all sorts of business delights. The success of some of these speculators would recruit others to do the same. The market continued this dance, not realizing that it would soon undergo significant change. The roller coaster ride enjoyably rushes upward toward the peak, then it suddenly plummets into a devastating, brutally quick downward economic plunge.
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According to an article published in the Sun-Sentinel, reference is made to "the Big Blow" of 1926, the most destructive hurricane ever to hit Fort Lauderdale, Dania, Hollywood, Hallandale and most viciously of all, Miami, at least until Hurricane Andrew struck in 1992. As a result of this storm's 150 mile per hour winds, which caused massive destruction and claimed at least 1000 lives, the wild real estate boom collapsed. Though they were previously warned that three tropical storms were building in the Caribbean, the warning fell on deaf ears as they were not familiar with the damage that a massive hurricane could do. Most of the 200,000 people living in the storm's path, lured by the easy money of the property boom, were devastated by the experience. Those that were millionaires the year before became paupers after the ruination caused by the storm and the allure of instant riches.The Federal Reserve System began tightening credit by making loans more expensive. One possible action considered would be to increase the rate of interest at which the banks borrowed from the Federal Reserve. This was not a smart idea, with low-interest rates, Americans could loan money to Europe which they needed badly for economic rehabilitation and development, but they wouldn't allow Europeans to sell them goods to repay the loans, which defaulted in many cases. Why make a loan to an entity that wouldn't be able to pay it back?
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"To supply foreign countries with the dollars needed to purchase American exports, the United States government decided, not sensibly to lower tariffs, but instead to promote cheap money at home, thus stimulating foreign borrowing and checking the gold inflow from abroad."
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However, this would not have affected those that were too far into speculation, willing to borrow at exorbitant rates just enough to keep their whistles wet and to feed the greed that begot their business ventures. They didn't rely on foreign trade and didn't realize that the economy they depended on required the support of foreign trade to stay afloat. These short-sighted people turned to investing in the dangerous, turbulent markets.
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The amount of sales on the New York Stock Exchange soared from 236 million shares in 1923 to about 577 million in 1927. Then in 1928 it went up to 1,125 million.
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To be continued: Part 4 (b)
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To contact: miriammedina@earthlink.net
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