The “Gilded Age,” also referred to as the “Roaring Twenties” expanded the United States’ economy so much that the average family income practically doubled. During the twenties, the unemployment rate was low and the economy felt stable, but due to unsound financial practices of the time, the economy was heading toward ruin. Investing in the stock market was a trend at this time accessible to everyone, from the wealthy to the middle class to businesses and companies all over the country. Many more Americans than before were enjoying upgrading their lifestyles, and investing their money was a step in that direction growing in popularity every day.
The stock market was overbought, overused, with many people investing blind, without understanding what they were getting into or how to invest wisely. As the stock market began to decline, a troubling number of people were excessively buying stock on margin to try to keep their investments afloat, but margin trading is dangerous even when the market is in good shape. To buy on margin, investors borrow most of the money needed to trade, hoping to make it back so that they can repay that debt and then end up with a small profit. At this time, margin trading wasn’t regulated to prevent outcomes like Black Tuesday, and everyone borrowed a lot of money from banks to put into the stock market. But when the stock market only grew much worse, plummeting, and then completely crashing, suddenly everyone’s investments were gone. Their stock wasn’t worth anything, losing all of the money that they had invested, and then to compound this problem, the investors were also drowning in debt.
The repercussions of the reckless margin investing were like shock waves going through the entire nation. When investors were unable to pay back their loans, their finances were ruined, but so was everyone else’s. We may not realize it, but in many ways, we are all connected. When the stock market and investors lost everything, banks did too. So much money had been loaned out for margin trading that many banks had to declare bankruptcy. Additionally, when companies lost their investments, millions of employees who had not personally invested were affected just as strongly because as the companies failed and went bankrupt, they lost their jobs.
Many factors exacerbated the national crisis, making the thirties a truly memorable time for the United States. For example, extreme drought conditions and the lowering of prices paid for crops crippled farmers all across the agricultural states. More on that next time.