Crash of '29: where did all the money go?

Factual Questions
21

[QUOTE=ralph124c]
So, the stock market is a zero-sum game-for everyone that loses, somebody wins.
[/QUOTE]

Except, as has been pointed out in this thread, that’s not always the case, and it wasn’t the case with the '29 crash and the depression that followed. Money didn’t just change hands, a lot of it disappeared. And even the “big money people” that you mentioned, sufferred. It’s just that if you were somebody like John Rockefeller, Jr., you could absorb the loss a lot better than if you were an average person.

22

[QUOTE=CurtC]
I’m sorry David Simmons, I don’t understand. Corn may have been 15 cents in 1933, and 50 cents in 1935, but that doesn’t mean that corn (being perishable) would be a good investment in 1933, would it?

I’ve made all my money in cardboard. I bought it when it was 14 cents a ton. And you know what it is now - 16 cents! And I bought three tons of it, so that’s… well, you can figure it out. I got a special deal with my broker so that I only had to keep two tons of it at my house.

(stolen directly from Steve Martin)
[/QUOTE]
In addition to the futures market mentioned by Captain Amazing, corn isn’t really all that perishable. In a corn storage crib it can easily be kept for a couple of years and all the buyer would have to pay the farmer would be a relatively small storage fee. Most farmers of the day would have been happy to store 3-4000 bushels of corn for peanuts. During the depths of the 1930’s depression money was exceedingly valuable and comodities weren’t so a couple hundred bucks would go along way toward storing the corn for a year. If you bought 4000 bushels for .15 a bushell and paid $200 a year for storage the corn cost you 25 cents a bushel. You’ve doubled you money in just two years. Even if the storage cost doubles you have made 18% which is not bad.

23

The stock market is NOT a zero-sum game. Take for instance, a company like Microsoft. If you bought Microsoft stock in 1985 and held onto it, you’d be a millionare now. So who did you take the money from? Nobody. The money you made as a Microsoft investor was created out of thin air by a bunch of people figuring out clever ways to turn zeros into ones and ones into zeros.

But that value created out of thin air can go back into thin air…someone writes a virus and a valuable computer turns into a valueless doorstop. Or a negative value spambot. A valuable side of beef becomes a valueless hunk of rotting meat, or a negative value case of E. coli tainted hamburger.

So money is not a zero-sum game. If it were, every disaster would inevitably mean someone would earn the exact amount of money equivalent to the goods destroyed in the disaster. But we know that’s not the case, as shown by the example of the $50,000 Ming vase that turns into worthless pottery shards. If you smash your Ming vase is $50,000 in value magically created somehow to replace the value of that vase? Of course not. The total amount of the world’s total wealth has just dropped by $50,000.

Likewise a valuable company that produces products people want and has jobs that employ lots of people can be destroyed in an economic downturn, and when you lose your job at that company it doesn’t follow that someone else somewhere somehow gets a job because you lost your job. In fact, other people are MORE likely to lose their jobs due to your job loss, not less.

24

[QUOTE=Lemur866]
The stock market is NOT a zero-sum game. Take for instance, a company like Microsoft. If you bought Microsoft stock in 1985 and held onto it, you’d be a millionare now. So who did you take the money from? Nobody. The money you made as a Microsoft investor was created out of thin air by a bunch of people figuring out clever ways to turn zeros into ones and ones into zeros.

But that value created out of thin air can go back into thin air…someone writes a virus and a valuable computer turns into a valueless doorstop. Or a negative value spambot. A valuable side of beef becomes a valueless hunk of rotting meat, or a negative value case of E. coli tainted hamburger.

So money is not a zero-sum game. If it were, every disaster would inevitably mean someone would earn the exact amount of money equivalent to the goods destroyed in the disaster. But we know that’s not the case, as shown by the example of the $50,000 Ming vase that turns into worthless pottery shards. If you smash your Ming vase is $50,000 in value magically created somehow to replace the value of that vase? Of course not. The total amount of the world’s total wealth has just dropped by $50,000.

Likewise a valuable company that produces products people want and has jobs that employ lots of people can be destroyed in an economic downturn, and when you lose your job at that company it doesn’t follow that someone else somewhere somehow gets a job because you lost your job. In fact, other people are MORE likely to lose their jobs due to your job loss, not less.
[/QUOTE]

You are confusing stock valuations with stock transactions. of course, you gain wealth when Microsoft goes up-and lose when it drops. the point is, the value is established when you sell it. So, for every poor fool who bought Amazon at $112.00/share, some lucky winner made out. A good point to remember-the stock market “grows” in value when interest rates drop. this is because capital is mobile, and goes seeking a higher return. Just because MICROSOFT gets bid up (because interest rates drop) does not mean that MICROSOFT is any better at producing wealth-it just means that the market price for its stock has risen. The Joe kennedys of the world understood this-that is why they engineered run-ups in stocks-and promptly dumped their holdings once the price rose. The kennedy fortune consists largely of money swindled away from the small investors of this country, and the Kennedys made the mafia look like shmucks! :eek:

25

[QUOTE=Lemur866]
If you smash your Ming vase is $50,000 in value magically created somehow to replace the value of that vase? Of course not. The total amount of the world’s total wealth has just dropped by $50,000.
[/QUOTE]

I’m curious, in an ignorant sort of way, about this very point. I submit that in the case cited, the world’s total wealth wouldn’t drop by $50,000, and I would reason as follows: there are a finite number of Ming vases in the world, and with every restriction to supply – through loss, in this case – the value of the remaining ones goes up a little. You don’t get a perfect dollar-for-dollar offset, admitted. The aggregate effect may be less than the amount lost, but it could just as easily be more.

26

[QUOTE=ralph124c]
You are confusing stock valuations with stock transactions. of course, you gain wealth when Microsoft goes up-and lose when it drops. the point is, the value is established when you sell it. So, for every poor fool who bought Amazon at $112.00/share, some lucky winner made out.
[/quote]
Whether the stock market is a zero-sum game or not depends on how the game is played. If you’re trading future contracts, then it can be a zero-sum game, as long as your strategy is not to hold (but if you’re holding, you wouldn’t be buying futures, as it’s really inefficient way of doing business.)

[QUOTE=ralph124c]
A good point to remember-the stock market “grows” in value when interest rates drop. this is because capital is mobile, and goes seeking a higher return.
[/quote]
No, that’s not what “growing” or being “mobile” is about. Simply stated: Growth does happen in the stock market. Peope invest money into the market. Companies issueing shares are given capital for investment. In return, all those little shares give the owners some form of ownership. When the company creates profit (see coke example above supra), it returns profit to its shareholders, thus wealth is created.

When the interest rate drops, people will invest more money because money is cheaper to borrow. They won’t hold it in savings, because with low interest rates, the return won’t be as good. However, with stock markets returning at least 10% on average over the long term, people will invest money there. That is what is meant by mobility.

[QUOTE=ralph124c]
Just because MICROSOFT gets bid up (because interest rates drop) does not mean that MICROSOFT is any better at producing wealth-it just means that the market price for its stock has risen.
[/quote]
No, this means that investors see that MSFT is returning money to its shareholders, is profitable, is stable, adequately liquid, has a great outlook, or is a number of good things that investors like to see. At the same time, a stock can be undervalued, but when quarterly earnings come out and dividened shares are payed, then all that gets corrected.

[QUOTE=ralph124c]
The Joe kennedys of the world understood this-that is why they engineered run-ups in stocks-and promptly dumped their holdings once the price rose. The kennedy fortune consists largely of money swindled away from the small investors of this country, and the Kennedys made the mafia look like shmucks! :eek:
[/QUOTE]
This is illegal you know (well, at least it’s illegal depending on how you “make” people over-value a stock). If you think that this is how the stock market works, then I hope for your sake that you don’t invest in the market. If you do, then I feel so ever sorry for your portfolio managing company.

27

[QUOTE=ralph124c]
The Joe kennedys of the world understood this-that is why they engineered run-ups in stocks-and promptly dumped their holdings once the price rose. The kennedy fortune consists largely of money swindled away from the small investors of this country, and the Kennedys made the mafia look like shmucks! :eek:
[/QUOTE]

Well, Kennedy did engage in stock pools and insider trading and a lot of stuff that would be illegal today, but that doesn’t have very much to do with the Crash of '29, except insofar as the rather irrational exuberance in the late 20s made running up prices easier.

But Kennedy was largely out of the market in 29. having accurately predicted that it was about to collapse.

28

[QUOTE=kunilou]
But Smith was betting with money he didn’t have. The stock is now worth only 10 cents, but he still owes $9 for the first batch of stock, and $18 for the second batch. Smith is forced to use up his savings, sell his house and car for whatever he can get. If that still doesn’t cover everything, Smith goes bankrupt.

Smith can’t pay the broker. Therefore the broker can’t pay the investor who originally sold the stock to Smith (who wasn’t worried about getting HIS money as long as the stock prices kept rising. Once the stock crashed, he wasn’t interested in retrieving 10 cent stock. He wanted the $10 he agreed to sell the stock for.)

Since the broker guaranteed the sale, the broker is on the hook, as well as Smith. With Smith and the broker bankrupt, they can’t pay for their houses. The real estate market then goes belly up. They stops buying things. The retail market, then the wholesale market, then the manufacturers, then the raw material suppliers go bankrupt.

What about the guy who originally sold the stock to Smith for $10? He never got his money, so he goes bankrupt, as well.

Multiply this by a few million investors and you get the general drift.
[/quote]
Exactly.

And to get into a bit more detail, all those houses that people lived in and paid good money for, are now nearly worthless, because all those millions of bankrupt people don’t have the money or credit to buy them after they’ve been evicted from them. The bank is holding a bunch of worthless houses instead of money owed it. Which means the bank’s in trouble. If they go under, then the businesses that banked with them lose their money.

And it goes from there like kunilou said, in this cascading collapse of consumers not having enough money to buy stuff, employers not making enough money to pay people to work for them, and the value of goods and services collapsing because too many people can’t afford them anymore.

That’s definitely one I’ll have to pick up, now that I’ve broken down and gotten Netflix.

29

[QUOTE=ralph124c]
So, for every poor fool who bought Amazon at $112.00/share, some lucky winner made out.
[/QUOTE]

Not really, if they bought them from some poor schmuck who mortgaged their house at 5% to buy the stock at $110 per share, hung on to them for a few months in the hope of seeing them double in value, and then dumped them for a $2 gain (minus comissions) - they might have made a small gain, a small loss, or broken even.
Just because the underlying value of an item is 5c, it does not automatically follow that anyone selling it for $3 is coining it - you have to consider what they bought it for and what their transaction costs are. One of the characteristics of a bubble is that you see people forget all about true value and costs and apply the “All I have to do is buy it, wait a bit and sell it and I’ll be RICH!” business model. Whether it’s stocks, tulips or real estate, once a frenzy like that sets in a lot of people are going to get a lot poorer, and its reasonable to assume that a few people will get rich, but total wealth at the beginning will not necessarily equal total wealth at the end.
That’s without considering the number of people who give up productive jobs as carpenters, underwriters or undertakers to become tulip bulb traders or day traders or whatever, only to find their net earnings for the year turn out to be maybe $2 per hour, and all the business activity that does not take place because everyone is investing their capital in penny shares.

30

[QUOTE=slaphead]
Not really, if they bought them from some poor schmuck who mortgaged their house at 5% to buy the stock at $110 per share, hung on to them for a few months in the hope of seeing them double in value, and then dumped them for a $2 gain (minus comissions) - they might have made a small gain, a small loss, or broken even.
Just because the underlying value of an item is 5c, it does not automatically follow that anyone selling it for $3 is coining it - you have to consider what they bought it for and what their transaction costs are. One of the characteristics of a bubble is that you see people forget all about true value and costs and apply the “All I have to do is buy it, wait a bit and sell it and I’ll be RICH!” business model. Whether it’s stocks, tulips or real estate, once a frenzy like that sets in a lot of people are going to get a lot poorer, and its reasonable to assume that a few people will get rich, but total wealth at the beginning will not necessarily equal total wealth at the end.
That’s without considering the number of people who give up productive jobs as carpenters, underwriters or undertakers to become tulip bulb traders or day traders or whatever, only to find their net earnings for the year turn out to be maybe $2 per hour, and all the business activity that does not take place because everyone is investing their capital in penny shares.
[/QUOTE]
Once again, the (subsequent collapse) of the share price did NOTHING to affect the fact that money was neither created or destroyed. the fact is, the people who sell at the top get the money-their gain is exactly balanced by the losses of the subsequent owners. So, in 1929, a HUGE amount of cash was transferred to a small number of shareholders. Those lucky few entered the 1930s with a huge hoard of cash-and as the Depression wore on, they became richer and richer. take my late gradfather-in 1930, he purchased a house for $11,000-that house was built in 1924-for a cost of over $24,000! So the people who cashed out of the market in 1929 were the big winners-they got to buy up real estate for cheap, and became millionaires in many cases. :smiley:

31

But the guys who sold near the top didn’t neccesarily make a lot of money unless they bought at a previous bottom. If they bought high and sold high they didn’t make any money.

Thing is, under your theory for every dollar lost in the stock market crash somebody somewhere somehow made a dollar. But most people lost money. Sure, a few people made money, but their gains were not equivalent to everyone else’s losses.

So the guy who sold at the top got an amount of money equal to the amount lost by the guy who bought at the top. But most investors didn’t buy at the top, they bought at the middle and weren’t able to sell at the top. They couldn’t sell their stocks to some sap because by then the stocks were worthless. Those stocks represented fractional ownership of companies that were now bankrupt. When the company wasn’t bankrupt the stocks were valuable. When the company goes bankrupt the stock is worthless. And very few stockholders were able to unload the stocks when they were worth something, one day stockholders owned valuable assets the next day the assets were worthless.

The total value of the stock market dropped significantly. And the value didn’t drop because a few investors converted all that value into cash and removed it from the market (although this happened a little bit), the value vanished into thin air and nobody got it.

32

The disconnect here is, I think, that several are forgetting that mosy of the stocks were bought on margin. There won’t be a one for one equivalence in who won/who lost because 90% of the value was illusory to begin with. You only had to front $10 for $100 worth of stock. Once the bubble burst, all that “value” represented by the margin vanished. Money didn’t go anywhere, it was all the “owed money” that took the hit.

33

And even if they weren’t bought on margin, a lot of people had “paper wealth.”

We’ve seen that recently, big houses built by people in the 1990s. Mortgaged, but the qualifications came from the fact that they were turning over good profits in the stock market - not simply their salary and that they had significant assets in the market. They had enough wealth on paper to get a large loan. Stock market crashes and now there isn’t the wealth there to cash in to make up for the lost cashflow they were making on trading, and often market crashes come with recessions - job losses, business closings.

34

Couple of quick questions (by the way, I’m damn impressed with the way this has been explained – I’ve never been able to understand it as well as right now!)

  1. Is it now illegal to borrow money for the specific purpose of investing in stocks, etc? I’ve never tried, and never thought to ask my friendly neighborhood banker.

  2. Was the U.S. dollar actually still sound through the crash and the depression that followed?

35

[QUOTE=Sunrazor]

  1. Is it now illegal to borrow money for the specific purpose of investing in stocks, etc? I’ve never tried, and never thought to ask my friendly neighborhood banker.
    [/quote]
    Certainly, you can borrow money from a bank, or via your mortgage, and invest the money in stocks if you’re so inclined. When you show up at the broker, he won’t ask, “Is this your money, or did you borrow it?”

However, you’re now limited in how much stock you can buy on margin–that is, via a loan directly from the broker, collateralized by the stock itself. The requirements can be complicated, but in general, you have to put up at least 50% of the purchase price in either cash or paid-up securities.

Keep in mind that soundness meant something different in 1929, when most countries were on a gold standard. Nowadays we measure “soundness” by a currency’s value against other currencies. In 1929, exchange rates were fixed, and currencies were convertible at a fixed rate into gold.

Under such a regime, an “unsound” currency is one whose holders would prefer to exchange it for gold, leading to a run on central bank gold stocks. Fears of a devaluation can become self-fulfilling, as fear leads more people to exchange dollars for gold, putting pressure on gold stocks, creating more fear of a devaluation, and so forth.

Even though prices were falling during the Great Depression, the dollar became “unsound”, a run on the Treasury began, and the United States had to go off of the gold standard in 1933.

36

Something ralph124c may not understand is that stocks normally (and IMHO almost always should) pay out dividends and are not reliant solely on stock price. Companies that do better pay out more dividends. Investors will be willing to pay out different amounts (or sell stocks for certain amounts) based on how well they expect the company to pay out and how long they want to keep it. There’s no reason that anyone has to lose, although if they misjudge the company’s value or stability, or find they need to sell early for some reason.

This was the essential problem behind episodes of wild inflation. Once the conceopt of value is cut off from any grounded measure, it no longer connect to reality in any meaningful way, except custom. And customs change.

37

Despite some minor exchanges of opinion, this is not really a debate and seems better suited to General Questions. (Now don’t start squabbling so those Mods have to send it back.)

[ /Moderating ]

38

Super-villains were involved.

I’d say more, but professional courtesy forbids me.

39

[QUOTE=Freddy the Pig]
people who bought during the 1933 trough made out like banshees.
[/QUOTE]
Perhaps you mean “made out like bandits.”