This “Money With Mak and G” podcast episode, Mak & G look further into the stock market crash, the knock-on effect it had across America, and what we can learn from the Great Depression.
We’re back for Part 2 of the stock market crash, what caused it, and what we can learn from this awful period.
This time Mak & G look at the knock-on effect the stock market crash in 1929 had on America, other times there has been crashes in the stock market, and what we can learn from the Great Depression.
“Just like the stock market crash you didn’t see it coming, but there were a lot of clues.” – Mak
“The stock market crash can be boiled down to three things, easy access to money, issues with companies financials, and excessive spending.” – Ben Jones
02:22 – Why the stock market performed so well after the war ended.
03:22 – Black Thursday and how much money people lost in the crash.
04:22 – What happened when banks went bankrupt.
06:05 – The knock-on effect the stock market crash had across America.
06:50 – The difference between a depression and a recession.
07:56 – How many people lost their jobs during the depression.
08:49 – What we learned from the depression.
10:03 – Other times there have been issues in the stock market.
10:56 – The main causes for the stock market crash.
11:27 – The good things that came out of the depression.
Connect with Ben Jones:
#1 Where are higher-income families more likely to do most of their Christmas shopping, compared to lower-income families?
#2 What are lower-income families more likely to use to pay for Christmas shopping?
#3 How do 29% of Americans plan to pay off their holiday bills?
#4 How long did we calculate a typical $1500 credit card bill would take to pay off at average interest rates if you only paid the minimum amount?
#5 Prices today are around 50% higher than 20 years ago because of what?
A) 44 months
C) Ten years
MAK: Grant, WHAT… ARE… YOU… doing?
GRANT: Wooooaaooo. This thing is hard.
MAK: You know you shouldn’t be on that thing. It’s dangerous and if dad finds you, he’ll kill you.
GRANT: I can do it. I just need a little more time.
MAK: Why don’t you get off, and let’s finish our discussion with dad about the stock market crash.
GRANT: This thing IS fun. Watch this!! WHOOA.
MAK: Grant, that’s really risky. If I didn’t know any better, here comes the biggest HoverBoard Crash of all time.
GRANT: Why would you say that?
MAK: Seriously? It’s like the stock market crash. A couple things were going on at the same time that led to the crash. 1) You think you can’t fall 2) You’re on a HOVERBOARD and 3) if you look around you’ll see the water makes things slippery
GRANT: Never going to happen. WHOOAA, WHOA. OH no!!!
MAK: Perfect… Just like the stock market crash, you didn’t see it coming, but there were LOTS of clues.
GRANT: That’s not funny, my arm hurts. OUCH!!!
MAK: Oh, no. I guess the parties are over now, and it’s time to deal with the consequences!!
DAD: Grant, what the heck are you doing…
GRANT: I didn’t mean to… OUCH!!!
DAD: Well, in reality, Grant really broke his arm, and we posted it on social media last week. Grant, is there anything you want to say?
GRANT: Probably not a great idea to get crazy on a hoverboard. I actually broke my arm in two places and had to go to surgery and get pins put in. Totally not cool. And, dad says it was seriously expensive.
DAD: It was, and I agree, that was nuts. We’re all glad you’re doing better. And, I love the dollar signs on your cast. You rock!!
GRANT: Thanks dad. I don’t think I’ll be doing that again any time soon. Do you think we can get back to the stock market??
DAD: That’s probably a good idea. Mak, do you want to remind us where we were?
MAK: Sure. After the war, people were happy, spending money, new technology was invented, and stock prices went up 10 times. But, companies weren’t audited, and they were lying about how well they were doing.
DAD: Exactly. So, people bought stocks based on bad information. And, what was worse is that they borrowed money from the bank to do it. Money was easy to get.
MAK: Oh no, that sounds terrible. That doesn’t sound good borrowing money on bad info. And this was one of those times it was easy to get money?
DAD: It was very easy to get money during this period. Remember it was called the “Crazy Years”. But, the rules today are much different. They’re tougher and it’s not as easy.
MAK: Ok, so people borrowed money, used it in the stock market that went up by 10 times, and the information wasn’t always correct.
DAD: Couldn’t have said it better myself Mak. Grant, what do you think happened next?
GRANT: Is this where the stock market crash comes in? Did it all happen at once?
DAD: It is when things started. On October 24, 1929 the bad stuff really started. They called that day “Black Thursday”. In a handful of days one-quarter of the value of all stocks were lost.
MAK: That doesn’t sound good.
GRANT: I agree, bad stuff.
DAD: You’re right. Grant, what if you start with 100, and lose a quarter. How much did you lose in a couple days?
GRANT: Well, if you broke 100 into 4 even parts, that would be 25. Your investment would drop to 75.
DAD: And, if you had $200 worth of stock, Mak what would it be worth after the drop?
MAK: It would drop $50, which is twice of 25. It would go down to $150.
DAD: Yep, that’s a lot in just a couple days. And, by the time it was over, stocks lost 80%. So your $100 goes down to $20. Ouch. What do you think happened next?
GRANT: If people borrowed money, and couldn’t pay it back to the bank, did something happen to the banks with all those losses?
DAD: It got really bad, and the banks went bankrupt or out of business because they couldn’t pay their bills.
MAK: But, didn’t you say that a bank loans money from the deposits from its customers?
DAD: They do.
GRANT: So did the people who put their money in the bank lose it too, because of all the loans that didn’t get repaid?
MAK: Wait. You can’t lose your money in a bank because it’s insured by the government.
DAD: You’re both right.
GRANT: That doesn’t make sense. You can’t have both. People can’t lose their money and it also be guaranteed by the government.
DAD: I agree, but here’s what happened. There was a bank run.
GRANT: Funny. Did you say the bank ran, like in a marathon? What?
MAK: Ok dad now you’re talking wack?
DAD: Well, after a while, when the stock prices dropped so much, people realized that the banks might have problems, and they’d lose any of their deposits, and they thought the bank would run out of money.
GRANT: Oh man, that’s nuts! So, if you put your savings in the bank, and knew it was going to go bad, you’d race to the bank to try and get your money out.
MAK: You’d probably drop whatever you were doing.
DAD: Exactly. People ran to the bank to get their money. That’s called a bank run. There were long lines of people waiting their turn and it went on for blocks.
GRANT: Did people get angry if they couldn’t get their money?
DAD: They did, lots of bad things started to happen.
MAK: Sounds like it went from really fun times to really bad times.
DAD: You’re exactly right. Before 1933, if a bank run happened, people lost all their money in the bank, because it wasn’t insured.
MAK: Oh my gosh dad. So this crash hurt sooo many people. It hurt the people that borrowed money, the banks….
GRANT: The people who deposited their money with the banks, and did it hurt others?
DAD: Absolutely. If people lost their money, and banks weren’t around to loan money, what do you think happened?
MAK: People wouldn’t buy things, which meant companies then didn’t make as much?
GRANT: So, they didn’t need as many people to work, which meant less money was spent, and the whole cycle started all over again.
MAK: So, people lost their jobs, and probably their homes and more…
DAD: That’s all true. It started something called the GREAT DEPRESSION, which lasted for 10 years.
MAK: Being depressed is really bad, is this the same thing?
DAD: It was really bad. DEPRESSION is a word that refers to how well the economy is doing. The financial health of the country was really bad, like someone REALLY sick. This is the only Depression we’ve had.
GRANT: So, if a Depression is REALLY REALLY bad, is there something that isn’t as bad?
MAK: How about a “Sad” “Session”. You know, it’s sad, but not as bad as a full-on depression.
DAD: I LOVE the creativity Mak. It’s actually called a “REcession”. And, there have been around 33 of these over the last 175 years.
MAK: So, how do you know if you’re in a RECession?
DAD: Just like you measure your temperature when you’re sick, people measure the health of the economy, and if it’s not good for 6 months, then it’s a recession.
GRANT: The recession sounds like you can rebound. But, yuck, depression sounds bad. During the depression, how many people lost their jobs?
DAD: Let me compare things now with then. Currently, things are SUPER good and less than 4 people out of 100 don’t have jobs who want one. In the depression it was over 25 people for every 100.
MAK: Wow, dad, that’s more than 6 times what it is today. That’s a lot less money moving around.
DAD: You’re right. Plus, over 9,000 banks failed, it was estimated about half of the banks failed from all this stuff sooner or later. And, people started to put all their money under their mattress in their bed instead of a bank.
MAK: That probably made things lumpy.
GRANT: Yeah, and the lumpy probably made people grumpy. Did you hear that? A joke!
DAD: I heard it. Not bad G. A dad joke. I’m absolutely sure it was hard to sleep on. So, I have a question for you. Do you think putting money in your mattress helped or hurt things?
GRANT: Not sure.
MAK: Knowing you dad, you wouldn’t ask the question, unless it was bad…
DAD: Right-o, Mak- a-roo! If the money isn’t going into banks, it can’t be loaned out, so companies and people can’t borrow it. So, less growth, less jobs, less innovation, and just LESS.
MAK: So, everything is connected.
GRANT: Yeah, I didn’t know that. Dad, did we learn from the depression, so it wouldn’t happen again?
DAD: We learned lots of things. Most of the changes happened in 1933 and 1934, which were a few years later. First, the government insured, or protected your deposits at a bank.
MAK: Oh, I get it, after the stuff with the crash, people’s money was protected by the government.
DAD: Yep, and they also created a law that every company had to be audited to make sure the numbers on their financial statements were correct.
GRANT: That would help protect against companies lying. So dad, that means you’ll always have a job if you want to be an auditor?
DAD: You’re right. Since accountants are the auditors, we call this the “accountants always have a job” law. This is where that CPA, or Certified Public Accountant thing comes from.
MAK: So, the CPA audits a company’s financials when they have stock they sell to the public?
DAD: You got it.
GRANT: Wow, I guess learning a bit of history does explain a few things.
MAK: I agree. But, this also makes me think stocks can be risky. Were there any other times the stock market tumbled?
DAD: Yep, there were, but it didn’t end up in the great depression. Remember there has only been one of those. But, stocks had issues in 1987, 2000, 2008 and some other more recent decreases.
MAK: So, it sounds like there is risk when you own stocks. There was one big depression and around 30 recessions. Maybe we’ll talk about those some other time.
GRANT: Yeah, I need to rest my arm.
DAD: I guess no more video games for a while.
GRANT: I didn’t mean that. I can still play with my other arm.
DAD: That’s what I thought and no more hoverboards. Promise?
GRANT: Promise. Thanks dad, that was interesting.
MAK: Yeah dad. Thanks.
Ben’s two Cents
Can you believe it? G-man broke his arm. If it’s not one thing, it’s another, but at least he got the cast in Colts Blue.
Now, the stock market crash, can be boiled down into 3 things:
1) Easy Access to Money
2) Issues with company financials
3) And Excessive spending
When it all came crashing down, it was quick and had a big ripple effect. Stock prices fell, loans defaulted, banks went bankrupt, people lost their money, their jobs and their homes. And, it lasted for 10 years. Unemployment and the number of people without homes went sky high.
On the bright side, there was a ton of great stuff that came out of the depression. Banks implemented FDIC insurance to protect your deposits. The Securities and Exchange Acts of 1933 and 1934 were set up to protect people who bought stocks. It was a very tough time. And, imagine the stock market traded information through a mechanical machine that typed out the prices of stocks on a ticker tape. Not instantly like computers nowadays. Since things were so crazy, and technology was slow, there were times the ticker tape would be delivering information hours later, or even hours after the stock market closed. Can you imagine? If it was behind, you could get a quote hours after it already dropped 20%.
This period of time was absolutely fascinating. Technology was considerably different. We never had a situation like this in our country’s history. But, we did learn some things that we implemented to help protect us from future problems.
As we become more and more knowledgeable, you’ll see people on TV who talk about different information in the economy that give an indication of how healthy things are. Unemployment is just one, and we’ve seen through this discussion that it’s all interconnected. That’s why having a bit of knowledge on how money moves around and affects things is very helpful. It can help identify current and future risk.
Thanks for being here as we took a look back so we can take a few steps forward. Come back next week when we’ll talk a bit more about risk and reward. Thanks for being here and I’ll try to keep Grant off that darn hoverboard, so we don’t have any more accidents. Until next time…