Gregor: “Twenty-three percent off the value of all my shares in one day has apparently made the press photographers even more anxious to get close-up photographs of my dull face.”
Why is losing twenty-three percent off the value of shares a bad thing? In the stock market, investors profit when shares increase in value, and lose money when shares decrease in value. It can be as easy to make money as it is to lose money when investing in the market. The crash of 1929 attested to how volatile the stock market can be.
Most people during the 1920s had bought stocks “on margin”. Buyers would front a small percentage of what the stock was actually worth from brokers who would borrow money from the bank to officially buy the stock. In turn, the buyer would have to pay interest to the broker. If stock prices fell drastically, buyers worried that they would not be able to pay their brokers, so they would quickly sell their shares before stock prices fell even more.
While the crash of the stock market resulted from several previous events, there are three important dates to remember that led to the eventual financial crisis:
“Black Thursday” October 24th, 1929:
Stock prices fell in the morning. Buyers did not want to lose money, so they started selling their shares in large amounts. In an effort to prevent a crash, several banks banded together to invest money back into the market. As a result, other buyers stopped selling their shares and the market recovered.
“Black Monday” October 28th, 1929:
The shock of Thursday’s market downfall worried many buyers. Even though the market was looking steadier, no one wanted to be caught in another downfall. Shares once again were rapidly being sold and prices plummeted. The banks could not step in for a second time to save the financial market.
“Black Tuesday” October 29th, 1929:
This date is considered the worst in stock market history. Unprecedented amounts of shares were sold and no new shares were bought. The cycle continued until the market finally crashed. Vast amounts of people lost their life savings and still owed money to their brokers.
It would take over 20 years for the stock market to get to it’s pre-crash level. After 1929, President Roosevelt who took over the presidency in 1933 instated several laws that required companies to provide information regarding the stability and income of their business to investors. In June of 1934, a month before Man and Boy takes place, the Securities and Exchange Commission was created to make sure everyone followed the financial rules. From that point on, corporations were under surveillance by the Commission to help restore confidence in investing.
Gregor: “My dear fellow, I am so much more accustomed to these little disturbances, ’31 was just as bad, you know, and ’29 was even worse…”
For roughly ten years from 1929 to 1939, an era known as the Great Depression followed the crash of the stock market in 1929. In 1929, 21% of Americans were considered poor. During the Depression, 38% of Americans were considered poor. As stock prices continued to fall, the economy suffered. Thousands of Americans could no longer afford the lifestyles they were accustomed to. Industrial production fell, unemployment rose and people crammed into small apartments to save money.
The characters in Man and Boy show the effects the Depression had on the wealthier and working classes but all social classes were affected. Many families began saving items “just in case” they needed them or got clothing and furniture at secondhand shops. Below is a representation of what it meant to live during the 1930s.
The Wealthy and the Upper Middle Class
- Approximately 12% of Americans
- Saved money by buying cheaper cigars, laying-off servants and taking the subway
- Newspaper coverage of the very rich was prominent
The Middle Class
- Income covered basic necessities including food, shelter and clothing
- Married housewives or children 14-18 years of age found jobs to earn extra money for the family
The Working Class
- Faced lower wages, longer hours, no job security and poor working conditions
- The fatigue of working long hours caused industrial accidents
- Labor unions gained momentum as workers demanded better conditions
- More than 1/3 of the American population in the 1930s
- Lived in rural and urban areas alike
- Urban poor lived in makeshift shacks on vacant lots and stood in breadlines for food
Gregor: "At this moment I have got a serious crisis, yes. A crisis of confidence and liquidity…exactly the same crisis as our world economy is passing through today...I know my enemy. It’s the Depression. Liquidity and confidence, that’s all the crisis is about."
Charles Ponzi (1882-1949)
In 1920, Italian immigrant Charles Ponzi founded the Securities Exchange Company in Boston. Claiming to exchange postal coupons in different international currencies, Ponzi promised his investors a 50% return in 45 days; in fact he made these payments by using deposits from new investors to pay his initial investors and created a “pyramid” scheme – paying commissions to agents to attract new investors and recruit subagents, who made a smaller commission to bring in yet more investors. Before long, Ponzi was bringing in $1 million a week, but in August 1920, the Boston Post revealed the truth about his company and about Ponzi’s past as a convicted forger. Investors demanded refunds and his company was found to be $3 million in debt. Six banks failed as a result of Ponzi, and investors finally received less than 30 cents on the dollar. Convicted of fraud, Ponzi served several years in prison, evaded the law for further charges, and conducted a smaller scheme in Florida (using a different name). He was caught and deported to Italy in 1934. In 1949 he died alone in Brazil, with $75 to his name. “Ponzi scheme” became a common term to describe this type of financial fraud.
Ivar Kreuger (1880-1932)
“The Match King,” Swedish-born Ivar Kreuger began his career as a civil engineer before taking over his family’s struggling match business in 1911. Kreuger built a financial empire by consolidating the factories, buying competing businesses, streamlining production, and raising capital through investor financing. He obtained monopolies by offering loans (and bribes) to European government officials. He used the assets of acquired businesses to pay investors, while inflating the value of these acquisitions on balance sheets. He forged millions in Italian bonds to boost the company’s assets. These practices allowed him to build investor confidence when in fact, the company was drowning in debt. In the early 1930’s, rumors spread about Kreuger’s operations, and the banks demanded a closer examination of his books. In 1932, with his empire about to collapse, Kreuger shot himself in his Paris apartment. The bankruptcy of Kreuger’s American operations was the largest of its time; -- $250 million in assets were gone (over $3 billion today) – and investors received about 30 cents on the dollar. As a result of this scandal, Congress passed the Trust Indenture Act in 1939 to regulate the use of collateral in borrowing.
Bernard Madoff (1938- )
The most recent major fraud in America was revealed by the SEC in 2008: Bernard Madoff’s well-respected investment firm was in fact operating as a “giant Ponzi scheme.” New York-born Madoff founded Bernard L. Madoff Investment Securities, LLC in 1960 and built the firm on the promise of “an unblemished record of value, fair-dealing, and high ethical standards.” The company was known for its reliable annual returns, and Madoff developed the computer technology that would be used by NASDAQ. He was also a prominent philanthropist, supporting many Jewish charities. Late in 2008, Madoff revealed to his sons that a branch of his firm was operating as an elaborate Ponzi scheme. The sons reported their father to federal authorities, and Madoff was arrested and charged with securities fraud. He admitted to losing $50 billion of investors' money, and in 2009 he pled guilty to 11 felony counts including fraud, perjury, false statements, and theft. Madoff has been sentenced to150 years in prison—the maximum possible prison sentence. Many of Madoff’s charities have been damaged, and several people, including Madoff’s eldest son, have committed suicide in the aftermath of the scandal.
Man and Boy is playing at the American Airlines Theatre through November 27, 2011. For more information about the show or how to purchase tickets, click here.
2011-2012 Season, Education @ Roundabout, Man and Boy, Upstage