Unregulated System
At the time of the 1929 crash, the stock market was largely unregulated. In the months before the crash there were signs that the system was beginning to collapse under its own weight, but the industrialists who owned most of the real wealth fed millions of dollars into the market to stabilize it. They were successful for a time, but at last the artificial conditions created through margin buying (the buying of many market shares at a deflated value) and wild speculation brought the whole system down. Most people lost all, or nearly all, of the money
TABLE 4.3
| Employer stock in selected retirement plans, 2001 | ||
| Company name | Company stock as a percentage of defined contribution plan's assets: | Does company have a defined benefit plan? |
| SOURCE: Patrick J. Purcell, "Table 1. Employer Stock in Selected Retirement Plans," in The Enron Bankruptcy and Employer Stock in Retirement Plans, Congressional Research Service, Library of Congress, March 11, 2002, http://fpc.state.gov/documents/organization/9102.pdf (accessed January 4,2005) | ||
| Procter & Gamble | 91.5% | No |
| Anheuser-Busch | 81.6% | Yes |
| Coca-Cola | 81.0% | Yes |
| Abbott Laboratories | 80.0% | Yes |
| General Electric | 77.4% | Yes |
| William Wrigley, Jr. | 75.0% | Yes |
| Pfizer | 74.8% | Yes |
| Home Depot | 72.0% | No |
| BB&T (Branch Banking & Trust) | 69.6% | Yes |
| Texas Instruments | 69.0% | Yes |
| Duke Energy | 67.9% | Yes |
| Target | 66.0% | Yes |
| Textron | 65.0% | Yes |
| Reliant Energy | 64.5% | Yes |
| Kroger | 63.6% | Yes |
| Southern Company | 62.8% | Yes |
| ExxonMobil | 62.0% | Yes |
| Household International | 61.4% | Yes |
| Sherwin-Williams | 59.1% | Yes |
| BellSouth | 57.9% | Yes |
| Merck | 57.5% | Yes |
| Williams | 57.0% | Yes |
| McDonald's | 56.8% | No |
| TXU (Texas Utilities) | 56.3% | Yes |
| Dell Computer | 53.4% | No |
| Ford Motor Company | 50.2% | Yes |
they had invested in the stock market. Ultimately, about 50% of the new securities that were offered in the 1920s became worthless.
When the stock market crashed, the economy crashed with it. The banking industry, which depends on consumer confidence to stay in business, was devastated. The economy did not fully recover until World War II, when government spending increased dramatically to support the war effort. Farmers, who were affected by the crashes of both the stock and commodities markets, filed for bankruptcy in record numbers during the Depression, with 6,000 filing in 1933 alone, according to Farmer Bankruptcies and Farm Exits in the United States, 1899–2002, a report from the Economic Research Service of the U.S. Department of Agriculture.
Table 4.1 shows the dramatic drop in the return on three-month Treasury bills from 1929 through 1941. Prior to the Great Depression, the return was 4.42%, but it declined to a low of 0.01% in 1940. Similarly, Table 4.4 shows a drop in stock prices from 1929, with an average share closing price of $26.02 in the Standard and Poor's Composite, to 1934's average closing share price of $9.84. Figure 4.2 shows the drop in the gross national product from $105 billion in 1929 to only $55 billion in 1933.
TABLE 4.4
| Stock yields and prices, 1900–2002 | |||||||||||
| Stock prices | Common stock yields (percent) Standard and Poor's1 | ||||||||||
| Dow-Jones & Co., Inc. | |||||||||||
| Standard and Poor's 500 composite (1941-43=10)1,2 | NYSE common stock index (Dec. 31, 1965=100)3 | NASDAQ composite3 (Feb. 5, 1971=100) | Industrial (30 stocks) | ||||||||
| Year | Composite (Dec. 31, 1965=50)3 | Year-end close (30 stocks) | Yearly high | Yearly low | Transportation3 (20 stocks) | Utility3 (15 stocks) | Dividend price ratio4 | Earnings price ratio5 | |||
| 1900 | 6.15 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1901 | 7.84 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1902 | 8.42 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1903 | 7.21 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1904 | 7.05 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1905 | 8.99 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1906 | 9.64 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1907 | 7.84 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1908 | 7.78 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1909 | 9.71 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1910 | 9.35 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1911 | 9.24 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1912 | 9.53 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1913 | 8.51 | NA | NA | NA | NA | NA | NA | NA | NA | NA | NA |
| 1914 | 8.08 | NA | NA | NA | 54.6 | 56.8 | 53.2 | NA | NA | NA | NA |
| 1915 | 8.31 | NA | NA | NA | 99.2 | 99.2 | 54.2 | NA | NA | NA | NA |
| 1916 | 9.47 | NA | NA | NA | 95 | 110.2 | 85 | NA | NA | NA | NA |
| 1917 | 8.50 | NA | NA | NA | 74.4 | 99.2 | 66.0 | NA | NA | NA | NA |
| 1918 | 7.54 | NA | NA | NA | 82.2 | 89.1 | 73.4 | NA | NA | NA | NA |
| 1919 | 8.78 | NA | NA | NA | 107.2 | 119.6 | 79.2 | NA | NA | NA | NA |
| 1920 | 7.98 | NA | NA | NA | 72.0 | 109.9 | 66.8 | NA | NA | NA | NA |
| 1921 | 6.86 | NA | NA | NA | 81.1 | 81.5 | 63.9 | NA | NA | NA | NA |
| 1922 | 8.41 | NA | NA | NA | 98.7 | 103.4 | 78.6 | NA | NA | NA | NA |
| 1923 | 8.57 | NA | NA | NA | 95.5 | 105.4 | 85.8 | NA | NA | NA | NA |
| 1924 | 9.05 | NA | NA | NA | 120.5 | 120.5 | 88.3 | NA | NA | NA | NA |
| 1925 | 11.15 | NA | NA | NA | 156.7 | 159.4 | 115.0 | NA | NA | NA | NA |
| 1926 | 12.59 | NA | NA | NA | 157.2 | 166.6 | 135.2 | NA | NA | 4.94 | 9.19 |
| 1927 | 15.34 | NA | NA | NA | 202.4 | 202.4 | 152.7 | NA | NA | 4.76 | 6.29 |
| 1928 | 19.95 | NA | NA | NA | 300.0 | 301.6 | 191.3 | NA | NA | 3.98 | 5.67 |
| 1929 | 26.02 | NA | NA | NA | 248.5 | 386.1 | 195.4 | NA | NA | 3.47 | 7.51 |
| 1930 | 21.03 | NA | NA | NA | 164.6 | 297.3 | 154.5 | NA | NA | 4.51 | 6.33 |
| 1931 | 13.66 | NA | NA | NA | 77.9 | 197.0 | 71.8 | NA | NA | 6.15 | 7.51 |
| 1932 | 6.93 | NA | NA | NA | 59.9 | 89.9 | 40.6 | NA | NA | 7.43 | 5.95 |
| 1933 | 8.96 | NA | NA | NA | 99.9 | 110.5 | 49.7 | NA | NA | 4.21 | 4.36 |
| 1934 | 9.84 | NA | NA | NA | 104.0 | 111.9 | 84.6 | NA | NA | 3.72 | 5.16 |
| 1935 | 10.60 | NA | NA | NA | 144.1 | 149.4 | 96.0 | NA | NA | 3.82 | 7.23 |
| 1936 | 15.47 | NA | NA | NA | 179.9 | 186.4 | 141.5 | NA | NA | 3.44 | 6.57 |
| 1937 | 15.41 | NA | NA | NA | 120.9 | 195.6 | 112.5 | NA | NA | 4.86 | 8.25 |
| 1938 | 11.49 | NA | NA | NA | 154.8 | 158.9 | 97.5 | NA | NA | 5.18 | 5.55 |
| 1939 | 12.06 | NA | NA | NA | 150.2 | 157.8 | 120.0 | NA | NA | 4.05 | 7.34 |
| 1940 | 11.02 | NA | NA | NA | 131.1 | 153.3 | 110.4 | NA | NA | 5.59 | 9.80 |
| 1941 | 9.82 | NA | NA | NA | 111.0 | 134.3 | 105.5 | NA | NA | 6.82 | 12.14 |
| 1942 | 8.67 | NA | NA | NA | 119.4 | 120.2 | 92.7 | NA | NA | 7.24 | 11.42 |
| 1943 | 11.50 | NA | NA | NA | 135.9 | 146.4 | 118.8 | NA | NA | 4.93 | 7.82 |
| 1944 | 12.47 | NA | NA | NA | 152.3 | 153.0 | 134.1 | NA | NA | 4.86 | 7.34 |
| 1945 | 15.16 | NA | NA | NA | 192.9 | 196.6 | 150.5 | NA | NA | 4.17 | 6.39 |
| 1946 | 17.08 | NA | NA | NA | 177.2 | 213.4 | 160.5 | NA | NA | 3.85 | 6.31 |
| 1947 | 15.17 | NA | NA | NA | 181.2 | 187.7 | 161.4 | NA | NA | 4.93 | 10.69 |
| 1948 | 15.53 | NA | NA | NA | 177.3 | 194.5 | 164.1 | NA | NA | 5.54 | 14.60 |
| 1949 | 15.23 | NA | NA | NA | 200.1 | 200.9 | 160.6 | NA | NA | 6.59 | 15.12 |
| 1950 | 18.40 | NA | NA | NA | 235.4 | 236.6 | 193.9 | NA | NA | 6.57 | 15.20 |
| 1951 | 22.34 | NA | NA | NA | 269.2 | 277.5 | 234.9 | NA | NA | 6.13 | 10.89 |
| 1952 | 24.50 | NA | NA | NA | 291.9 | 293.5 | 254.7 | NA | NA | 5.80 | 9.56 |
| 1953 | 24.73 | NA | NA | NA | 280.9 | 295.1 | 254.4 | NA | NA | 5.80 | 10.36 |
| 1954 | 29.69 | NA | NA | NA | 404.4 | 407.2 | 278.9 | NA | NA | 4.95 | 8.93 |
| 1955 | 40.49 | NA | NA | NA | 488.4 | 490.8 | 385.7 | NA | NA | 4.08 | 8.72 |
| 1956 | 46.62 | 24.4 | NA | NA | 499.5 | 524.4 | 458.2 | NA | NA | 4.09 | 7.14 |
| 1957 | 44.38 | 21.1 | NA | NA | 435.7 | 523.1 | 416.2 | NA | NA | 4.35 | 7.78 |
| 1958 | 46.24 | 28.9 | 32.7 | 202.4 | 583.7 | 587.4 | 434.0 | 157.7 | 91.0 | 3.97 | 6.02 |
| 1959 | 57.38 | 32.2 | 35.0 | 219.5 | 679.4 | 683.9 | 571.7 | 154.1 | 87.8 | 3.23 | 5.92 |
| 1960 | 55.85 | 30.9 | 34.5 | 205.9 | 615.9 | 688.2 | 564.2 | 130.9 | 100.0 | 3.47 | 5.88 |
| 1961 | 66.27 | 38.4 | 45.4 | 246.0 | 731.1 | 741.3 | 606.1 | 143.8 | 129.2 | 2.98 | 4.76 |
| 1962 | 62.38 | 33.8 | 38.6 | 229.4 | 652.1 | 734.4 | 524.6 | 141.0 | 129.2 | 3.37 | 6.06 |
| 1963 | 69.87 | 39.9 | 46.4 | 266.8 | 763.0 | 773.1 | 643.6 | 178.5 | 139.0 | 3.17 | 5.68 |
| 1964 | 81.37 | 45.7 | 57.2 | 305.8 | 874.1 | 897.0 | 760.3 | 205.3 | 155.2 | 3.01 | 5.54 |
| 1965 | 88.17 | 50.0 | 67.0 | 340.9 | 969.3 | 976.6 | 832.7 | 247.5 | 152.6 | 3.00 | 5.59 |
| 1966 | 85.26 | 43.7 | 63.9 | 281.6 | 785.7 | 1,001.1 | 735.7 | 203.0 | 136.2 | 3.40 | 6.63 |
| 1967 | 91.93 | 53.8 | 80.9 | 314.1 | 905.1 | 951.6 | 776.2 | 233.2 | 127.9 | 3.20 | 5.73 |
| 1968 | 98.70 | 58.9 | 101.8 | 341.0 | 943.8 | 994.7 | 817.6 | 271.6 | 137.2 | 3.07 | 5.67 |
| 1969 | 97.84 | 51.5 | 99.4 | 263.0 | 800.4 | 974.9 | 764.5 | 176.3 | 110.1 | 3.24 | 6.08 |
| 1970 | 83.22 | 50.2 | 89.6 | 272.8 | 838.9 | 848.2 | 627.5 | 171.5 | 121.8 | 3.83 | 6.45 |
| 1971 | 98.29 | 56.4 | 114.1 | 310.1 | 890.2 | 958.1 | 790.7 | 243.7 | 117.8 | 3.14 | 5.41 |
| 1972 | 109.20 | 64.5 | 133.7 | 329.2 | 1,020.0 | 1,042.4 | 882.8 | 227.2 | 119.5 | 2.84 | 5.50 |
| 1973 | 107.43 | 51.8 | 92.2 | 272.5 | 850.9 | 1,067.2 | 783.6 | 196.2 | 89.4 | 3.06 | 7.12 |
| 1974 | 82.85 | 35.4 | 59.8 | 199.7 | 616.2 | 904.0 | 570.0 | 143.4 | 68.8 | 4.47 | 11.59 |
| 1975 | 86.16 | 47.6 | 77.6 | 261.7 | 852.4 | 888.9 | 619.1 | 172.7 | 83.7 | 4.31 | 9.15 |
| 1976 | 102.01 | 57.9 | 97.9 | 325.5 | 1,004.7 | 1,026.3 | 848.6 | 237.0 | 108.4 | 3.77 | 8.90 |
| 1977 | 98.20 | 52.5 | 105.1 | 287.2 | 831.2 | 1,007.8 | 792.8 | 217.2 | 111.3 | 4.62 | 10.79 |
| 1978 | 96.02 | 53.6 | 118.0 | 272.2 | 805.0 | 917.3 | 736.8 | 206.6 | 98.2 | 5.28 | 12.03 |
| 1979 | 103.01 | 62.0 | 151.1 | 298.3 | 838.7 | 904.9 | 792.2 | 252.4 | 106.6 | 5.47 | 13.46 |
| 1980 | 118.78 | 77.9 | 202.3 | 373.4 | 964.0 | 1,005.2 | 730.0 | 398.1 | 114.4 | 5.26 | 12.66 |
| 1981 | 128.05 | 71.1 | 195.8 | 347.8 | 875.0 | 1,031.0 | 807.5 | 380.3 | 109.0 | 5.20 | 11.96 |
| 1982 | 119.71 | 81.0 | 232.4 | 409.2 | 1,046.5 | 1,078.5 | 770.0 | 448.4 | 119.5 | 5.81 | 11.60 |
| 1983 | 160.41 | 95.2 | 278.6 | 502.9 | 1,258.6 | 1,296.5 | 1,013.4 | 598.6 | 131.8 | 4.40 | 8.03 |
| 1984 | 160.46 | 96.4 | 247.4 | 489.9 | 1,211.6 | 1,298.6 | 1,079.0 | 558.1 | 149.5 | 4.64 | 10.02 |
| 1985 | 186.84 | 121.6 | 324.4 | 616.5 | 1,546.5 | 1,570.9 | 1,178.7 | 708.2 | 174.8 | 4.25 | 8.12 |
| 1986 | 236.34 | 138.6 | 348.8 | 736.8 | 1,896.0 | 1,971.7 | 1,491.7 | 807.2 | 206.0 | 3.48 | 6.09 |
| NA Not available. | |||||||||||
| 1Source: U.S. Council of Economic Advisors, Economic Report of the President, annual. | |||||||||||
| 2Annual average of daily closing prices. The S&P 500 composite index represents the 500 largest publicly traded companies. | |||||||||||
| 3As of end of December. | |||||||||||
| 4Aggregate cash dividends (based on latest known annual rate) divided by aggregate market value based on Wednesday closing prices. Averages of monthly figures. | |||||||||||
| 5Averages of quarterly ratios which are ratio of earnings (after taxes) for four quarters ending with particular quarter to price index for last day of that quarter. | |||||||||||
| SOURCE: "No. HS-38. Stock Prices and Yields: 1900 to 2002," in Statistical Abstract of the United States: 2003, U.S. Census Bureau, http://www.census.gov/statab/hist/HS-38.pdf (accessed January 4, 2005) | |||||||||||
| 1987 | 286.83 | 138.2 | 330.5 | 714.3 | 1,938.8 | 2,746.7 | 1,616.2 | 748.9 | 175.1 | 3.08 | 5.48 |
| 1988 | 265.79 | 156.3 | 381.4 | 825.9 | 2,168.6 | 2,195.1 | 1,846.0 | 969.8 | 186.3 | 3.64 | 8.01 |
| 1989 | 322.84 | 195.0 | 454.8 | 1,035.1 | 2,753.2 | 2,809.1 | 2,127.1 | 1,177.8 | 235.0 | 3.45 | 7.42 |
| 1990 | 334.59 | 180.5 | 373.8 | 920.6 | 2,633.7 | 3,024.3 | 2,344.1 | 910.2 | 209.7 | 3.61 | 6.47 |
| 1991 | 376.18 | 229.4 | 586.3 | 1,156.8 | 3,168.8 | 3,204.6 | 2,447.0 | 1,358.0 | 226.2 | 3.24 | 4.79 |
| 1992 | 415.74 | 240.2 | 677.0 | 1,204.6 | 3,301.1 | 3,435.2 | 3,087.4 | 1,449.2 | 221.0 | 2.99 | 4.22 |
| 1993 | 451.41 | 259.1 | 776.8 | 1,381.0 | 3,754.1 | 3,818.9 | 3,219.3 | 1,762.3 | 229.3 | 2.78 | 4.46 |
| 1994 | 460.42 | 250.9 | 752.0 | 1,274.4 | 3,834.4 | 4,002.8 | 3,520.8 | 1,455.0 | 181.5 | 2.82 | 5.83 |
| 1995 | 541.72 | 329.5 | 1,052.1 | 1,693.2 | 5,117.1 | 5,266.7 | 3,794.4 | 1,981.0 | 225.4 | 2.56 | 6.09 |
| 1996 | 670.5 | 392.3 | 1,291.0 | 2,025.8 | 6,448.3 | 6,624.0 | 5,000.1 | 2,255.7 | 232.5 | 2.19 | 5.24 |
| 1997 | 873.43 | 511.2 | 1,570.4 | 2,607.4 | 7,908.3 | 8,340.1 | 6,315.8 | 3,256.5 | 273.1 | 1.77 | 4.57 |
| 1998 | 1,085.5 | 596.1 | 2,192.7 | 2,870.8 | 9,181.4 | 9,457.9 | 7,379.7 | 3,149.3 | 312.3 | 1.49 | 3.46 |
| 1999 | 1,327.33 | 650.3 | 4,069.3 | 3,214.4 | 11,497.1 | 11,428.9 | 8,994.3 | 2,977.2 | 283.4 | 1.25 | 3.17 |
| 2000 | 1,427.22 | 656.9 | 2,470.5 | 3,317.4 | 10,786.9 | 11,908.5 | 9,571.4 | 2,946.6 | 412.2 | 1.15 | 3.63 |
| 2001 | 1,194.18 | 589.8 | 1,950.4 | 2,892.2 | 10,021.5 | 11,436.4 | 7,926.9 | 2,640.0 | 293.9 | 1.32 | 2.95 |
| 2002 | 993.94 | NA | 1,335.4 | 2,375.0 | 8,341.6 | 10,728.9 | 7,181.5 | 2,310.0 | 215.2 | 1.61 | 2.92 |
| Highest value | 1,427.22 | 656.9 | 4,069.3 | 3,317.4 | 11,497.1 | 11,908.5 | 9,571.4 | 3,256.5 | 412.2 | 7.43 | 15.20 |
| Lowest value | 6.15 | 21.1 | 32.7 | 199.7 | 54.6 | 56.8 | 40.6 | 130.9 | 68.8 | 1.15 | 2.92 |
FIGURE 4.2
Regulation of Securities
Beginning in 1933, Congress enacted a series of laws designed to regulate the securities markets. The Securities Act of 1933 (sometimes referred to as the Truth in Securities law) was a reaction against the events that had led up to the stock market crash of 1929. Its purpose was relatively simple: to protect investors by ensuring that they receive full information on the securities offered for sale to the public, and to prohibit fraud in such sales. The Securities Act set up a system whereby most corporations that wanted to offer shares for sale to the public had to register their securities with the Securities and Exchange Commission (SEC); the registration information was then made available to the public for review. The required registration forms—still in use today—that contain information on the company's management and business structure and the securities it is offering for sale, as well as financial statements drafted by independent accountants. This system is intended to protect investors by making available any information they may need to make informed decisions about their investments, although the SEC does not guarantee the truth or accuracy of the information.
With the passage of the Securities Exchange Act in 1934 Congress established the Securities and Exchange Commission (SEC), which regulates the entire American securities industry. The SEC expanded the Securities Act of 1933 to require more stringent reporting of publicly traded companies and all other entities involved in securities transactions, including stockbrokers, dealers, transfer agents, and exchanges. Additionally, large companies with more than $10 million in assets and five hundred shareholders are required to file regular reports with the SEC detailing their finances and business dealings. The Securities Exchange Act of 1934 also explicitly outlawed illegal insider trading (described below).
Additional legislation that regulates the securities industry includes:
- Public Utility Holding Company Act. Passed in 1935, this Act oversees interstate holding companies that sell or provide electric and gas utilities.
- Trust Indenture Act of 1939. A trust indenture is a formal agreement between a bondholder and an issuer of bonds. The Trust Indenture Act requires this agreement when debt securities such as bonds are offered for public sale.
- Investment Company Act of 1940. This Act requires investment and trading companies, such as those that handle mutual funds, to divulge their financial and management information to the public, as well as information about the funds they offer for sale.
- Investment Advisors Act of 1940; amended in 1996. When this Act was originally passed, it required most investment advisors to register with the SEC and abide by laws designed to protect investors. In its amended form the Act applies only to larger advisors who manage at least $25 million in assets or work with a registered investment company.
- Sarbanes-Oxley Act of 2002. This Act is the strongest legislation since the 1940s to impose reforms on the securities industry. Intended to combat fraud and encourage corporate accountability, it also established the Public Company Accounting Oversight Board (PCAOB). Under Sarbanes-Oxley, companies that trade in the U.S. markets must perform audits of their fraud-prevention and accounting procedures, as well as annual examinations by management of their internal controls. One of the most significant reforms instituted by Sarbanes-Oxley is the provision that bankrupt companies must compensate investors before paying creditors. This provision was largely the result of the WorldCom scandal (described below).
The Commodities Futures Trading Commission
Trading of commodities futures and options in the United States is regulated by the Commodities Futures Trading Commission (CFTC). Established by Congress in 1974, the CFTC is responsible for ensuring integrity in the commodities markets. Like the securities markets, commodities exchanges are not immune to corruption in the forms of fraud, misrepresentation, and price manipulation. The most recent update to the Commodities Exchange Act was the Commodity Futures Modernization Act of 2000.
The sitting U.S. president appoints the five commissioners of the CFTC, who serve staggered five-year terms, as well as a chairman (http://www.cftc.gov/cftc/cftcabout). Under the CFTC chairman's administration are the Office of the Inspector General, which is responsible for internal audits of the CFTC; the Office of International Affairs, which handles the CFTC's involvement in the global markets; and the Office of External Affairs, which serves as the CFTC's media liaison. The CFTC has offices in all U.S. cities that have commodities exchanges: New York, Chicago, Kansas City, and Minneapolis.
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