Why a Rich Minority is a Good Thing
A common plank in the Democratic Party’s agenda is that of wealth redistribution. They never call it that in public but that is essentially what it is. The idea, simply put, is that a small minority of the population should not posses a majority of the nation’s wealth. Proponents of this policy often cite the widening gap between rich and poor and the vast differences in their standards of living. I''m going to take a few minutes here and look at this argument from a historical perspective and attempt to find its roots.
A good portion of this argument has its roots back in the time of the Great Depression. A time when vast fortunes were being made by investing on margins. If there ever was a time when the rich got richer (and the poor got richer) this was the time. With exchanges all over the USA (Chicago and Boston with New York seen as the big one) many people were jumping into the stock market and buying stocks to be a part of the boom. This was a time when a stock may jump 20 points in one day, there was no where to go but up! This lasted a long while and many people began putting their stocks up as collateral for bigger loans to speculate on the market with. Even the rich banker types were falling into this system of grand dreams. Some economists even declared that the market was safe and not akin to gambling because the prices on stocks ALWAYS went up!
This was destined not to last. There were a few bumpy days in late 1929. Before the great Wall Street Crash of 1929 there were a few organized efforts to slow the market down but none proved effective enough. Some thought the Federal Reserve should increase it rates to curb speculation but speculators were already borrowing at rates much higher than what the Federal Reserve was lending at. As such, any action by the Federal Reserve would likely have no impact on speculators but would have an impact on small business men and farmers.
Due to the great wealth building power of the Stock Market in the 20''s there were many companies that decided to invest their profits into the stock market! This is similar to the current stories you read of farmers in China who put away their hoe and shovel and pick up a computer to farm for gold in on-line MMORPG games.
There were also many inside traders at the time. People would form groups and one person would begin buying a stock at an inflated price to make the market think the stock was going somewhere. Once the market took hold of this notion the other investors in the group would sell off their stock in that company for a quick profit. There were a lot of back room deals going on in the 1920''s and many fortunes were made in this way. Fortunes were also lost in a similar way when investment companies began selling securities and then decided to buy back their own securities because they were doing so well!
In fact, many economic historians now see the market crash not as the starting point of the Great Depression but a casualty of it. Earlier in 1929 the economy was begining to go into a downturn. Why it took so long for the market to catch up with reality is a question for the economists, but it did.
Why am I going into the Stock Market and the Crash of 1929? The thing about the Stock Market prior to the crash is that is was being driven by the minority of wealthy people in the USA. When stocks were selling at $300 per share and weekly rent was $5 most people could not afford to be part of the 5,000,000+ shares being traded every day on the exchange. Even though it is popular to state that everyone was in the market at the time less than 1% of the US population was actively involved in the market. Those who were most actively involved in the market were the super-rich of the time. Those hurt the most were also the super-rich.
What happens when someone loses half of their money? Well, it depends on how much half is. If you only have ten dollars and lose five you don''t feel thata sting. If you have 10M and lose 5M well... That hurts a bit more!
With the destruction of so much money and the collapse of the market many investors had no desire to invest. The fact that the market did not just crash in one day but kept crashing for weeks also helped put fear in the hearts of investors. See, after the crash some people thought, "Look, it''s a market correction I better buy while the prices are low," but, these market corrections kept on happening every day! So, in effect, the person who bought the stock the next day for $50 ended up selling it the day after for $40 and on and on until the stock reached a price in the single digits.
- Ramita Goyal