The Stock Market Crash of 1929
In 1929, the United States economy was falling into ruins, it would soon become known as the Great Depression. The start of the fall of our economy began in late October, but on October 29, 1929 the stock market officially crashed. This date would later become known as “Black Tuesday”. In that week the stock market lost more than $30 billion dollars, and $14 billion alone on that Tuesday. The devastating crash of the stock market was the signal of the longest, and deepest depression our nation has ever faced. Some economist believe that the stock market crash was the cause of the Great Depression, others believe it was just a large factor. Either way it was detrimental to individuals and businesses alike. I am going to explore a couple of the factors that caused the market to crash. From my research the main causes of the Stock Market Crash were the credit boom, buying on margin, irrational expectations, incongruity between production and consumption, and weaknesses in the banking system.
In the early 1920’s the economy was flourishing, and there was an exponential growth in credit and loans. Many people felt that investing in the Stock Market was safe, firms and individuals alike continued to borrow money to invest and expand. People were indebted, so they were sensitive to change. When the market took a down turn everyone tried to sell their shares at once. The chart below shows the US debt, and how the credit boom added to our debts.
Buying On Margin
This concept is similar to buying on credit. You only had to pay a small amount of the shares, which meant you were borrowing 80-90% of the share. The idea of this allowed people to invest more therefore increasing the value of shares. So when the market began to crash not only were the people who owned the shares wiped out, but also the firms and banks that loaned them the money.
Some described the Stock Market as the new Gold Rush. Many believe this was the largest contributor to the crash of ’29. People were eager to make millions and investing was one way people could make money. In the years leading up to the crash people bought shares only expecting to make money. The higher the shares went the more people borrowed to make money. The market soon became stuck in a speculation bubble. A problem soon arose from this, stock prices were not the same as the real earnings of the stocks. The prices were not driven by the structure of the economy, but by exuberance. Stock prices were inflated by 400% between 1923-1929 (www.economicshelp.org).
Incongruity between Production and Consumption
In the early 1920’s the economies of scale greatly increased due to technological advancements. The problem with this is the consumption for these goods was not as high as the production. This resulted in smaller profits, causing the share prices to drop. Many industries, such as the automobile, steel, and housing markets, indicated the down turn of the economy. But, despite these warning signs people continued buying.
The chart above shows the booming GDP, our economy could not keep up with the increase forever.
Weaknesses in the Banking System
Previous to the Great Depression the American banking system had no standards or regulations and was comprised on many small to medium sized banks. According to www.economicshelp.org, there was over 30,000 banks before the economic downfall. Many banks failed, because of the agricultural depression, and when stocks lost value banks lost the money they loaned. In less than 5 years more than 5,000 banks had closed.
So in conclusion, these five factors led to the fall of the Stock Market in October of 1929, the largest being our irrational expectations. The combination of the crash and our slowly failing economy drove our nation into a decade of dark economic times. Many historians and economists believe the Stock Market crash was the biggest cause of the Great Depression. We learned many things from the stock market crash, and history repeated itself in 2008 when our economy became similar to the economy before the Great Depression. Studying what happened in 1929 helped us with our present day issues.
Hiebert, Ray. The Stock Market Crash, 1929. New York: Franklin Watts, 1970. Print.