In October 1929, the US stock market collapsed. This caused the American economy to collapse. As a result, the USA entered a period of depression that destroyed much of the prosperity of the 1920s. There were many causes as to why this happened. Such as poor distribution of income between rich and poor, overproduction by American industries, the actions of speculators, no export market for US goods, the decision by the banks not to support share prices, the loss of confidence and the attitude of ”Laissez-Faire” caused a lot of economical problems for the USA at the time. This led to the great depression of the 1930s.
The first main cause was speculation. Speculation was a type of gambling, by this time around 600,00 new investors were speculators. But speculators didn’t intend to keep their shares for long instead, they borrow money to buy some shares, then they sell them again as soon as their prices have increased. By doing this they pay off their loan still have a quick profit to show for it. During the 1920s, speculators didn’t have to pay the full value of the shares because of this they could put down 10% of the cash needed to buy shares and could borrow the rest, this was known as ”buying on margin”. Women soon came involved in speculation. Women speculators owned over 50% of the Pennsylvania Railroad, which became known as the ”petticoat line”. It was only individuals who speculated. Banks themselves participated in speculation they certainly didn’t anything to stop it. Banks lent $9 Billion for speculating in 1929.
Prices start at $12
Prices start at $11
Prices start at $14
Prices start at $12
Through most of the 1920s, the increase in share prices was quite stable. Unfortunately, there were downfalls, but, in 1928 speculation really took hold. As a result, the demand for shares was at an all-time high, and prices were rising at an unknown rate. In March, Union Carbide’s shares stood at $145 by September 1928, they had risen to $413. An important part of this was confidence, if people were confident that prices will keep rising, there will be more buyers rather than sellers. But this can have an effect if people think that prices might stop rising, all of a sudden there would be people selling rapidly with very low prices for each share. This is exactly what happened on the 24th of October 1929. This day was known as Black Thursday. This day kick-started one of the greatest economical crashes of all time. As a result, speculation was responsible for the Wall Street crash, but to a certain extent as other factors also played a part in the dreaded Wall Street crash. But this was one of the if not the most important reason for the stock market to crash.
Weaknesses in the US economy were also a big problem and factor leading to the Wall Street crash. One industry in particular The Construction Industry had actually started its downfall as far back as 1926. This was also similar to the decline in farming and coal, textile and other industries. There were other problems as well such as unequal distribution of wealth and the state some banks were in. Before the crash, 1920, over 500 banks failed each year. The cause of this was many small banks lent too much money to speculators in the stock market. By 1929 other sectors of the economy were showing signs of strain problems after the boom in the years of the 1920s. The boom was based on the increased sale of consumer goods such as cars, and electrical appliances.
There were signs that American industries were over-producing surplus amounts, which was more than they could sell. The market for these goods was largely the rich and middle classes. By 1929 those who could afford consumer goods had already bought them. The majority of Americans who were poor couldn’t afford to buy them, even on generous hire purchases and credit schemes on offer. Hire purchase was something similar to ” buy now pay later”. This meant they didn’t pay straight away but after a period of time. Companies tried widespread advertising, in 1929 American industry spent a staggering $3 billion on magazine advertising. But with workers’ wages not rising and prices not falling demand decreased. In the past, American industry would’ve tried to export its extra goods to Europe. But due to the fact, America had put on import tariffs (tax) – this was implemented to protect American Industries also known as ”protectionism”, Europe retaliated by doing the same thing, but people in Europe couldn’t afford American goods either. Also after 9 years of American tariffs, Europe had put up its own tariffs to protect its own industries. By the summer of 1929, these weaknesses began to show.
Even car sales were slowing, and in June 1929, the official figures showed a fall for the first time in four years. As a result of this, America’s economy started to show a lot of weaknesses which made the economy of the country at the time even more unstable. This showed as a result between the widespread of the rich and poor, due to the fact that the rich could afford the consumer products whereas the poor couldn’t. The Republican policy called ”Laissez-faires” also contributed to the Wall Street crash. ”Laissez-faires” meant that the Republicans didn’t interfere with the lives of businessmen. This meant that they let industries and businesses do what they want. This meant that if example, a bank was borrowing too much money, then the government wouldn’t warn them because of this, many banks had closed because they couldn’t receive help because of this policy. The government’s policy was to not interfere and let the market sort out its own economical problems out, this was also known as non-intervention.
Overproduction was a serious concern and another factor that led to the Wall Street crash. Over-production was when you produced more surplus amounts than you needed. A lot of industries thought that they should produce as much as they can, hoping, that they would sell all of their products and thus making a profit, but this didn’t happen. Due to this happening, they couldn’t sell their products and were left with many unsold products. By 1929, industries mainly the home market that sold consumer goods was running out of customers. Many products had been bought by people in the upper classes in American society at that time and became saturated or full because people had already bought products that would last them a long time. Industries then had to make people redundant or fire them because this was the only solution to the problem.
The loss of confidence in people buying shares at the stock market exchange also led to a big rise of people selling their shares on a mass scale at very low prices. People were selling more shares than they were buying them. October 24th, 1929, was known as black Thursday because this was the day that people at the stock market exchange started selling their shares rapidly. Although this went on for a few more days, many shares were sold at very low prices. Speculators on the American stock market became nervous about the value of their shares and began to sell quickly. The shared values throughout September and October slowly gathered pace. Many investors who had borrowed money to buy their shares couldn’t afford to be stuck with shares less than the value of their loan. Soon other investors sold their shares and within days panic set in. On Tuesday 29th October it became clear to speculators that the banks were not going to stop to help support the prices of shares, and the Wall Street crash experienced its busiest and worst day in history as speculators desperately tried to dump 13 million shares at a fraction of the price they had paid for them.
The weakness in the economy had a big impact leading to the crash, people lost confidence in buying shares and started to sell rapidly, which led to the crash. Nobody knows why this happened, it’s still today unknown. Bu Autumn 1929, shrewd investors realized that a crisis was looming and sold their shares as quickly as possible. This led to a big drop in confidence. Having confidence in buyers was the main reason why prices kept rising, but when that confidence is taken away, prices of shares just plummet to very low prices. Economic problems such as hire purchase were factors that also led to the Wall Street crash. Hire purchase was when people paid a little amount of money as a deposit (or sometimes none at all), and then paid the rest later. An example of this is ”buy now pay later”. This was used on many consumer products to get many buyers to buy consumer goods such as electrical appliances. The problem was that not the full value for the product was paid immediately but paid over a period of time.
Another factor was Tariffs. Since America had put up its own import taxes or tariffs, Europe didn’t really import any goods into the USA. So instead, Europe retaliated by doing the same thing. This protected many European businesses and industries, just the same way as America did during the roaring ’20s. As a result, America had to pay tariffs to sell its goods in Europe which was pretty much expensive. Social factors also played a part before the Wall Street crash and leading into it. Unemployment was a big factor that meant a lot of Americans weren’t working and creating goods, which would then be sold. As a result, money wasn’t circulating and the American government and its people were not benefitting from this. Poverty as a result of this came about. Agricultural areas were hit hardest by the depression because they didn’t get their fair share of prosperity during the 1920s.
Many draughts started to appear, meaning no farmers could or weren’t planting and producing crops to sell. Before the crash, farmers overproduced which was a serious problem as it was very expensive and they couldn’t sell their crops due to cheaper foods and there was more competition from overseas. As a result of other factors not just related to agriculture but from unemployment in general, many shanty towns started to appear. These rubbish tips were crowded, with families hoping to scrape a meal. Many people, as a result, died from starvation and malnutrition as a result of poverty as they couldn’t afford food and water, and they were living in poor conditions within shantytowns.
In conclusion, there were various factors that led to the crash. But speculation was one of the most important reasons why the Wall Street crash happened. As speculators were the people that made the stock exchange carry on working, as they were the people that bought and sold shares. Banks taking part in speculation themselves and lending massive amounts of money which people weren’t able to pay back cause a lot of problems for the bank itself and for people on the stock market. The loss of confidence also meant people sold shares quickly than a fraction of the price they bought them for. This created chaos among the people at Wall Street at the time and then caused the stock market to crash. This was another major reason why the stock market crashed. Over-production was a big concern even before the crash because farmers had already been overproducing crops.
But industries made surplus amounts of goods that they couldn’t sell after, and many products became saturated as many people had already bought them and wouldn’t need another for many years. This also created a poor distribution between the rich and poor as the rich could afford to buy consumer goods but the poor couldn’t. Social factors such as poverty and unemployment also contributed. With people out of work and money not circulating, America wasn’t benefiting as no money was going to the government and industries, thus no jobs could be created or saved. Political factors such as laissez-faires meant that if the industry was ever in need of help it wouldn’t receive it from the government as the policy states, that the businessman should sort his own economical problems out without the government interfering. These were some of the main reasons why the Wall Street crash happened.