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  • Writer's pictureAbir Mohammed

The Wall Street Crash of 1929

One of the most well-renowned crashes of all time, the downfall of the New York Stock Exchange marks the largest in US history.

What Happened?

On October 28, 1929, many investors decided to sell their stocks, which led to an initial 12.87% drop. This was then followed by a further 11.73% drop the next day. An ongoing series of such events led to prices of stocks dropping until 1932, conceding the US market with a total fall of 89% and also being a major contributor to the Great Depression. On the first day of the crash, a number of banks had their CEOs gather assets and resources in order to buy a vast number of blue-chip stocks. Blue-chip stocks are safe, well-known stocks due to their relative stability, mainly due to the prominence of the companies offering such stocks. Much of their investments went towards US steel, which in fact did stop the panic of investors selling stocks for the day. However, the selling continued the following day, with prices once again falling. Thus, the Rockefeller family made huge purchases (one of the richest families of all time), but these were not enough to restore the confidence of the masses.

The reason for such a huge crash was mainly due to the fact that people held stocks as collateral, thus once prices began falling, banks demanded repayment, leading to a number of bankruptcies and investors panicking. There are also a number of other factors that contributed to this mass downfall of the US market:

Causes

Perhaps the biggest cause was speculation- a phenomenon that still plays a huge role in price changes in stock markets today. Speculation occurred as common people saw stock prices rise and people making 20-30% returns, thus themselves began investing, with the hopes that they’d also gain these 20-30% returns on their money.

Over time, the accumulation of millions of investors taking advantage of stock prices rising led to the formation of a speculative bubble- people keep buying stocks and speculate that the prices will keep increasing in the future. The issue with this was that many people borrowed money from financial institutions just to buy stocks. Of course, you can’t blame them. Imagine receiving money, investing it, making 20-30% back, and only paying back about 5% interest. It was practically free money. However, due to reasons listed below, prices eventually began lowering, leading to numerous sales as speculative bubbles popped (as people want to avoid losses).

A year before the crash occurred, there was an oversupply of wheat due to great harvests, thus leading to lower prices in 1929. Prices kept lowering as harvests from 1929 came in and especially since European nations also had good harvests, meaning exporting was no longer a viable option. Farmers, therefore, faced low prices, and due to poor harvests in 1929, they were unable to make a good enough revenue, thus agriculture as a whole began to crash.

On top of the reasons listed above, there was a large issue regarding information provision. Stock tickers (machines that manage which stocks are bought and sold) were unable to keep up with the huge number of orders being placed during the time of the crash. This meant prices were hours behind and thus led to even more investor uncertainty and panic, hence more stocks being sold quickly.

Consequences

The economic implications of the stock market crash may be some of the most tremendous downfalls in the history of economics. Millions of consumers lost not only confidence but a large amount of money leading to numerous and widespread bankruptcies. In turn, businesses began suffering, due to lower demand for their goods and services. This created a vicious cycle of unemployment as businesses were unable to keep up with the variable cost of paying the wages of their employees. An estimated 14 million people became unemployed following the crash.

Unemployment led to millions more becoming homeless. This was especially true in the agriculture industry, with an estimated 2 million bankrupt farmers unable to feed their own families. Banks suffered massive losses due to the abundance of bankruptcies being declared. In fact, almost 700 banks closed in 1929, rising to over 2000 by 1931. Indeed the Wall Street Crash of 1929 played a huge role in the dark era that is the Great Depression.

Conclusion

Historians and economists both look back at the crash not to grieve at the tremendous losses faced by America, but to learn from the mistakes made by people from all ranks of society. From corporate owners to investors and common people, the event has taught a lot about the grave risks associated with speculation and marginal trading.

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