What caused the Stock Market Crash of 1929: Causes, Facts & Brief History


 

Stock Exchange after the crash1929

A crowd gathers outside the Stock Exchange after the crash1929.Photo By US-gov. Wikimedia.

The stock market crash of 1929 is considered the worst economic event in world history. The events that are described as the Stock Market Crash began on Black Thursday, October 24, 1929 with skittish investors trading a record 12.9 million shares  to the Black  Monday (29th October), through to Tuesday  30th October 1929 led to a loss of over 90% of the market value.
After the world war I America poised itself as great source of both Agricultural and Industrial goods leading to unprecedented growth period known as the roaring twenties.

The period was full full great growth in the America Industry including the Financial Industry, the growth was quite and unprecedented and outpaced development of government regulations. During this time the New York Exchange grew and offered lucrative investment opportunities to the growing urban dwelling population that were engaged in various productive activities.

In financial and economic sector it offered an opportunity for capital re-allocation as more and more firms sought to raise capital to expand their already existing ventures to cope with the increasing demand for goods and services.

With the recovery of the European countries their farmlands and industries started production and their government had started imposing import tariffs.

1.It was Precedented by a Decade of Post War Recovery Optimism

The world war I came to an end in 1917 with great destruction on the European farmlands, infrastructure and industries. This led to an increased demand for both agricultural and industrial good during the reconstruction, there was no better country to do this than the United States of America since it had not been greatly affected by the war.

It also offered great optimism to  rural Americans who had migrated to the cities in vast numbers throughout the decade with hopes of finding a more prosperous life in the ever-growing expansion of America’s industrial sector.

This led to a period of great economic growth known as the roaring twenties. It said that the roaring twenties is said to have roared loudest and longest on the New York Stock Exchange, where Share prices rose to unprecedented heights from 1921 to September 1929 the stock exchange indicator Dow Jones Industrial Average increased from sixty-three on August 1921 to three hundred and eighty-one in September 1929.
By this time, many ordinary working-class citizens had become interested in stock investments, and some purchased stocks “on margin,” meaning they paid only a small percentage of the value and borrowed the rest from a bank or broker. Additionally, the overall economic climate in the United States was healthy in the 1920s. Unemployment was down, and the automobile industry was booming.
The rise caused great optimism though some economist such Irving Fisher claimed that the stock prices had reached a permanently high plateau but failed to predict the event leading to the crash.

2.The Epic Boom ended in a Cataclysmic Bust

On Black Monday, October 28, 1929, the Dow declined nearly 13 percent. On the following day, Black Tuesday, the market dropped nearly 12 percent. By mid-November, the Dow had lost almost half of its value. The slide continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak.

3.There was Overconfidence Amongst the Public Market Intermediaries

The years before the bubble was full of optimism and this led to over confidence among the makert players who never foresaw any eminent danger in the growth.
It is widely agreed among modern experts that the stocks then were wildly overpriced since the stock market had increased by nearly 20 percent year on year until 1929.
That same sense of reckless overconfidence extended to average consumers and small investors, too, leading to an “asset bubble.” The crash happened after a long period of rising market growth that led to consumer overconfidence.

4.People Bought Stocks with Easy Credit

During the 1920s, there was a rapid growth in bank credit and easily acquired loans. People encouraged by the market’s stability were unafraid of debt.
The concept of buying on margin allowed ordinary people with little financial acumen to borrow money from their stockbroker and put down as little as 10 percent of the share value.
A similar type of overconfidence was seen in industries such as manufacturing and agriculture: overproduction led to a glut of items including farm crops, steel, durable goods and iron. This meant companies had to purge their supplies at a loss, and share prices suffered.

5.Economic Recovery of The European Markets

Post world war recovery period was a great period for America as majority European Countries were rebuilding leading to increased production by the American Industries and farmers, however by the late 1920s the European Industries had started their production and government passed protectionist policies to protect their infant factories,
This led to the American company having to deal with over production.

6.Federal Raised Lending Interest Rates

The federal reserve in its  March 1925 bulletin issue  noted  a decrease in bank loans to brokers that  was caused by borrowers shifting from borrowing from brokers to directly borrowing from banks against securities for investment or for speculation.

This shift may have been due in part to the increasingly high rates and wide margins demanded by brokers from their customers

had cautioned against the increasing loans against securities with In August 1929 –just weeks before the stock market crashed – the Federal Reserve Bank of New York raised the interest rate from 5 percent to 6 percent.
Some experts say this steep, sudden hike cooled investor enthusiasm, which affected market stability and sharply reduced economic growth.
Another factor was an ongoing agricultural recession: Farmers struggled to make an annual profit to keep their businesses afloat. Some believe this agricultural slump affected the financial climate of the country.

7.Panic Made the Situation Worse

Public panic in the days after the stock market crash led to hordes of people rushing to banks to withdraw their funds in a number of “bank runs,” and investors were unable to withdraw their money because bank officials had invested the money in the market.
This led to massive bank failures and further deepened an already dire financial situation.
Many analysts claim that the financial press also played a key role in contributing to the sense of panic that exacerbated the stock market crash.
The day before Black Thursday, the Washington Post ran the headline: “Huge Selling Wave Creates Near-Panic as Stocks Collapse,” while The New York Times announced: “Prices of Stocks Crash in Heavy Liquidation.”

8.There Was No Single Cause for the Turmoil

Most economists agree that several, compounding factors led to the stock market crash of 1929.
A soaring, overheated economy that was destined to one day fall likely played a large role. Equally relevant issues, such as overpriced shares, public panic, rising bank loans, an agriculture crisis, higher interest rates and a cynical press added to the disarray.
Many investors and ordinary people lost their entire savings, while numerous banks and companies went bankrupt.

 

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