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Critical Analysis Of The Wall Street Crash Of 1929 (Case Study Sample)
CRITICAL ANALYSIS OF THE WALL STREET CRASH OF 1929. This essay analyses the factors that led to the crisis, consequences of the crash, and lessons learnt.source..
CRITICAL ANALYSIS OF THE WALL STREET CRASH OF 1929
The securities crash that started in October 1929 resulted from systemic failures that allowed for high-risk mass share ownership, significant margin trading, market manipulation, and lobbying that prevented government supervision. The crash lead to a loss of personal wealth and bankruptcies, bank collapses, and a liquidity crisis that would elicit mass business failure and culminate in the Great Depression. In response, private and public sector interventions led to establishment of strict securities regulation.
Table of Contents TOC \o "1-3" \h \z \u ABSTRACT PAGEREF _Toc486766787 \h iiINTRODUCTION PAGEREF _Toc486766788 \h 2CAUSES PAGEREF _Toc486766789 \h 3EFFECTS OF THE 1929 WALL STREET CRASH PAGEREF _Toc486766790 \h 4LESSONS LEARNT PAGEREF _Toc486766791 \h 5CONCLUSION PAGEREF _Toc486766792 \h 6REFERENCES PAGEREF _Toc486766793 \h 7
Between 1929 and 1924, the Dow Jones Industrial Average (DJIA) experienced double-digit growth in an unprecedented bull run. Volatile and uncharacteristically high-volume trading would, however, trigger an equally unprecedented crash. In October 23, 1929, 2.5 million shares were sold during last hours trading and panic selling would persist throughout the week. Furthermore, in the 36 hours between the 28th and 29th, the DJIA recorded a 23% fall.[J. Conlin, The American past: A survey of American history, volume II: Since 1865, Boston, Cengage Learning, 2013, p. 667.] [P. Rappoport and E. White, ‘Was the crash of 1929 expected?’ The American Economic Review, vol. 84, no. 1, 1994, pp. 271.]
Figure SEQ Figure \* ARABIC 1 - Newspaper headline in October 24th 1929 showing the mass share sales during the crash[M. Klein, Rainbow's end: The crash of 1929, New York, Oxford University Press, 2003, p. 214.]
This essay analyses the factors that led to the crisis, consequences of the crash, and lessons learnt.
Figure SEQ Figure \* ARABIC 2 - The crash of the Dow Jones Industrial Average in October 1929[K. Blumenthal, Six Days in October: The Stock Market Crash of 1929; A Wall Street Journal Book for Children., New York, Simon and Schuster, 2002, p. 202.]
One of the causes of the 1929 stock crash was the liquidity in the credit markets. As consumer credit became cheaper, a post-World War II consumer culture emerged especially for big-ticket consumer good purchases. In 1928 alone, about 70% of the over four million household radios were sold on instalment credit. Consequently, consumer non-mortgage credit doubled by 1929 to over 2017-adjusted $100 billion. Ultimately, said access engendered ubiquitous money desensitization among the public and, in later years, elicited highly-leveraged and voracious risk taking from a newly-investing public,.[P. Scott and J. Walker, ‘Bringing Radio into America's Homes: Marketing New Technology in the Great Depression’, Business History Review, vol. 90, no. 2, 2016, pp. 262, 267, 273.] [B. E. Gup, (ed.), Too big to fail: policies and practices in government bailouts, Santa Barbara, Greenwood Publishing Group, 2004, p. 92.] [J. Conlin, The American past: A survey of American history, volume II: Since 1865, Boston, Cengage Learning, 2013, pp. 661-62.] [P. Scott and J. Walker, ‘Bringing Radio into America's Homes: Marketing New Technology in the Great Depression’, Business History Review, vol. 90, no. 2, 2016, p. 255.]
Furthermore, the successful Liberty Bond campaign of the period cultivated an investing culture sustained mostly by unaccredited and unsophisticated investors. These investors responded to relentless entreaties by Wall Street brokers to take up high-risk securities trading, expecting a respectable and streamlined market similar to bond trading. An incautious populization of the stock market ensued and by the later half of the 1920s, about three million Americans were speculating in the stock market, marking the start of a bull market. Financial traders and corporations responded in kind: between 1928 and 1929, there was an 80% increase in brokerage office branches across the country while US corporations had issued shares worth over 2017-adjusted $1 trillion by 1929. The resultant mass share ownership, and increasing demand and supply for financial products prompted a speculative frenzy. Uninformed speculation had an outsized role in sparking the volatility that culminated in the crash.[R. Lambert, ‘Crashes, Bangs and Wallops’, Financial Times, 7 August 2008, /content/3cc7b1b2-52f2-11dd-9ba7-000077b07658?mhq5j=e3, (accessed 5 July 2017).] [J. Conlin, op. cit., p. 667.] [B. E. Gup, (ed.), op. cit., p. 92.] [J. Traflet, ‘Spreading the ideal of mass shareownership: Public relations and the NYSE’, Essays in Economic & Business History, vol. 22, 2012, pp. 257-260.] [J. Traflet, A Nation of Small Shareholders: Marketing Wall Street After World War II, Baltimore, JHU Press, 2013, pp. 226-28.]
Moreover, brokerage houses and banks responded to investor enthusiasm by offering margin loans and brokers’ loans respectively, thereby extending familiar consumer credit to securities trading. By the late 1920s, margin debt amounted to ~20% of all listed stocks and went unregulated, with up to 90% margin on stock positions. This scenario created heavily leveraged investors unaware of downside risks while the resultant capital inflows increased demand for securities. In response, 100 million shares from 60 IPOs were filed in mid 1929 in the NYSE. When the crash commenced, brokerages issued numerous margin calls to avoid undermargined stock, but when loan calls went unmet, defaulters’ securities were liquidated in a sellers’ market, further depressing rapidly deflating stock prices.[P. Rappoport and E. White, op. cit., pp. 271.] [B. E. Gup, (ed.), op. cit., 92.] [J. Conlin, op. cit., p. 667.] [P. Rappoport and E. White, op. cit., p. 272.]
Established traders also manipulated ticker prices through insider trading and bankers’ pools,. Market manipulation thrived due largely to the laissez faire approach of the 1920-1932 Republican administrations, secured through preferential treatment for stock deals for policymakers and close relationships between politicians and elite Wall Street traders. Inconsequential legislation had two main consequences. Firstly, market manipulation went unchecked and, secondly, government was denied information equilibrium. The latter manifested when, in late October 1929, the President mistook the crash for a welcome stock price correction, stymying the government’s ability to curtail panic selling.[J. Traflet, ‘Lessons in crisis mismanagement from the 1929 crash’, Essays in Economic & Business History, 24, 2012, pp. 90, 94.] [M. Klein, op. cit., p. 224.] [J. Conlin, op. cit., p. 667.] [C. Crawford, ‘The repeal of the Glass-Steagall Act and the current financial crisis’, Journal of Business & Economics Research, vol. 9, no. 1, 2011, p. 128.] [M. Klein, op. cit., pp. 215-16, 230-31.]
EFFECTS OF THE 1929 WALL STREET CRASH
Due to pervasive margin trading, brokerages issued numerous margin calls at a steep rate, uneasy that the crash would eliminate the collateral. This had a double effect. On the one hand, shareholders lost significant personal wealth invested into stocks. On the other, mass trades depressed stock prices, part of a vicious cycle that accelerated panic selling and intensified value loses.
Consequently, the securitized loans market underlying the margin trading collapsed, dramatically eroding the balance sheets of the heavily exposed retail banks,,. Importantly, banks also experienced above average depreciation in securities portfolios, often exceeding the losses from defaulted margin loans. In addition, the crash undermined public confidence in the financial and banking system. As retail bank deposits were uninsured, individuals and businesses risked losing savings and bankruptcies. This prospect triggered retail bank money runs by non-investing depositors. Ultimately, over 2,000 collapsed between 1929 and 1931.[R. Lambert, ‘Crashes, Bangs and Wallops’, Financial Times, 7 August 2008, /content/3cc7b1b2-52f2-11dd-9ba7-000077b07658?mhq5j=e3, (accessed 5 July 2017).] [P. Rappoport and E. White, op. cit., p. 271.] [B. E. Gup, (ed.), Too big to fail: policies and practices in government bailouts, Santa Barbara, Greenwood Publishing Group, 2004, pp. 92-96.] [B. E. Gup, (ed.), op. cit., pp. 92-93.]
Furthermore, investors defaulted on margin credit offered by financial institutions such as banks and as stock prices fell faster than stock could be closed, significant collateral was lost. These losses, coupled with bank collapses, triggered a liquidity crisis that, in turn, meant that business could no longer access short-term commercial credit to sustain production or expansion. Consequently, this lead to numerous business and personal bankruptcies, mass layoffs, and falling consumer demand. For instance, vehicle sales decreased by 75% between 1929 and 1932.[R. Lambert,op. cit.]
These events culminated in the Great Depression. The Great Depression would also cause a global slowdown due to the international nature of trade in commodities. The resultant downturn elicited protectionism and economic nationalism in the USA (the 1930 Smoot–Hawley Tariff Act) and international retaliations, emboldened anti-capitalist movements, and precipitated trade wars that morphed into a world war,,,.[B. Beaudreau, Mass production, the stock market crash, and the Great Depression: the macroeconomics of electrification (Vol. 175), Bloomington, iUniverse, 2004, pp. 29-48.] [D. Irwin, Peddling Protectionism: Smoot-Hawley and the Great Depres...
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