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Chicago
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Business & Marketing
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Topic:

Economic Factors That Led To The Us Stock Market Crash Of 1929 (Research Paper Sample)

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ECONOMIC FACTORS THAT LED TO THE US STOCK MARKET CRASH OF 1929

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ECONOMIC FACTORS THAT LED TO THE US STOCK MARKET CRASH OF 1929
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Economic Factors that Led to the Crash of the US Stock Market on 1929
Abstract
The US stock market crash started on the 24th of October in 1929 a Thursday and it became known as the Black Thursday, it was the worst day in the US economic history. The stock prices in the market fell that day and it took years to try and revive the market. Many companies, firms, and people lost their investments when the markets came crashing. Not even one investor was spared and many people could be seen crowding outside Wall Street that day talking with their fellow investors. The crash meant that many companies had fallen completely and the people who had invested in them had lost their money. A mini crash had occurred on March but it was contained and this bought more time for the market. There were many adverse effects of the stock market failing but the worst one was the Great Depression that followed after the market tumbled. This paper discusses and focuses on some of the major causes that led to the fall of the stock market in 1929. There are detailed explanations on each point that was a major contributor to the fall and it seeks to explain how all of these happened. It seeks to find the root cause and how the market grew to the point it had reached and where it started to decline. There is a vivid explanation in each step and there are also some highlights on how the economy had grown and the negativity it impacted on the stock market. The rapid growth of the stock market, increase in crop produce, and the increase in the number of banks all laid the foundations for the crash of the stock market on the 24th of October 1929. Overproduction of goods to low consumer levels, buying on the margin, credit boom of the early 20th century, and agricultural recession are some of the causes that led to the crash of the stock market.
Discussion
Buying on the margin means that the people could buy shares and not pay the full amount required. This meant someone could pay for only 10 to 20 % of the total value of the shares they intended to buy and borrow the remaining percentage. This allowed a lot of money to be put into shares and there were very many ‘margin millionaires.’ This caused the share prices to rise greatly and they made a lot of profits. All the ‘margin millionaires’ were vulnerable when the stock prices began to fall and they lost a lot of their money.1 They were wiped out and those that lent them money including banks suffered the loss too. During the period of the 1920s, many people speculated that if they invested in the stock market they would be assured of a solid investment. The continued growth of the stock prices in the market gave the investors an assurance they needed in order to buy. Many people took out loans and invested while others sold some of their assets and to raise funds for investing. 2
There was panic when the markets crashed on the Black Thursday causing many people to rush and sell their stock since they did not want to keep on holding to worthless investment. This rampant selling of stock affected the market more and many people did not manage to sell their stock since no one was buying and they were aware of the fall. The stock prices continued to drop for two more years and many people lost their entire savings and many companies were affected. Many people lost their entire life savings and many other assets. 3
-63512065001 Sornette, Didier. Why stock markets crash: critical events in complex financial systems. Princeton University Press, 2009.
2 White, Eugene N. "The stock market boom and crash of 1929 revisited." The Journal of Economic Perspectives 4, no. 2 (1990): 67-83.
3 Schwert, G. William. "Stock market volatility." Financial analyst’s journal (1990): 23-34.
A great depression followed after the market crash thereby resulting in one of the worst economic periods in the US. The great depression affected other economies and stock markets in the world like the London Stock Exchange.4
In the 1920s the financial sector boomed and many banks grew and expanded a lot. The rapid growth in the economy gave people the assurance they needed and so they took loans to invest. They invested in many industries, bought shares in the stock market, started companies, others bought lands to practice farming, and much more. The economy encouraged even the banks, therefore, they invested large chunks of the people’s money while some saw the chance to expand rapidly. Many firms, various sizes of companies, and startups took out large loans to expand their businesses. Other companies also took loans and invested in the stock market.5
0270954500The wild speculation affected the people who took loans as they anticipated more growth expecting to pay back their loans soon. The stock prices began to fall and all those who took loans to invest in the stock market were affected. A large population of the productive people in the country were in debt to various financial institutions and the banks too were affected as they had used the people’s deposit for other projects. This means that people were highly indebted and therefore, they were highly exposed and more vulnerable to any change in confidence. The change came in 1929 and they were in fear so they sold rapidly whatever shares they had acquired in order not to lose a lot and redeem their debts.6
4 Amadeo K. Stock Market Crash of 1929 Facts, Causes, and Impact. (2017).
5 Pettinger T. What Caused the Wall Street Crash of 1929? (2012). The Balance Inc.
6 Schwert, G. William. "Stock volatility and the crash of’87." Review of financial Studies 3, no. 1 (1990): 77-102.
In the decade after the World War I the agricultural sector was in a mess as it struggled to maintain its profitability. Many farmers gave up their economic activity and were carried with...
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