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

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
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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 the wave of industrialization because it was the new thing. There was a new economic climate in the country and this posed a threat to the agricultural economy. Many farmers were greatly affected as they were driven out of business since they could not compete with the new climate. The people who had large tracts of land were able to apply the new trends of agricultural technology to their farms. The development and innovations in agriculture increased the supply of farm produce in the country. The major problem was that the increase in food supply was at a very high rate compared to the increase in demand for food.7
279403006090The overproduction of food meant that there was no market for all the farm produce and there was an oversupply. The oversupply affected the market prices of food and it fell affecting both the small-scale and large- scale farmers. Their incomes dropped hugely and they were left with little money yet with a lot of crops that had no market. There was a change in the market as many small-scale farmers were forced to move to the cities to look for a living after the disappointment they had. 8 Many of the farmers did not have skills in any other profession meaning they were unskilled, it was very hard for them to find jobs anywhere. Many were depressed and those that had invested heavily in their farms were the most affected. 9 Some farmers had taken loans to finance their economic activity and most had listed their farms
7 Romer, Christina D. "The great crash and the onset of the great depression." The Quarterly Journal of Economics 105, no. 3 (1990): 597-624.
8 Bhide, Amar. "The hidden costs of stock market liquidity." Journal of financial economics 34, no. 1 (1993): 31-51.
9 Shiller, Robert J. Irrational exuberance. Princeton university press, 2015.
as the securities to their loans. Most lost their farms as the banks were forced to possess them in order to recover the loans they took.
Another factor that attributed to the fall of the stock market was the weak banking system in the country. This was caused because the country had very many growing medium firms and the banks were more than 30000. The cash deposits to the banks were not usually of a substantial amount as they competed for whatever amount of money that was available. The banks were at a very high risk of becoming bankrupt in case there was a run on the deposits.11The banks that were the most affected were those in rural areas when there was the agricultural recession. The rural areas were mainly made up of farmers and the banks’ major customers in those areas were the farmers. More than 5000 banks collapsed between 1923 and 1930.
The banks became bankrupt and they collapsed bearing an adverse effect to the economy. Many people who were employed in the banks lost their jobs and the banks were not hiring any more, they were cutting down on their staff. The people who had their money in the banks were greatly affected as they lost their money when the banks went down. Many people were left penniless, hopeless, and jobless and this state increased the poverty levels in the country.12
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10. Bordo, Michael D., Angela Redish, and Hugh Rockoff. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or…)?" The Economic History Review 68, no. 1 (2015): 218-243.
11. Bordo, Michael D., and Joseph G. Haubrich. "Deep recessions, fast recoveries, and financial crises: Evidence from the American record." Economic Inquiry 55, no. 1 (2017): 527-541.
12. Laeven, Luc. "The development of local capital markets: rationale and challenges." (2014).
The advent of the 20th century saw many companies grow and there were a lot of inventions too. The banking industry was growing rapidly and many new banks were being opened to cater for the ‘newly rich.’ The newly rich were the young people who were working in the stock market, the industries, the banks, the inven...