The most devastating stock market crash in the history of the United States of America occurred in October 1929. Roughly one month after the crash of London Stock Exchange, the Dow Jones industrial average at the New York Stock Exchange dropped by 23 percent in just 2 days. The impact of the Financial Crash of 1929 was instantaneous as billions of dollars were lost and the savings of most of the investors were completely wiped out within a few days. Because of panic selling and a sudden contraction in investment, many businesses were hit hard and had to shut down.
The effects were not limited to America. Stock markets crashed worldwide with the exception of Japan. Some of the other ill-effects of this crash were more gradual and took more time to show. Within 4 years, nearly half of American banks had closed. In addition to this, nearly 15 million people, or 30 percent of America’s workforce, did not have jobs. Moreover, this also led to wide-scale social instability in America. This was because people belonging to the African American community were the hardest hit.
Due to rampant racial discrimination, businesses were skittish about employing African Americans and only turned to them when they had no choice. Hence, when the time came for retrenchment, African American workers were naturally the first ones to be fired. Apart from these impacts, the crash of 1929 also triggered a major socio-economic debate with regards to the state’s role and involvement in the economy. This academic debate has continued to rage on in modern times. But these facts are already quite well known. Hence, this article is going to focus upon the causes of the Financial crash of 1929.
Before dwelling into the causes, it is important to outline the context in which the Financial crash of 1929 took place. The decade of the 20’s had been a great one for the American economy. After tectonic revolutions in technology, automobiles and movie theaters had become common throughout the nation. Industrial production was at an all time-high and America was quickly becoming the most powerful economic nation in the world. Banks were popping up at great rapidity so aspiring businessmen had access to cheap credit. Because of this, there was widespread increase in the number of businesses throughout the country. The housing market was also witnessing tangible gains as people were flocking to cities from rural areas in the hopes of finding a job and living a better life. The Dow Jones Industrial average had multiplied by six times between 1921 and 1929. The stock market was relentlessly rising. That decade was called the ‘Roaring 20s’ for a reason.
Caught up in this euphoria of unbridled optimism, no one thought that an economic catastrophe was on the cards. It is clear that everyone was wrong. The stock market did eventually crash. But why did it happen?
Firstly, because of the boom in the economy, there was over optimism with regards to the stock market. Millions of Americans, having limited knowledge of the stock market, were told that they could get rich overnight by buying stocks. They were told that the stock market was rising and that it would continue to rise forever because of the expanding economy. Hence, people resorted to large scale margin buying tactics. This meant that they would buy stocks at a third of its price by taking a loan from the stockbroker itself. This meant that millions of Americans could afford to buy stocks as the stockbrokers were willing to sell them at grossly low prices. Some of the ordinary Americans also mortgaged their houses to invest in stocks. This may seem like a very silly move in today’s context, but in the 20’s, it was quite reasonable considering the fact that people thought they would never lose money in the stock market.
In addition to this, new banks were coming up almost daily and in order to compete, they were advancing incredibly cheap and risky credit to the American populace. All of these delicate complexities were balanced on one pre-assumption- the stock market would continue to rise forever. Even a decrease in its growth rate, let alone a contraction, could lead to major losses. So when the stock market nosedived in October 1929, billions were lost.
Secondly, in the aftermath of World War 1, there was a large scale increase in food production. This was because vast expanses of land had been converted into farm lands during World War 1 to ensure a steady supply of food to the soldiers in Europe. When the war ended, the demand declined but the supply went up. Not only did more lands come under cultivation but the production received a boost by virtue of new technologies like tractors and combines. All of this led to overproduction causing a glut in the economy. Due to this, the prices of food grains declined rapidly. Now, a stock market is sensitive to the prices of commodities.
Hence, many eminent economists had predicted a fall in the value of stocks. However, their views were denounced as pessimistic by the optimists in the financial sector who pointed towards a huge relief package passed by Congress to help the farmers. Some droughts in Central America did delay the inevitable crash. But it couldn’t delay it for too long.
Thirdly, panic selling of stocks was perhaps one of the biggest reasons that the Financial crash of 1929 evolved into an international economic disaster. As soon as people began receiving news that the market was going down, they started selling all their shares to prevent major losses. On some days in that fateful month of October, more than 12 million shares were sold. This sudden pull out of money from the market intensified and sped up the crash.
All in all, there were clear signs of a potential crash. Automobile and steel production had begun falling in the second half of the 20’s. The economy was clearly going towards a depression. But unfounded optimism created an economic bubble which allowed the bankers and stockbrokers to live in a state of denial. By the time they became attentive, it was too late. It is seen by many as the starting point of the great depression which engulfed the world in the next 4 years. While some scholars continue to state that the great depression wasn’t actually caused by the crash, it is hard to agree with them.
Their main argument was that only about 15 percent Americans were invested in the stock market and hence most of the people weren’t affected by the crash. But they underestimate the psychological impact of the crash. Many businesses faced uncertainty with regards to securing enough capital investments and hence had to fire a considerable number of workers. Moreover, the average American consumer was now much more cautious about spending money and hence consumer expenditure declined. Hence, one can tout the Financial Crash of 1929 as one of the major reasons of the great depression. What’s shocking is that America failed to learn from these mistakes as the economy succumbed again in 2008 to a housing bubble. There were many eerie similarities. An unfounded wave of optimism that the housing market would never fail, banks advancing cheap credits and Americans investing in mortgage bonds relentlessly caused yet another economic disaster.
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The one word that defines him is curiosity. Always looking for new things to explore and learn. Apart from this, he is an avid debator which largely stems from his habit of reading voraciously. Currently pursuing Political Science (Hons.) at Ramjas College, Manraj is a movie buff and a huge football fan.