The Wall Street Crash, also known as Black Tuesday, was a stock market crash that devastated the USA economy on the 29th of October 1929. The ramifications of this crash were immense as it helped cause the Great Depression. After the crash, it took the stock market up until 1954 for prices to return to 1929 levels.
Below, we outline the major causes of the Wall Street Crash.
Monetary and Credit Expansion
As a result of the Fed’s monetary expansion in the USA during the 1920s, credit became widely available and the stock market was teaming with stories of self-made millionaires. The incentive was there for agents to take out loans and invest in stocks and shares, and invest they did. Inevitably, this left agents in a risky position as they took on incredibly large amounts of debt. Thus, when confidence in the stock market started to plummet, a significant number of investors wanted out and rushed to sell their shares. As share values tumbled, this left those who had borrowed in a horrible position; they owed large amounts of money to their creditors but their wealth had been reduced drastically. Debt-defaults spread like wildfire and confidence in the stock market drastically spiralled downwards.
Buying on the Margin
Additionally, many agents had dangerously engaged in ‘buying on the margin’, that is, buying shares with loaned money. Agents were borrowing up to 90% of the value of shares and only paying for the remainder up front, allowing them to invest in more shares; this left many investors exposed to debt-defaults.
Bull Market: Irrational Exuberance
A key problem in the run-up to the Wall Street Crash was the irrational exuberance of investors. A Bull Market is a period of rising stock prices, and in the 1920s this period was quite long. Between 1922-1929, the average stock price rose from $50 to $350. As share prices rose, more investors wanted a piece of the pie, driving share prices up further and, in turn, attracting more investors. The problem was, share prices did not reflect the profitability of firms, they showed the rising expectations of investors. Predictably, when firms began to post poor results on Black Thursday (24th of October 1929), investors became nervous and reality set in. Investors were in a panic and began to sell their shares as quickly as possible, causing share prices to tumble.
Another cause of the Wall Street Crash revolved around the US banking sector. In the build up to the crash, there were many small banks in the USA who faced little federal regulation and recklessly invested their funds in the bull market. When the stock market crashed, these small banks lost their money and, subsequently, lost their customers’ money. Once the US public caught wind of this there were a multitude of bank runs which forced many small banks to close. Ultimately, this helped cause the Great Depression as well as the Wall Street Crash.
In the early 20th Century, the USA was experiencing a bout of ‘consumerism’. The media were advertising the latest products and consumers were encouraged to buy them. Since buying new cars and products outright was beyond the reach of the average household, most consumers turned to credit; exposing themselves to even more debt whilst helping to push up share prices of the firms they were buying from.
One of the reasons why firms posted disappointing results on Black Thursday was over-production. The advent of the assembly line, as well as other innovations in production, allowed firms to increase output in the face of growing consumer demand. However, the growth in production soon outstripped the growth in demand for automobiles and other consumer goods, resulting in over-production and lower profits for firms.