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Causes of the Wall Street Crash

Herbert Hoover

Causes of the Wall Street Crash: Herbert Hoover was the 31st US President who served in office from March 4, 1929 to March 4, 1933. One of the most important events during his presidency were the events that led to the reasons and causes of the 1929 Wall Street Crash.

Definition and Summary of the Causes of the Wall Street Crash
Summary and definition:
The Wall Street stock market crashed on Tuesday October 29, 1929 (Black Tuesday) due to the panic-selling of massive amounts of stocks and shares. There were many reasons and causes of the 1929 Wall Street Crash including the feeling of optimism and overconfidence during the Roaring Twenties and the economic boom in the era.

The rise of American Consumerism led to the overproduction of consumer goods that were attained as a result of easy credit schemes. The Stock Market boom and the 'Long Bull Market' led to the system of buying stocks "on margin" with loans from stock brokers. The Fall in demand for consumer products and the unequal distribution of wealth across America were also important causes of the Wall Street Crash as were the weaknesses in the American banking system.

What caused the Wall Street Crash? The Wall Street Crash, the collapse of U.S. Stock Market on October 29, 1929 (Black Tuesday) was caused by a number of factors including:

  • Irrational exuberance, optimism and over confidence

  • US Economic Boom

  • Rise of American Consumerism

  • Overproduction of consumer goods

  • Easy credit schemes and increased debt

  • The Stock Market boom and the 'Long Bull Market'

  • Buying stocks "on margin" (buying shares with loaned money)

  • Unequal distribution of wealth

  • Fall in demand

  • Weaknesses in the banking system

What were the Effects of the Wall Street Crash? The Effects of the 1929 Wall Street Crash resulted in the closure of banks, high levels of unemployment, bankruptcies, suicides, starvation, evictions and wage cuts that led to the Great Depression. The global impact of the 1929 Wall Street Crash resulted in the world-wide collapse of share values.

Facts about Causes of the Wall Street Crash
The following fact sheet contains interesting facts and information on Causes of the Wall Street Crash.

 Over Confidence: The Roaring Twenties brought a new, exciting modern lifestyle to many people in the United States, as war-weary Americans began to experience prosperity in the 1920s which led to,  over confidence and optimism. It produced feelings of invincibility and irrational exuberance - many Americans believed that the good times would never end.

 The Economic Boom: The 1920s Economic Boom was a time of financial prosperity with increases in productivity, sales and wages. There was a rising demand for new consumer products leading to massive profits for American businesses. The vast profits encouraged growth and led to the economic boom in the 1920s resulting in the rise of Consumerism, easy credit and an unprecedented increase in stock market investments.

 Consumerism: Consumerism in 1920's America encouraged the acquirement of goods and services in ever-increasing amounts. Consumerism increased in America as a result of technical advances and innovative inventions. Mass advertising via the newspapers and the new radio industry saw a massive increase in sales obtained with easy consumer credit. Refer to 1920's Radio and Advertising.

 Easy Credit: Americans desired the new labor saving devices and the new automobiles that were advertised. There was a movement away from the traditional values and avoidance of debt to the concept by buying goods on credit installments. The once "thrifty and prudent" American adopted the modern philosophy of "Live now, pay later".

 The Stock Market Boom: As US industry boomed, so did company shares on the Wall Street stock market. Prices of shares went up year after year, and investors made substantial profits. The Long Bull Market of the 1920's saw stock prices soar from an average of $50 per share in 1922 to a massive $350 per share in 1929. Investors were unconcerned about what companies they were investing in, or whether the business had good future prospects - they were gambling that the stock market share prices would continue to rise. There were virtually no controls on the buying and selling of shares.

 The 'Long Bull Market': A Bull Market is a long period of rising stock prices. The Long Bull Market of the 1920s and the profits being made, encouraged people to engage in heavy speculation on the Stock Exchange. Stock Brokers promoted the idea of "Buying on Margin".

 "Buying On Margin": The system of 'Buying on Margin' essentially meant buying stocks with loaned money. A deposit of $1,000 would buy and investor $10,000 worth of stocks - the remaining $9,000 would come as a loan from the stockbroker. Millions of new investors were 'Buying on Margin' in the 1920s and bid the prices of stock up still further.

Overproduction: Businesses and factories reacted to the increase in demand for the new consumer goods. Advances in technology, manufacturing machinery and the adoption of innovative systems such as the Assembly Line resulted in a soar in output and ultimately in overproduction of consumer goods.

 Unequal distribution of wealth: The Unequal distribution of wealth in the 1920's contributed to the Stock Market Crash. 40% of middle class Americans prospered during the economic boom. The other 60% of Americans were poor and struggling to make a living. The majority of the nation's farmers had suffered a severe overproduction crisis. By the end of the 1920s the people who had money had purchased the goods they wanted, the remainder could not afford the new luxury products. The market quickly dried up, too many products were being produced with too few people earning enough money to buy them. 

 Margin Calls: When the price of stock fell stock brokers issued 'Margin Calls' to protect the loans. A margin call demanded that the investor repaid the loan all at once. As stock prices fell investors had to sell quickly in order to repay their loans.

 Weaknesses in the Banking System: America had too many small banks and there were virtually no federal regulations to control banks. Small banks had recklessly invested their depositor's money on the bull market, buying stocks on margin with customers’ savings, other banks loaned money to investors. When the Stock Market crashed small banks lost money, defaulted on their loans and did not have the assets to respond to the withdrawal requests of their customers. There runs on banks, small banks begin to close, others stopped lending money, making less credit available and the economy fell into recession which led to the Great Depression.

The Effects of the Wall Street Crash
The following fact sheet continues with facts about the Effects of the Wall Street Crash.

The Stock Market: The Dow Jones Industrial Average (DJIA) lost nearly 90% of its value between 1929 and 1932. It took 23 years for the US market to recover.

Suicides: The number of suicides jumped to an alarming 18.9 per 100,000 in the year of the Wall Street crash.

Psychological effects: The psychological effects of the crash led to the end of the feelings of invincibility and exuberance experienced in the Roaring Twenties and were replaced by feelings of vulnerability, lethargy, uncertainty and helplessness.

Bankruptcies: Over 20,000 companies and business went bankrupt and closed

Banks: During the first 2 years following the Wall Street Crash over 3000 banks went bankrupt - over 10% of the nation's total. Those that survived were far more cautious and the era of 'easy consumer credit' was over.

Fall in Demand: The fall in demand for consumer products necessitated wage cuts for businesses to survive and the reduction in labor.

Low Productivity: Industrial production dropped by 45% between 1929 and 1932 contributing to high unemployment

Construction: Construction projects fell by 80% between 1929 and 1932 contributing to high unemployment.

Mass Unemployment: There were unprecedented levels of unemployment. Over 12 million people were unemployed with over 12,000 people being made unemployed every day.

Starvation: There was no benefits system and people were literally starving. Soup Kitchens were the only form of sustenance for many Americans.

Evictions: People were unable to pay their bills, it became impossible to obtain credit, there were foreclosures and many Americans were evicted from their homes.

Overproduction: Overproduction in the agricultural industry resulted in an excess of wheat production that contributed to the Dust Bowl of the 1930s. One farmer in 20 were evicted from their farms.

Global impact: The 1929 Wall Street Crash resulted in the world-wide collapse of share values and economic recessions.

The Great Depression: The 1929 Wall Street Crash resulted in the Great Depression that caused massive levels of poverty in America for nearly 10 years.

US American History
1929-1945: Depression & WW2

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