What caused the stock market crash of 1929? The stock market crash of 1929 is considered one of the worst economic events in world history. Many lost their entire life savings, while banks and companies went bankrupt. While the crisis sent shock waves across the financial world, numerous signs that a stock market crash was coming. What exactly caused the stock market crash of 1929—and could it have been prevented are some topics we will explore today.
What Caused the 1929 Wall Street Crash?
The stock market crash of 1929 followed an epic period of economic growth. So much growth, in fact, that we call this period the Roaring Twenties. In August of 1921, the DJIA was at 63 points.
Fast forward eight years, and the DJIA increased an astonishing six-fold amount. At its peak, on September 3, 1929, it closed at a high of 381.17 points. T
hat September day marked the peak of the largest and greatest uninterrupted bull market the U.S. had ever seen. Many economists concluded that “Stock prices have reached what looks like a permanently high plateau.”
I must say, this sounds eerily familiar. Everyone is feeling confident. During this joyous time, unemployment levels were low. And the automobile industry was booming. What’s more, ordinary working folk became quite interested in the stock market.
Some financed their stock purchases through margin – a dangerous game to play if you’re not wise to the rules. What came next was almost incomprehensible. The DJIA’s fall from grace was so swift and severe; it sent the nation into an economic depression lasting more than a decade.
The Worst Economic Event in World History
I hate to say it but Octobers in the stock market don’t have a great history. Thursday, October 24, 1929, marked the beginning of the worst economic event in world history. Come “Black Monday” on October 28, and the Dow Jones Industrial Average plunged nearly 13 percent. And by Black Tuesday”, the market fell another 12 percent.
As with many complex events, it’s difficult to trace back to one root cause. However, several widely accepted theories of what caused the stock market crash of 1929 exist.
Overconfidence in the Market, the People, and Industries
Due to reckless overconfidence, many economists believed that stocks were wildly overpriced at the time and that a collapse was imminent. This overconfidence extended to people from all walks of life. It was evident from the extension of credit irrespective of their financial situation.
All of this rising growth and consumer overconfidence lead to an “asset bubble” lasting eight years. To put this in perspective, the stock market had increased by nearly 20 percent each year from 1921 until 1929. As a result, there was access to easy credit.
With unprecedented access to bank credit and loans being handed out like candy, it was a recipe for disaster. People were living as they were invincible, afraid of debt and falsely reassured by the market’s so-called “stability”.
The margin extension allowed many who typically couldn’t buy on such a large scale to buy and buy large. Regular people were able to borrow money from their stockbroker, with as little as 10 percent down.
The overconfidence we saw was not exclusive to the stock market. Industries such as manufacturing and agriculture jumped on the bandwagon, overproducing goods and crops. All this excess production leads to a surplus of supplies, driving their share prices down.
The Government Raised Interest Rates – No Surprise Here
In August 1929 – mere weeks before the crash, the Federal Reserve Bank raised interest rates one percent from 5 to 6. This sudden and steep one percent hike put the breaks on investor sentiment. In turn, the market became a little less stable, with economic growth sharply reduced. Which of courses affected more than the market.
As mentioned above, a surplus of crops and goods lead to the Agricultural Recession. Farmers struggled to make an annual profit to keep their businesses afloat. Some believe this agricultural slump affected the financial climate of the country. Eventually, farmers underwent a crop failure which marked the first signs of the Great Depression.
As Always, Panic Made the Situation Worse
Days following the stock market crash of 1929 saw widespread public panic. People rushed in hoards to withdraw funds from their banks.
This so-called “bank runs” left many in shock as they were unable to withdraw their money. And the worst part is, they couldn’t access their money because the bank executives had invested their money in the market.
In a domino chain of events, we saw massive failures in the banking system, which made a dire financial situation even worse. If you’ve ever watched It’s A Wonderful Life then you saw it play out in that movie.
So many people lost everything. And they couldn’t go pull their money from the banks. We can’t really fathom that these days. Even with a crash, we have credit cards we can use to get by.
The Media Also Played A Part in What Caused The Stock Market Crash Of 1929
No surprise here.
Many experts claim that the press played a key role in the panic that spread like shockwaves throughout the United States. In all likelihood, this panic exacerbated the stock market crash of 1929.
For proof, look no further than the Washington Post headline that ran the day before Black Thursday:
“Huge Selling Wave Creates Near-Panic as Stocks Collapse.”
I’d be remiss not to mention The New York Times headline:
“Prices of Stocks Crash in Heavy Liquidation.”
What Actually Caused the Great Depression?
Without a doubt, the crash was a catalyst to the Great Depression but not the sole driver. I believe it was one of the triggers that burst the bubble and started a downward devastating economic crisis. The burst of the stock market bubble left a mark that plagued the U.S. economy for many years after 1929.
“The stock market crash of 1929 was a cause, but not the sole driver, of the Great Depression.”
Final Thoughts
What caused the stock market crash of 1929? Most economists agree that there was no single cause of the stock market crash of 1929. However, a soaring, on-fire economy that was destined to one day fall likely played a significant role. While historians sometimes debate whether the stock market crash of 1929 directly caused the Great Depression, there’s no doubt that it greatly affected the American economy for many years.
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