What Problems Might Easy Credit Have Caused in the Decades Following the 1920s
The stock market crash of 1929—considered the worst economic event in world history—began on Thursday, October 24, 1929, with skittish investors trading a record 12.9 million shares.
On October 28, dubbed "Black Monday," the Dow Jones Industrial Average plunged nearly 13 percent. The market fell another 12 percent the next day, "Black Tuesday." While the crisis send shock waves across the financial world, there were numerous signs that a stock market crash was coming. What exactly caused the crash—and could it have been prevented?
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A Stock Market Peak Occurred Before the Crash
During the "Roaring Twenties", the U.S. economy and the stock market experienced rapid expansion, and stocks hit record highs.
The Dow increased six-fold from August 1921 to September 1929, leading economists such as Irving Fisher to conclude, "Stock prices have reached what looks like a permanently high plateau."
The market officially peaked on September 3, 1929, when the Dow shot up to 381.
By this time, many ordinary working-class citizens had become interested in stock investments, and some purchased stocks "on margin," meaning they paid only a small percentage of the value and borrowed the rest from a bank or broker.
Additionally, the overall economic climate in the United States was healthy in the 1920s. Unemployment was down, and the automobile industry was booming.
While the precise cause of the stock market crash of 1929 is often debated among economists, several widely accepted theories exist.
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The Market—And People—Were Overconfident
Some experts argue that at the time of the crash, stocks were wildly overpriced and that a collapse was imminent.
That same sense of reckless overconfidence extended to average consumers and small investors, too, leading to an "asset bubble." The crash happened after a long period of rising market growth that led to consumer overconfidence.
In fact, after 1922, the stock market had increased by nearly 20 percent each year until 1929.
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People Bought Stocks With Easy Credit
During the 1920s, there was a rapid growth in bank credit and easily acquired loans. People encouraged by the market's stability were unafraid of debt.
The concept of "buying on margin" allowed ordinary people with little financial acumen to borrow money from their stockbroker and put down as little as 10 percent of the share value.
A similar type of overconfidence was seen in industries such as manufacturing and agriculture: overproduction led to a glut of items including farm crops, steel, durable goods and iron. This meant companies had to purge their supplies at a loss, and share prices suffered.
The Government Raised Interest Rates
In August 1929 – just weeks before the stock market crashed – the Federal Reserve Bank of New York raised the interest rate from 5 percent to 6 percent.
Some experts say this steep, sudden hike cooled investor enthusiasm, which affected market stability and sharply reduced economic growth.
Another factor was an ongoing 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.
Bankrupt investor Walter Thornton trying to sell his luxury roadster for $100 cash on the streets of New York City following the 1929 stock market crash. (Credit: Bettmann Archive/Getty Images)
Bettmann Archive/Getty Images
Panic Made the Situation Worse
Public panic in the days after the stock market crash led to hordes of people rushing to banks to withdraw their funds in a number of "bank runs," and investors were unable to withdraw their money because bank officials had invested the money in the market.
This led to massive bank failures and further deepened an already dire financial situation.
Many analysts claim that the financial press also played a key role in contributing to the sense of panic that exacerbated the stock market crash.
The day before Black Thursday, the Washington Post ran the headline: "Huge Selling Wave Creates Near-Panic as Stocks Collapse," while The New York Times announced: "Prices of Stocks Crash in Heavy Liquidation."
There Was No Single Cause for the Turmoil
Most economists agree that several, compounding factors led to the stock market crash of 1929.
A soaring, overheated economy that was destined to one day fall likely played a large role. Equally relevant issues, such as overpriced shares, public panic, rising bank loans, an agriculture crisis, higher interest rates and a cynical press added to the disarray.
Many investors and ordinary people lost their entire savings, while numerous banks and companies went bankrupt.
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.
Source: https://www.history.com/news/what-caused-the-stock-market-crash-of-1929
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