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The stock market collapsed dramatically in October 1929

Introduction

The period in America between 1920 and 1930 was known as the ‘roaring twenties’. This term was applied to the US because of the economic boom in the country. The World War I ended in 1918 after which there was a great change in the American society. The mindset of Americans changed greatly during the post-war period and thus began a new age of possibilities. Everybody in America wanted a bright future for themselves and their families and so they began investing in the American stock market.

Industries at that time in America were booming because of new technologies, increased man-power and a promise of prosperity for the investors.

People had a high rise in income during this period. Therefore, they were convinced that they would come out richer if they invested their money in the stock market. There were a number of reasons for this new trend and spending habits of people. 1920’s was a period of industrialization. Productivity in industries increased greatly during the roaring twenties.

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There were new methods of production that helped step-up production and made it safer. The ford car company was one such industry that prospered during the boom. They made cars using the assembly-line production and thus the speed increased.

The production increased rapidly over the years

In 1900, only 4000 cars were being produced and the production increased rapidly over the years. In 1929, 4. 8 million cars were being made. There was a low rate of unemployment because as the industries grew, manpower needed also increased. The rate of unemployment decreased from 5 million in 1921 to only 2.

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5 million in 1929. The government also aided America in this rapid growth. They cut down taxes on imports and exports due to which trade boomed. Within the country it helped the richer section of society who bought land and assets because of which the economy would get a boost.

People of the middle-class also began investing in the share market because they had a high income. In 1920, there were about 4 million investors and this figure rose to a staggering 20 million in 1929. Speculation was a very important aspect of the rapid increase of share prices in America. Speculation means a financial transaction that involves risks but is potentially profitable. The Americans wanted to make as much money as they could in the stock market. Whenever a new public limited company was formed, people would buy as many shares as they could and then would wait for the share prices to rise.

The price kept rising inexplicably

However, if the price kept rising inexplicably because of the demand, it would blow the stock market out of proportion. This was known as a ‘mania’ because people were buying large volumes of shares anticipating a profit everywhere. They would never keep shares for long and sell them after the price rose considerably. Due to this buying, the market was bullish because the share prices kept rising. If they did not have enough money to buy shares, they bought them on margin. Buying on margin meant paying only 10% of the cash needed to buy the shares and borrowing the rest. Women too, were speculating in the 1920’s.

They owned 50% of a company called Pennsylvania railroad which was thus called ‘the petticoat line. ‘ The prices of shares grew at such a fast rate that even the ticker-tape (a piece of paper on which share price are recorded) was being printed 2 hours behind time. Speculation caused over-confidence in American investors. The over confidence of people was seen as a mood of optimism. There was a very low rate of unemployment because of the industrial boom where more manpower was needed to sustain the high level of production. People got high wages even though the prices of goods remained stable.

People felt that the market will continue to be bullish and thus they kept taking the risks. They were fascinated by the sudden and steep rise in the market and knew that they would become richer. Even though the country was seeing a rapid growth, there were major weaknesses in the US economy. After the great boom, the decline of the economy started in 1926. Although at that time it was very slow, its effect showed later when the Wall Street crash actually occurred in 1929. The main reason for the economic boom was due to industrialization and sale of consumer goods.

When people got high incomes, they bought the goods and this market was mainly meant for the rich and the middle class people. However, a time came when the people who could afford had already bought all the goods they could. This caused a decline in trade. Even raw material industries were affected because of this. In June 1929, it was seen that steel production began declining. The companies in America would normally export the surplus production but now since prices of everything were so high (because of the high income of people), the European countries could not afford the American goods.

An effect on the share prices

This had an effect on the share prices. Share prices of companies such as the Westinghouse and New York Central dropped to $100 and $ 150 from a price of $300 and $250 respectively just in a matter of 6 months. This was one reason why people who speculated felt that since the companies were not doing well, they must sell off their shares before the share-prices dropped. After the mania of buying shares due to over-confidence, there were hardly any sellers in the stock market. When the cracks in the US economy began to show, there was a sudden nervousness in the market because of this and thus people began selling their shares.

On 24th October, 1929, people had bought so many shares because of their over-confidence that they felt that soon the market would crash as the sales had become slow and trade had been affected due to the high pricing of consumer goods. The people, who were buyers, began selling off their shares to reduce their loss before the stock market crashed. Since the buyers became sellers, the supply increased and the demand decreased. There were so many shares sold in a day that the market fell steeply. Nevertheless, people did buy shares on that day because of which there was some stability.

“Black Thursday”

This day was termed as “Black Thursday” because of the stock-market crash. On 29th October, 1929, the chaotic selling of shares began again because of predictions by many brokers. Roger Babson, an economic forecaster said, “Sooner or later a crash is coming and it may be terrific. ” People like Roger Babson now speculated that the market would crash because it had been blown completely out of proportion because of the booming share prices. This time, the investors had lost their nerves. Thus, there were no buyers and people only wanted to get out of the market with as much money as they could save before the crash happened.

Therefore, millions of shares were sold in a day because of the panic. This day was termed as the day of the “wall street crash” or “Black Tuesday” and after this followed a period of depression that affected not only the US but also the world. Q2. Explain the different ways in which the short term and long-term causes contributed to causing the great depression. Ans. The great depression was an aftermath of the Wall Street crash on 29th October, 1929. It was a period of recession that greatly affected not only America but also many other countries of the world.

The Wall Street crash

The first and most immediate cause of the great depression was the Wall Street crash. On 29th October, 1929, there was a sudden chaotic selling of shares in the American stock exchange. This was because the investors in the market saw that companies were not trading as fast as they were before and the share prices were not rising as quickly. They began selling their shares fearing that the stock market would crash sooner or later. Since the demand for shares decreased and the people selling the shares became more, a drastic crash happened in the stock market and people lost a lot of their money.

This day was called “Black Tuesday. ” The second short term cause for the great depression was speculation. Speculation is a risky transaction involving money but is profitable in future. Prices of leading shares rose steeply. In 1924 the share index was a little above $100 and had risen to approximately $350 in the next 5 years i. e. 1929. This had an effect on speculation also. In 1924, only 236 million transactions had been made by investors and speculators whereas in 1929, this value had risen to a huge 1125 million.

This was because as the share index was rising, the confidence of speculators also grew rapidly. Millions of people in America were involved in this business and they thought that the profit they earned by investing would be a primary source of their income. Some banks were also heavily involved in speculation. Individual investors would buy shares on credit at a low price and when the price of the share would increase, they would sell it off and earn a profit. The speculation caused over-confidence in people who thought that the prices of shares would never fall and they would always gain a profit.

Just some days before the Wall Street crash, over-confident investors such as Charles E Mitchell said, “the industrial condition of the United States is absolutely sound. ” Another learned professor of Economics at the Yale University, Irvin Fisher stated, “Stock prices have reached what it looks like a permanently high plateau. ” This over-confidence was contrasted by a sudden selling of shares on 29th October that was the day of the crash. The crash was followed by a period of the great depression. The period between 1920 and 1929 was known as the ‘roaring twenties’ in America. The lifestyle of people had changed a lot during these years.

As their income increased, their spending habits also changed. During these years, about one-third of the American population was investing in the American stock exchange. This is why they had a lot of disposable income. They invested in any company that they found promising. As a result, industries in America started producing goods in huge quantities. There were new technologies introduced because of which production grew rapidly. People bought the latest products by taking loans that were given very easily by banks. The system of credit cards was also introduced during this period of prosperity.

The term ‘buy now, pay later’

The term ‘buy now, pay later’ became common amongst commoners. They would buy goods on credit and paid through instalment. However, when the depression began in America, people were forced to repay their loans and banks also started shutting down. Big industries had over produced according to demands which had decreased towards 1928. This was because people had already bought whatever they could afford. The surplus could not be exported to other countries because the prices of American goods were so high that Europeans couldn’t afford them and when the excess wasn’t sold, the companies began producing less.

As a result, share prices started falling and investors lost interest in companies. These were the short-term causes that led to the great depression after the Wall Street crash. Along with the short-term causes, there were important long-term causes also that led to the depression. The World War I had ended in 1918 and it had not caused America much damage in terms of land, people and weapons. It was a war being fought in Europe and America was supplying its allies with ammunition. This gave a boost to the American industries.

They were also giving huge loans so that the European countries could sustain the war damage. Production and employment rate was high in America. Due to the economic boom in the country, people invested more and more until one day in October 1929 there was chaotic selling of their shares and the Wall Street exchange collapsed leading to the depression. Another important long term cause for the great depression was the introduction of new government policies. The Republican Party had won the elections in 1928 and to support the economic boom, they made many reforms in the economy.

They cut down the taxation so that people, especially the rich section of the society would buy fixed assets in the country such as land. The government also cut duties on import and export and as a result, trade flourished. This boosted the economy greatly. The government also decided that they would not get involved in any industrial matters and gave up control of major companies so that they could work privately. This was called ‘Laissez-faire. ‘ This step taken by the government resulted in an uncontrollable growth of industries and people kept buying shares.

When they later began selling off their shares, the wall-street crashed. Therefore, the government policies were also a major long term cause for the great depression. These long-term and short-term causes summed up for the condition of the common man in America after the crash. The most important short term cause for the Wall Street crash was speculation. This is because people saw speculation as an easy way of earning money. They had become over-confident and were blinded by the fact that the market was growing so rapidly. They did not realize that one day if they sold shares, the market would drop steeply.

This cause is more important than the other short term causes because of the new trend and spending habits of people. The new attitude towards investing in the market had caused a very sudden rise in the share values and sooner or later, the market would fall rapidly. If people had not been over-confident and speculated, the outcome would have been a little different. If people had not increased their expenditure, factories would not over produce and this would keep the whole country in moderation. Therefore, this cause plays a key-role in the Wall Street crash and the great depression.

Explain why the Crash and the Great Depression affected Americans in different ways.

The Wall Street crash that took place on 29th October, 1929 was the first major blow to the American economy. It was followed by the great depression that left its impact on the people throughout the world even 10 years after the crash. By 1932, 14 million people in the USA were unemployed and companies were bankrupt. Banks that had suffered great losses due to their involvement in speculation were forced to shut down completely and big businessmen started calling back for loans they had given to the European countries.

According to the Dawes’ plan, the American businessman had given millions of dollars to Germany in 1924. He and other businessmen began calling back for the loans to sustain in the years of the depression. America’s economy had been shaken from its roots and it would take a very long time to get life back to normal. Everybody in America was affected by the depression whether he was initially rich or poor. Big businessman and industrialists lost a lot of money because they were the main A picture of the years after the Wall Street crash shows a former businessman who is forced to sell apples for a living.

Another picture shows that well-to-do people of America were forced to eat in soup kitchens because they had no money to buy any food for themselves. The small population of people which had not invested in the share market blamed those who had. They said that they were being punished for being greedy. The depression affected different social groups in a big way. Speculation was a major cause for the crash and its aftermath. Many banks had also been involved in speculation during the days of the boom.

The smaller banks had given very easy loans to the people and now the debtors did not have that kind of money to pay back. Therefore banks did not have enough money to give back to the depositors as well when they came to withdraw their money altogether just before and after the Wall Street crash. By the end of March 1933, nearly 5,000 banks collapsed. The greatest bankruptcy occurred in the Bank of United States in New York. 400,000 depositors had their money in this bank out of which many were immigrants. One-third of New York’s population also had money in this bank.

The biggest failure in the history of America

It was the biggest failure in the history of America that happened in 1930. Rich industrialists in America did sustain the depression for some time but after that, they too were forced to do humble jobs such as selling apples on the street. Big investors such as the Vanderbilt family and Winston Churchill lost $40 million and $500,000 respectively. Citizens who had brought new homes with their high income or on instalments were forced out and had to live on the streets. These were mostly the middle and lower middle class who was dependant on the stock market for their money.

They had to build temporary houses from crates and live in horrible conditions. The expensive cars that the middle-class had bought with their income or on credit had to be sold off at a fraction of their original prices just to gain enough money to survive. Even during the days of the economic boom, the agrarian economy was suffering because they were selling their produce at very low prices. During the depression, their condition worsened because they had nothing to produce. The farmers and those involved in the agrarian sector were the worst hit.

Banks seized their homes from them because they were unable to pay their mortgages. People went hungry as there was hardly any produce and it was sold at exorbitant prices. Common people suffered from diseases because of lack of food. There was an increase in malnutrition and many people died of starvation. Physiologically, many people were hurt too because they had become over-confident during the boom and had suddenly lost everything after the crash. The people had now lost their confidence. They kept their money with themselves instead of buying more goods or shares.

Many people even committed suicide because they could not support their families. Workers were not paid and this resulted in an increase in unemployment. By 1933, 14 million people were unemployed in America as compared to 1. 6million in 1929. In 1932, in the city of Cleveland, 50 percent of the workers in steel factories were unemployed. The workers in bigger cities had to live on the bread and soup given to them by social activists. They would sleep in parks at night or build themselves untidy shanties. The effect of depression on children was quite different from what it was on elders.

They took on responsibilities at an earlier age and tried to find jobs to support their families. A 12 year old boy in Chicago wrote to the president asking for help because he saw his father weeping and felt sorry for him. Thus children behaved more maturely and helped their families. The overall condition in America was bad because the economy had collapsed more than 60% of the population did not have money for their basic needs. The president of America, Herbert Hoover reassured people that the country would get back to its feet again and rise to prosperity.

He cut down taxes even further and this encouraged people to buy more goods. By mid 1931 there was an increase in production and again it looked as if America was settling back again. However, the national income of the country fell from $59 billion to $42 billion by 1932. Important individuals such as Irving Fisher had stated that market would get stronger but just three days later it collapsed. He was left poor just as other Americans and people blamed him for his wrong forecasts. Charles E Mitchell, who was also an affluent American, was also left poor by the crash.

He had bought shares when people were desperately selling them and finally he too ran out of money. He was also arrested for tax evasion during the depression period but eventually paid his debt by 1938. These were the harsh conditions that the Americans had to live with during the days of the great depression. Not only America but even countries such as Germany and Britain faced the slump. Unemployment was about 6 million in Germany and 3 million in Britain. Lives of people had changed greatly before America could recover from the terrible days of the depression.

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The stock market collapsed dramatically in October 1929. (2020, Jun 02). Retrieved from https://studymoose.com/stock-market-collapsed-dramatically-october-1929-new-essay

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