Causes and Consequences of the Wall Street Crash of 1929 - Essay Example

?Causes and Consequences of the Wall Street Crash of 1929 The period after the First World War was a time of great prosperity in the United s due to the rapid increase in wealth due to the enthusiasm, optimism, and confidence that followed the war. This was a time when new inventions were being created and many people felt that anything in the world was possible for them to do. This confidence encouraged people to take out loans, their personal savings or any other money they could lay their hands on and invest it and what was thought to be the best place to invest at the time was at the stock market. Investing in the stock market had a reputation of being a risky venture but the American stock market in the nineteen twenties seemed to be the best place to invest due to its seeming infallibility (Jost, 1997). Many thought that the stock market was the wisest place to make investments to secure their future. As more people invested in the stock market, the prices of stock continued to rise and with the rise of stock prices, more people were encouraged to invest because they believed that the rise in stock prices would continue indefinitely and that they would eventually get very high returns for their investments (Svaldi, 2004). By nineteen twenty eight, the rising stock prices had brought about the stock market boom and this changed the way investors viewed the stock market. The stock market was no longer a place where long term investments were made but had now become a place where people could get rich quickly by making short term investments due to the high interest rates given for their stocks (Klein, 2001, 325 - 351). The news of people having made millions from their investments in the stock market, even common people who would normally not have been a part of the stock market environment, encouraged many more people to invest. Many of those people who wanted to invest in the stock market did not have the money to do so and many chose to buy stock ‘on margin.’ This meant that the potential investor would put down his own money to buy the stock while the rest was borrowed from a stock broker, and this tended to be about ten to twenty percent of their own money. Buying stock ‘on margin’ was a very risky venture because if the prices of stock went down below its buying price, then the broker from whom the money to buy the stock was borrowed would issue a ‘margin call’ which meant that the investor had to come up with the money to pay back his loan almost immediately. Buying stock on margin was very popular for those people who did not have enough money to invest, and the continued rise in stock prices encouraged many more people to invest in this manner, not thinking of the risks which they were exposing themselves to through their ventures (Williamson, 2008). By the early nineteen twenty nine, many Americans were scrambling to make investments in the stock market because the profits from such investments seemed to be assured. This assurance of profits led many companies to invest their money in the stock market and these were not the only major investors. Banks were so confident in the stock market that they, without consulting their customers, invested their customers’ money in the stock market because with stock prices continually rising, the environment seemed perfect for investment (Mclynn, 2002). When the Wall Street crash occurred in October of the same year, many people and institutions were taken by surprise. A prelude to the crash occurred in March nineteen twenty nine when stock prices began to drop and there was an overall panic when stock brokers began making margin calls. However, confidence in the stock market was restored when banker Charles Mitchell made the announcement that his bank would continue lending to those who wished to invest (Burke, 2001). Mitchell and other bankers tried to again reassure the public to have confidence in the stock market but this was not enough to stop the great crash that occurred later that year. During the spring of nineteen twenty nine, there were signs that the economy was slowing down with the reduction of steel production, the slowing down of the construction of houses, and the significant drop in the sales of cars. There were a few reputable people at that time who warned of an impending market crash but many considered them pessimists and their warnings were ignored (Brittan, 1999). The advise for caution were completely forgotten when the stock market prices surged during the summer of nineteen twenty nine. Many thought that the continued rise of stock prices was inevitable and they continued to make even larger investments in the stock market (Christolon, 2005). The stock market was thought to have reached the peak of its rise and that this peak would remain permanent. On the third of September, the stock market prices had reached their highest peak and two days later; these prices started dropping although this drop was not massive. The prices continued to fluctuate throughout the months of September and October until the twenty fourth of October (known as Black Thursday) when stock prices suddenly plummeted. In the morning of that day, there was a massive drop in stock prices and many investors were selling their stock in a bid to stop any major losses on themselves (McKercher, 1987). Many stock brokers started sending out margin calls in a panic and some people, feeling overwhelmed due to the fact that they would not be able to recoup their losses or pay back the money they had borrowed, chose to commit suicide. A great crowd gathered outside the New York Stock Exchange in stunned disbelief of the events that had just occurred (Katel, 2012). That afternoon, a group of bankers who included Charles Mitchell decided to pool their money and invest it in the stock exchange and this large risk on the part of these bankers convinced many to stop selling their stock. This gave a brief respite to the stock market and some were once again buying stock at what they considered to be great prices. The quick recovery that occurred on that day was considered by many to have been amazing, however, four days later, the stock market prices fell again. The events that happened on Black Thursday had shocked many speculators at the stock market and many of them chose to sell in order to avoid the losses which they felt were coming their way (O'Neil, 1987). These attempts to sell their stock was further fuelled by the rumour that banks, which were supposed to be shoring up investor confidence in the stock market by investing in it, were also selling their stock holdings. This day, known as Black Tuesday, the stock market crashed again and this time, no one came to its aid, not even the banks which had only days earlier prevented a crash. There was a big panic in the market because everybody wanted to sell their stock as fast as possible and no one was buying any stock. Because of this, the stock prices fell rapidly and the sales of that day made a new record for the most sales in stock market history. Since it was not known how the panic in the market could be stemmed, the decision was made to close trading at the stock market, however, when the market was reopened, the prices continued dropping and this trend went on for the next two years and reached its lowest point in the year nineteen thirty two (Wighton, 2004). The stock market crash of nineteen twenty nine had a huge impact not only on the economy but also on the lives of many individuals. There were reports of mass suicides due to this because many people had lost most of their entire life savings. The aftermath of this crash was devastating for many companies and banks some of which collapsed and in the case of banks, a large number of people lost faith in them because many had lost all their savings due to the fact that the banks had invested their money in the stock market without their consent (Jacobs, 2008). Some scholars believe that since the stock market crash occurred at the very beginning of the Great Depression, then it must have been a trigger, but this view is highly debated (Randall, 2007). In the years after the crash, new laws and regulations were established to cover the buying of stock on margin and to control the role of banks in the stock market to ensure that such a severe crash does not happen again. Today, the Wall Street Crash of nineteen twenty nine is still studied in an attempt to discover what caused the stock market boom and what later brought about its collapse in an attempt to prevent such a thing from ever happening again. Many theories have been brought up but none of them gives a satisfactory explanation of what exactly happened in the nineteen twenties to trigger the events which led to the crash. The Wall Street crash of nineteen twenty nine has continued to perplex many scholars to this day and no satisfactory explanation has been given to explain what caused it. Some have blamed the loose lending practices of banks for the crash stating that if the banks had not done so, then so many people would not have gotten involved in the stock market and therefore there would have been no major catastrophe like the one which occurred. Others have blamed the government for not taking the necessary action to curb the uncontrolled rise of stock market prices by tightening control over the lending rates of banks. Despite these contradictory statements about the crash and what may have caused it, it is a fact that the crash happened and that hard lessons should have been learned from it to ensure that no such thing happens again. It is therefore necessary for scholars in History and Economics to continue studying this crash because its study will help us to prevent a recurrence of what occurred in nineteen twenty nine. References Brittan, S. (1999). Nonsense on stilts: Most of the rationalisations for the Wall Street boom were foreshadowed in the run-up to the 1929 crash, London (UK), United Kingdom, London (UK). Burke, J. (2001). Investment: Why is it always 1929 again on Wall Street? When US stock markets dip, the pundits predict instant disaster. Is it all a myth? asks John Burke, London (UK), United Kingdom, London (UK). Christolon, B. (2005). "Six Days in October: The Stock Market Crash of 1929: A Wall Street Journal Book for Children", School Library Journal, vol. 51, no. 8, pp. 50-50. Jacobs, S. (2008). Then and Now Current Stock Market Crisis Coincides with 79th Anniversary of Infamous 1929 Crash, Fort Lauderdale, Fla., United States, Fort Lauderdale, Fla. Jost, K. (1997). The stock market. CQ Researcher, 7, 385-408. [WWW]. Available from: http://0-library.cqpress.com.alice.dvc.edu/cqresearcher/ [Accessed 30/08/2012] Katel, P. (2012). ‘Occupy’ movement. CQ Researcher, 22, 25-52. [WWW]. Available from: http://0-library.cqpress.com.alice.dvc.edu/cqresearcher/ [Accessed 30/08/2012] Klein, M. (2001). "The stock market crash of 1929: A review article", Business History Review, vol. 75, no. 2, pp. 325-351. McKercher, C. (1987). The crash that wiped out millions of dreams; 1929's observers, like 1987's, didn't know where panicky market was taking them, Ottawa, Ont., Canada, Ottawa, Ont. MCLYNN, F. (2002). A crock of greed; Rainbow's End: The Crash of 1929. By Maury Klein. Oxford University Press, 345pp. (pounds) 20 sterling, Dublin, Ireland, Dublin. O'Neil, P. (1987). Veteran broker recalls anguish of crash of 1929, Vancouver, B.C., Canada, Vancouver, B.C. Randall, D. (2007). Echoes of the Crash that reverberated around the globe; Rear window ++ Wall Street 1929, London (UK), United Kingdom, London (UK). Svaldi, A. (2004). Coloradoans, like most Americans, did not appreciate scope of 1929 stock crash, Washington, United States, Washington. Unemployment and crash of 1929 1997, London (UK), United Kingdom, London (UK). Williamson, M. (2008). Lambert likens current problems to Wall Street crash of 1929, Glasgow (UK), United Kingdom, Glasgow (UK). Wighton, D. (2004). A collapse still resonating after 75 years: WALL STREET CRASH: The crash of 1929 seemed like the crash to end all crashes, but it was caused by factors that will always be with us, says David Wighton, London (UK), United Kingdom, London (UK). Read More