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Stock Market Crash of 1929

Introduction

The stock market crash of 1929 is currently defined as the most significant economic collapse in US history. It created unbelievable chaos in the country’s financial markets and resulted in the Great Depression regarded as the longest period of contraction and unemployment in modern history. However, even though the crush had devastating consequences for the whole financial world, numerous signs of upcoming calamity may be observed at that time. This paper aims to investigate the nature, significance, and main causes of the stock market crash of 1929. The significance of this study is determined by the general importance of any crush’s thorough examination to reduce or minimize the risks of a similar event’s occurrence in the future.

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Why Did the Stock Market Crash Happen in 1929?

During the 1920s, an era of optimism or the so-called “Roaring Twenties,” the stock market and economy of the United States experienced development and rapid expansion with unprecedentedly high share prices. [1] With a new industry of investment trusts, brokerage houses, and margin accounts, ordinary people, along with banks and businesses, received an opportunity to invest their growing incomes in stocks and bonds.

Since 1921, the Dow Jones Industrial Average has grown six-fold, from 63 to 381. [2] However, this prosperity ended in a cataclysmic stock market crash when on October 28, 1929, Black Monday, when the Industrial Average declined almost 13%.[3] The situation has substantially worsened the following day, so-called Black Tuesday when the market dropped approximately 12%, and the Dow Jones Industrial Average’s slide continued through several years and closed at 41.22, its lowest value of the 20th century. [4] A considerable number of banks, businesses, and people have lost all their investments and savings.

The Importance of the Crash

The importance of the stock market crash of 1929 is determined by several lessons that should be learned from it to prevent subsequent crises. First of all, it is the significance of financial regulation, stabilization, attention to warnings, and the limited activity of speculators that substantively contributed to the crash of 1929. [5] Instead of attempting to stabilize the financial market, investors kept crashing it through trading shares and losing billions. In addition, before the crash, there have already been experts’ warnings concerning the upcoming financial catastrophe, however, they remained unheard. In general, before the severe phase, the crisis was regarded as the market’s healthy correction that provided buying opportunities.

Why Was It Not Predicted?

In comparison with the present day when the prediction of market movements is facilitated by technologies and powerful hardware and software, investors of 1929 had limited information and could not see the whole scene. In 1929, quantitative forecasting just started to develop, and forecasters were occupied with only their stock market indexes capturing market trends. Their analysis methods were insufficient due to a lack of comparability and absence of strong indicators – people simply could not realize what they were buying and whether the economy would contract or expand. [6] At the same time, a certain crisis was expected, however, its actual scope was unpredictable.

Causes and Outcomes of the Great Crash

The 1920s in the United States may be characterized by “a revolution in manufacturing and technology that amplified economic growth and volatility in markets.”[7] As a result, oversupply in markets and overproduction in various industries may be observed. Due to extremely high share prices, companies acquired money cheaply and optimistically invested in production. In addition, the economic growth contributed to speculating in stocks as the population wanted the market’s piece. Citizens mortgaged their homes to pour their money into the stock market and in 1929 millions of shares were carried on margin providing a high Industrial Average.

Along with speculation, the proliferation of investment trusts and holding companies, an economic recession started in the summer of 1929, and a multitude of considerably large, thus unliquidated bank loans are regarded as the major causes of the economic collapse as well. The Great Crash led to the Great Depression that, despite multiple supportive measures, finally ended during World war II when the expanding industrial production helped to reduce unemployment.

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Conclusion

The stock market crash of 1929 is the worst economic calamity in history which resulted in the Great Depression, unemployment, the collapse of banks and businesses, and citizens’ substantial financial losses. It was characterized by the fall of the Dow Jones Industrial Average and stock prices. Oversupply and overproduction, substantial investments in stocks, related overextended credits and large bank loans, speculation, an economic recession, and the proliferation of investment trusts and holding companies are among the crash’s major causes. Although crises are frequently regarded as natural processes of economic regulation, they nevertheless should be thoroughly investigated to prevent substantial collapses in the future.

  1. Gary Richardson et al., “Stock Market Crash of 1929,” Federal Reserve History. Web.
  2. Gary Richardson et al., “Stock Market Crash of 1929,” Federal Reserve History. Web.
  3. Gary Richardson et al., “Stock Market Crash of 1929,” Federal Reserve History. Web.
  4. Gary Richardson et al., “Stock Market Crash of 1929,” Federal Reserve History. Web.
  5. Jacob H Schmidt, “The Role of Speculators in the Market Crash of 1929” (Regent’s University London, 2019), 2.
  6. Joel E. Thompson, “Investment Methods Before the Great Stock Market Crash,” Journal of Business and Accounting 11, no. 1 (2018): 38.
  7. Robert F. Bruner and Scott C. Miller, “The Great Crash of 1929: A Look Back After 90 Years,” Journal of Applied Corporate Finance 31, no. 4 (2019): 43.

Bibliography

Bruner, Robert F., and Scott C. Miller. “The Great Crash of 1929: A Look Back After 90 Years.” Journal of Applied Corporate Finance 31, no. 4 (2019): 43-58.

Richardson, Gary, Alejandro Komai, Michael Gou, and Daniel Park. “Stock Market Crash of 1929.” Federal Reserve History. Web.

Schmidt, Jacob H. “The Role of Speculators in the Market Crash of 1929.” London: Regent’s University London, 2019.

Thompson, Joel E. “Investment Methods Before the Great Stock Market Crash.” Journal of Business and Accounting 11, no. 1 (2018): 22-40.

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