A Critical Analysis of The 1929 Stock Market Crash: Causes and Impact

The United States stock market crash of 1929, also known as the Great Crash (TGC), is inarguably the most infamous financial collapse of the twentieth century. The stock-market slaughter was unforeseen as the US economy was slowly recovering from the post-World War I recession. Between 1922 and 1929, unemployment levels averaged 3.7% while gross national product grew at a rate of 4.7% (White 69). However, from 23 to 29 October, 1929, the New York Stock Exchange lost 25% of its value. The Great Crash marked the end of the “Roaring Twenties” and the start of the Great Depression. The devastating effects of this financial crisis were not only felt in the US, but also in other parts of the world. Economies shrunk, millions of livelihoods were disrupted, and the financial regulatory environment would variously change to prevent a similar disaster. The purpose of this paper is to explore the 1929 stock market crash and its impact globally.

What was the 1929 Stock Market Crash?

Background

The period before 1929 is critical to understanding the Great Crash. During the 1920s, America was experiencing a time of prosperity and optimism, leading many middle-class and wealthy citizens to invest in speculative ventures (White 72). The government, through the Federal Reserve, also played a role in fueling this speculation by keeping interest rates low and relaxing reserve requirements on large banks, resulting in an increase in the money supply and encouraging more Americans to invest in questionable schemes, such as Ponzi schemes. Speculation had become the norm, as people invested in high-risk projects that had the potential for quick returns but, significant losses upon failure. This mindset is exemplified by the Florida land boom, where investors purchased land in Florida with the hope of selling it at higher prices. Real estate organizations had marketed Florida as a tropical paradise.

However, the Florida land boom came to an end in 1926. Negative press regarding the boom’s speculative nature and revelation of the land broker’s unethical financial practices damaged investor interest (Lange 35). The great Miami Hurricane of 1926 resulted in most land developers going bankrupt. Despite this, speculation continued to thrive, with the new areas of focus being the stock market. Investors purchased stocks "on margin," buying shares with a small down payment and borrowing the rest, with the intention of quickly reselling at a higher price before the remaining payment was due (Lange 37). This strategy worked as long as stock prices continued to rise.

Events from October 24

As prices began to fluctuate in the summer of 1929, investors sought excuses to continue their speculation. However, when fluctuations turned into steady losses, panic set in and everyone began to sell. Public Broadcasting Service (PBS) (1) provides that on 24 October 1929, ticker tape ran “four hours later than normal at a volume of 12.9 million shares.” During the same day, headlines reported a paper loss of over $5 billion. The day is referred to as “Black Thursday. On October 28, referred to as “Black Monday,” the stock market fell by 22.6% (PBS 1). This was the largest one-day decline in the country’s history (PBS 1). The crash triggered a similar effect in markets across the world. Investors awaited the following day, hoping for a turnaround. October 29 completed the stock market crash. Investors panic sold over sixteen million shares, and the market recorded paper losses exceeding $15 billion (PBS 1). The market fell by 33 points, which represented a 12% decline (PBS 1). The market stabilized on November 23 after nearly a month in freefall.

Causes of the Great Crash

The 1929 stock market crash did not have a precise, obvious cause but resulted from the interaction of various factors. A comprehensive examination of the factors behind TGC is beyond the scope of this paper. The paper will briefly highlight four notable causes of this economic disaster.

One of the main causes of the crash was speculation. Bruner and Miller (50) notes that during the late 1920s, the high optimism and “new era thinking” indicate a deviation from the usual investor sentiment. Participation in the 1929 speculation suggests it had become a central component of the then US investors. This led to a stock market bubble that eventually burst when investors began to realize that the stocks they had purchased were overvalued. However, some researchers think that evidence does not attest to bubble-forming role of speculation (Cecchetti 2).

Another cause of the Great Crash was America’s domestic fiscal policy. Aiming to curb speculation, the US Federal Reserve tightened the country’s monetary regulation throughout 1929. Monetary authorities expanded discount rates from 5 to 6 percent (Bruner and Miller 50). However, this measure did not discourage speculation but made matters worse. Other countries seeking to attract gold reserves or stabilize currencies duplicated America’s restrictive fiscal policy, triggering monetary contraction worldwide.

Moreover, the recession contributed to the 1929 stock market crash. Bruner and Miller (50) state that “the US had entered recession by August 1929, presaged by declines in activity in some sectors.” The Great Crash reflected a consequence of this economic decline. Additionally, protectionist trade policies caused TGC. The Smoot-Hawley Tariff, passed by the House in May 1929, sought to increase tariffs on imported goods (Bruner and Miller 51). Although the bill would not become a law until 1930, other countries such as India, Canada, France, Italy, and Britain responded by enacting protectionism-related policies. Global trade consequently plummeted. A comprehensive examination of the factors behind TGC is beyond the scope of this paper.

Global Impact of the 1929 Stock Market Crash

The impact of the stock market crash of 1929 on the economy was severe. Firstly, TGC led to a profound decline in the gross domestic product worldwide. In the US, GDP plummeted by over 40%, from 103.1 billion to $58 billion (James 136). Other world economies also declined following TGC. When TGC occurred, the word immediately noticed. According to Clavin (1), the European nations most affected by the 1929 stock market crash and the subsequent Great Depression were Austria, Germany, and Poland.

Another global outcome of TGC was the collapse of global trade. Due to the devastating impact of the crisis, governments turned to protectionist policies to boost their sagging economies. Countries rushed to increase the tax levied on imported goods. However, this policy action had unintended consequences as it resulted in decreased international trade. Clavin (1) provides that “By 1932 the value of European trade had fallen to one-third of its value in 1929.” Such data shows the severe impact of TGC.

The stock market crash of 1929 also had a significant impact on the labor market. Growth and unemployment typically remain high after an adverse economic event. The decline in industrial production led to widespread unemployment, which resulted in a decline in wages and an increase in poverty. In Europe, in Austria, Germany, and Poland, 1 in 5 citizens were unemployed post the 1929 market crash (Clavin 1). Many workers were forced to take low-paying jobs or go without work altogether. This led to a decline in living standards for many people, as they struggled to make ends meet. The increase in unemployment can be attributed to various factors, including decreased industrial production and lower consumer spending. The immediate wealth loss caused by TGC reduced consumption, thereby enabling organizations to furlough workers and freeze hiring.

Finally, TGC negatively impacted the psychological wellbeing of the world’s population. In the US, cases of people committing suicide hit news media headlines. For example, John G. Schwitzgebel, a Kansas City investor shot himself dead on 29 October (James 137). Moreover, distraught brokers and investors jumped from Wall Street offices. Such effects were not unique to the US, as millions of people endured bank failures associated with TGC. The 1929 financial crisis the mental health problem globally.

In conclusion, the 1929 stock market crash was a significant event in history that marked the beginning of the Great Depression. The financial crisis was caused by a combination of factors, including overvaluation of stocks, speculation, and defective regulation. The crash led to widespread economic hardship and unemployment in the US and other parts of the world. The lessons learned from TGC led to the implementation of policies and regulations aimed at preventing such a catastrophic event from happening again in the future.