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Possible Causes of Stock Market Crash of 1929

Stock Market Crash

The Stock Market Crash of 1929 was an unprecedented event that took America by surprise and had many Americans speculating on what really caused it. Scholars came up with explanations that explain why the stock market collapsed.

Amongst the causes for the Stock Market Crash of 1929 include the following:

Credit Boom

During the 1920s there was a credit boom in America. There were many banks and investors willing to offer credit. This gave a false confidence to the citizens as well as potential investors. Such creditors were providing investors with money to buy the stock shares and this made it easy for any interested party to access stock shares. Loans being easily accessible led to the influx of “indebted investors” and when the markets collapsed, these investors rushed to sell off the stocks they had so as to salvage some money to repay their loans.

Unrealistic exuberant attitudes towards investing

After the World War 1, there was a general high sense of optimism in America. Since this period was also characterized by many inventions, people gained confidence in making investments. They were less averse to risks and when the stock market boom of the 1920s became popular, almost every citizen and company in America was interested in gaining a share.

Between 1923 and 1929 the returns on stock investments rose by 400%. This made investors blind to the potential risks and stock markets became the gold rush of the day. Such exuberance failed to deter investors even when the stock market became flooded and economists begun predicting pending loom.

Agriculture Recession

Many small scale farmers who could not produce efficiently were edged out of the market by those farmers that had invested in technology. This led to agricultural recession. With these farmers making the bulwark of clients for the banks, their exit from production and low deposits in banks contributed towards the closure of many banks.

Weak Banking Systems

By 1920s there were an estimated 30,000 banks in America. These were mostly middle sized and small banks. Since Image 2such banks mostly depended on the consumers they were prone to closure when clients were not doing too well. They were thus not cushioned from disasters such as the Agriculture recession which largely reduced the amount of deposits that such banks received. Some of these banks also lent money to those investors who wanted to purchase stocks. This made them vulnerable when the stock prices begun to fall. In fact between 1923 and 1930 around 5000 banks closed down due to this weak banking system.

Buying on Margin

This is strongly linked to the credit boom which occurred in America during the 1920s. Since there was so much money to lend to investors and such a huge demand for stocks, the notion of “Buying on Margin” was introduced. Creditors gave up to 90% loans to investors who had only 10% to purchase stocks. This created many indebted millionaires who had a false sense of confidence in the market. When the prices begun to fall, the indebted investors rushed to sell off their stock so that they could pay their debts. This ultimately led to the crash of the stock market.

Mismatched Production and Consumption Patterns

The fact that many companies were inventing new products and constantly improving on these products was viewed optimistically at first. However, consumers were not purchasing the expensive vehicles and other products being produced. This created a gap and many companies had to close down. This brought down the economy and in turn led to the crash of the stock market.

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References

http://www.economicshelp.org/blog/76/economics/wall-street-crash-1929/

http://useconomy.about.com/od/glossary/g/Stock-Market-Crash-of-1929.htm

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