, Research Paper
Causes of the Stock Market Crash
It has been said that all good things must come to an end. In the case of the Roaring Twenties that end came abruptly and unexpectedly. It is easy for one to look back upon the economic situation that lead to the crash and ridicule the experts for not seeing the signs of a potential disaster. But it was not so easy for them to see such a crash coming. The 1920’s were a booming decade and stock prices looked to be at a steady climb for a seemingly eternal rise. Many factors can be attributed to the cause of the crash but no one factor can be singled out as the solitary cause. The major causes of the stock market crash of 1929 were the uneven distribution of wealth, excessive practice of buying on margin, and the unwillingness of leading financial analysts to recognize any theories of a potential crash.
One major cause of the stock market crash of 1929 was the uneven distribution of wealth. Many inventions, such as the assembly line, allowed for the mass production of goods. Along with these inventions, the government also aided business throughout the 1920’s. However, while business was aided and encouraged, labor was ignored and even smothered. This complete favoritism towards business and the ignoring of labor resulted in a very uneven distribution of wealth in the nation’s economy. What this means is that while businesses were able to produce goods at a rapid pace the consumers didn’t have the money to buy them because they were not making nearly enough in wages due to the fact that labor was ignored throughout the decade. This surplus of goods caused businesses to load up on unsold goods and greatly hurt their earnings, leading to the plummeting of their stocks. The uneven distribution of wealth that occurred in the 1920’s was one of the major causes of the stock market crash of 1929.
Another important factor that was a cause of the crash of 1929 was the excessive practice of buying on margin. Buying on margin is the practice of buying a large number of shares of stock with a very small amount of one’s own money, as little as 3% during the 1920’s, and borrowing the rest from a broker or bank. The idea of this is to buy a large quantity of a stock which one expects to have a large increase of value, at least enough to cover the amount borrowed plus profit. This is a very risky practice because in order for it to work, the stock must go up enough to pay back the borrowed amount. If this does not happen then the broker must put pressure on the buyer to sell the stocks if there is any sign that the stock would not perform. This is a very key point in the system. In 1929 when the stock market was soaring there suddenly began to be minor decreases in the prices of stocks. This caused the brokers to force many investors to sell their stocks before they lost too much, which only inflated the problem and eventually resulted in the widespread panic and drastic plunge in stock prices. On Thursday, October 24, 1929, the day of the first drop in prices, news spread quickly of the problem and many investors panicked and quickly sold their stocks to save themselves from owing too much money to the brokers. This only intensified the problem. By the end of the day the market had lost four billion dollars. The following Monday, stocks plunged again, leading the nation into the Great Depression. The excessive practice of buying on margin was one factor that caused the stock market crash of 1929.
The third and final factor that was a major cause of the stock market crash of 1929 was unwillingness of leading financial analysts to recognize any theories of a possible crash. In a time of prosperity many people don’t want to hear anything that would suggest an end to the wealth. This was the case in 1929. For example, Roger Babson, a statistician, predicted a coming market crash at the 16th National Business Conference. Many people ridiculed him for his theory and no one really paid attention to him. This was the case for anyone who spoke out about the signs of a coming crash. This avoiding of any theory that wasn’t what the people wanted to hear resulted in the unprepared reaction to the plunge of stock prices on the day of the crash. Had the people been prepared they might have been able to react in a much calmer manor and not just rush to take all of their money out of the stock market. The ignoring of any theories that predicted the possibility of a crash was a major cause of the stock market crash of 1929.
In closing, the uneven distribution of wealth, the excessive practice of buying on margin, and the ignoring of any theory that predicted a crash were all major contributors to the cause of the stock market crash of 1929. The plunge of stock prices and the riot-like reaction of investors were all reasons for the severity of the crash and led to the nation going into a state of depression that would take an entire decade to recover from.