What caused the Wall Street Crash?

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  • Created by: Lily
  • Created on: 09-05-13 13:02

What caused the Wall Street Crash?

Causes

  • Nature of the Bull Market: Prices rose dramatically and there was a massive influx of buying, people did not think about the consequences if prices fell, most people just wanted to "get rich quick". The market constantly seemed to recover and seemed very stable and it's high publicity made it exceedingly popular. However, the market was not entirely stable, prices did sometimes fall and there was no regulation of "insider dealing" so it was easy to exploit the naive by artficially rasiing prices.
  • The Banking System: The Government took a laissez-faire attitude and there was little regulation over the activities of the market. The Federal Reserve Board could only act in 3 ways, 1. authorise the sale of government securities to provide a safe investments , however by doing this the Board purchased these from banks leading the banks to have more money for risky investments. 2. Raise the discount rate to discourage borrowing. However, the raise in December had little effect on the market, it was quite inadequate and highlighted their limited powers. The stock market still remained unchecked. 3. offer moral leadership. Issuing a statement in Februaru 1929 they caused a fall in stock prices and increase in interest. The Board was shown to be pwerless in comparison to bankers such as Charles E Mitchell who used his banks financial power to keep the market open. The Board could have also asked for more powers e.g credit control but it did not
  • Loss of Confidence: People were worried as big sellers began to sell, rumours that Federal Reserve Board was going to tighten credit, British financial empire crashed, "easy credit was evaporating", clients had to sell to repay loans, lenders began to call in loans, gamblers were naive, market supported by very little real wealth, prices changed constantly, people ignored the truth of it's fragile nature, insider dealings gave wrong impression, speculation was encouraged and unchecked

Effects

  • Wall Street handled 61% of Stock Transactions in teh US - other stock exchanges began to crash
  • Speculators lost thousands - many owed more to their brokes than what their stock was actually worth
  • Mass debt for ordinary people
  • Loss of confidence in business
  • Production was damaged
  • There was a slowdown in consumer spending leading to the slowdown of many industries
  • Many banks had made loans to investors on the promise of rising values and were left holding depreciated assests
  • Collapse of the banking system
  • Unemployment
  • Loss of respect for authority - Government did not do enough
  • Poverty
  • The Great Depression???

Overall summary

Overall the Wall Street Crash was a devastating event for thousands of Americans. There were many different things pointed to as the blame of this, people were desperate to find a scapegoat. With the added influence of individuals the market was easily manipulated by public opinion and so changed when they did, Overall the most important reason was probably the failings of the banking system. The Federal Reserve Board did not have enough power and did not do enough to prevent the stock market getting out of control. The mass hysteria over the market meant a crash was inevitable to happen at some point.

Comments

SerBronn

Report

This isn't a bad summary but the key was easy credit for market speculation. People were buying stock on margin (a 10% deposit say) which meant that the crash cost multiples of an individual's asset wealth. This credit instantly evaporated and the Fed simultaneously tightened the money supply cutting off credit to banks. The upshot was a decade-long period of loss liquidation when debts simply could not be cleared and yet no economic growth was possible with them still unpaid. The market was bought up to unrealistic levels and a crash was inevitable but without the trading on margin the subsequent debt liquidation phase would have been much shorter and less severe. Asking 'What caused the crash' is really the wrong question. 'Why did it take a decade to recover?' is the right one.

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