1929 Stock Market Crash: Causes, Effects, and Solutions
Crisis of ’29: Wall Street Crash
It started as a simple drop in stock prices and became the biggest crisis of capitalism. Contributions of shares held continually raised in New York and accumulated profits. The activity appeared to offer increased benefits and insurance. With readily available loans to buy shares, speculation increased even more.
The Evidence: Things Go Wrong
- Commodity values decreased.
- UK’s economic difficulties.
- German industrial production stagnated.
- International trade experienced a prolonged crisis.
The New York Stock Exchange was stagnant, and countries took measures to raise the price of money to regulate credit, but it was too late. A large number of shares went on sale, leading to a major drop in prices. On October 24, known as Black Thursday, investors sold almost all their shares to repay loans, worsening the fall. This triggered the stock market crash crisis in New York. Panic gripped investors, launching a massive sale of securities.
A slow recovery began in 1933. The crisis spread to all sectors. Initially, it was a stock market crash, but it spread to other sectors, becoming a financial crisis. The banking panic affected investors who could not repay loans, and savers withdrew their funds to avoid losses. Banks could not cope, leading to their ruin. The financial sector’s problems spread to the productive economy. Loan defaults and bank failures affected industry financing and limited consumption. Factories closed due to falling demand and raw material shortages. The US industry fell into overproduction and excessive stockpiling. There was a price decrease, falling profits, and closure of industrial enterprises. In agriculture, there were difficulties, decreased prices and demand, and a lack of credit, leading farmers to ruin.
Consequences: Increased unemployment, reduced demand, and decreased production. The crisis spread globally due to the interdependence of economies. Countries whose economies were based on raw material production were the first affected. The depression reached Europe: Austrian banks failed, German banks closed, savers withdrew their money, and the crisis in Austria and Germany was exacerbated by the repatriation of US capital. The United Kingdom was also affected. The pound was devalued, affecting other currencies. France was also impacted. The USSR, economically isolated, did not suffer the consequences and experienced spectacular growth.
Implications of the Crisis
Sinking of Industries: It was a general crisis. The industrial sector was the most affected. Industrial production fell by 40%, mainly in steel and non-essential consumer goods. The agricultural sector suffered a drop in production, price collapse, and declining demand.
Social and Political Consequences: The crisis affected society and politics. The increase in unemployment was most severe in countries that implemented protective measures and could not meet social costs. Unemployment led to prolonged misery. The gap between rich and poor widened. In rural areas, crops were destroyed. Measures taken by governments failed and led to popular discontent. The political balance shifted, and authoritarianism prevailed in many countries (Fascism). Different popular fronts emerged.
Initial Measures Against the Crisis: It was thought to be a brief crisis, and governments adopted measures to protect the market and facilitate work. Protectionism was implemented to defend against external production. The US raised tariffs on foreign products. The UK adopted similar measures. All countries increased tariffs and closed their markets, worsening the depression. The international monetary system was destroyed, creating separate currency areas.
Searching for Solutions
Classical Solutions: The evolution of the capitalist economy was not uniform. The novelty of the 1929 crisis was its depth and duration. For liberal economists, the crisis was a transient mismatch caused by excessive investment. Systems were configured with corrective mechanisms to overcome the crisis. Classical liberalism emphasized the secondary role of the state. State policy before the crisis was deflation: wage reduction and currency devaluation.
Failure of Traditional Measures: The spread of protectionism and devaluation practices were useless. All actions against the crisis failed. The possible consequences of serious deflation were evident, and deflation was seen as an attempt to restore economic order. The severity of the crisis necessitated new outlets (New Deal).
New Deal
The New Deal was the most successful policy in the US, led by President Roosevelt. It marked a shift from the fundamentals of classical capitalism, changing American politics. Its greatest success was restoring public confidence through innovative economic and social measures aimed at enhancing production and demand, banking reform, public authority control, contracts for workers at acceptable wages, ensuring the lowest prices for farmers, and public works projects.