Causes and Effects of the 1929 Stock Market Crash
Causes of the New York Stock Market Crash of 1929
To understand the causes of the New York Stock Market crash, we must consider the differences between the real economy and the financial economy. The real economy responds to the smooth running of enterprises, i.e., their productivity and market acceptance. The financial economy is the share prices of companies on the stock exchange. There must be a balance between the two, but this is not always the case. Actions may be overvalued because of speculation on the stock exchange. Speculation was a rapid means of obtaining money by buying shares, the price of which increased rapidly. There was a decrease in capital investments (banks, private individuals, etc.) in productive activities because the stock market offered more benefits. Companies lowered their sales and liquidity and were forced to seek bank loans. Money to banks was requested from the Federal Reserve, which lent at 5%, while they granted loans at 12% to invest in the stock market (individuals, convinced that the benefits outweighed the interest).
There was a blockbuster. U.S. economic growth showed imbalances. The most productive sector was consumer goods because there was strong demand, also agriculture, due to new production techniques and mechanization. However, more was produced than was sold, resulting in lower-income for farmers. In the energy sector, such as coal, and the steel and textile industries, productivity decreased. As a result, there were imbalances between the incomes of farmers and the incomes of urban dwellers, to the disadvantage of the former. In addition, employers’ benefits were very important, growing by 65%, but wages only increased by 17%. There was a drop in consumption in agriculture and urban areas by resorting to borrowing or hire-purchase loans.
The Stock Market Crash
The first manifestation of the crisis started when some investors began to put their shares up for sale, hoping to get good benefits. However, the prices began to fall, causing a ripple effect that further increased the number of shares for sale. The huge offer entailed the collapse of share value, which resulted in Black Thursday, October 24, 1929. That day, millions of shares were offered for sale but found no buyers. It was the crash of the New York Stock Exchange. The plummeting value of the shares ruined many investors. Banks requiring the cancellation of loans for the purchase of shares caused another wave of sales, resulting in Black Tuesday, October 29.
The Expansion of the Crisis
As the U.S. was the world’s political and economic power, and Europe’s economy was tied to the U.S., the crisis spread through different mechanisms. The prices of American products descended, and companies in other countries could not compete. U.S. demand for products from other countries backed down, and U.S. banks withdrew funds and closed loans. In the most affected countries, such as Germany and Austria, U.S. loans granted under the Dawes Plan were withdrawn. In Germany, the deficit soared, and unemployment reached 40% of the population. The stock market closed. In England, farms sank, and industrial production declined. The pound was devalued. In France, exports lowered, and war reparations that Germany should pay were not received. Other countries were also affected because they sold raw materials to the U.S. or European countries, such as Brazil, Chile, and Australia.
Effects of the Crisis: The Great Depression
Overproduction, lack of money, and the fall in consumption caused the crisis within months of the Stock Exchange crash, affecting all sectors of the economy. The banking system was one of the first affected because the stock market crash caused debtors to be unable to repay their loans, and banks had accepted shares of stock as collateral for loans. Fear of bank failures frightened the population, who came en masse to withdraw their accounts, but the bodies could not replenish the bank for lack of resources. This triggered the banking crisis: more than 4,000 banks failed and disappeared, millions of families were ruined, and thousands of Americans lost everything. The banks reduced lending to industry and consumption, further aggravating the situation. The pessimism and lack of confidence led to a reduction in industrial investment, as it was doubted that manufactured products might have buyers. The collapse of stock market investors and reduced credit caused a drop in consumption, aggravating overproduction. Stocks rose significantly, and prices fell. The drop in consumption and investment led to the industrial crisis. More than 100,000 companies had disappeared, and industrial production had fallen by 40%. The drop in industrial activity caused a major increase in unemployment, affecting 12 million workers. The depression had a serious social impact, and poverty spread. Many workers and peasants were on the dole with miserable living conditions, homeless, and depending on state aid or charity. Much of the middle class lost their savings and businesses and had to proletarianize. Unemployment further aggravated the contraction in demand: millions of unemployed people stopped eating, and those who feared losing their jobs retained and therefore also reduced their consumption to save. By reducing demand, industrial and agricultural production decreased. The crisis fed the crisis.