The 1929 Stock Market Crash and the Great Depression
The Roaring Twenties and the Crash
In the 1920s, America exuded confidence and economic expansion. Optimism fueled speculation in the New York Stock Exchange, where stock values quadrupled in a decade. Instead of reinvesting profits into industries, many sought quick gains in the stock market. The U.S. banking system, comprised of small, dispersed banks, encouraged this dynamic by lending to brokers who, in turn, financed investors.
This system, built on mutual trust, crumbled on October 24, 1929 (Black Thursday). Despite earlier warning signs, investors began massive stock sales, triggering panic. On Black Tuesday, October 29, the market plummeted, vaporizing fortunes and ruining families. The losses in a single day exceeded U.S. spending during the entire Great War.
The Great Depression
The stock market crash, coupled with underlying economic problems and inadequate government response, led to the Great Depression. The crisis, lasting throughout the 1930s, had devastating effects:
- Widespread Pessimism: Financiers lost prestige, spending and consumption plummeted, banks reduced loans, and businesses failed.
- Decreased Investment and Business Closures: Faced with declining consumption, businesses reduced investment, leading to closures and soaring unemployment.
- Falling Prices and Deflation: Decreased demand led to falling prices, economic losses, and further bankruptcies. Overproduction and falling agricultural prices worsened the situation. Deflation was exacerbated by the lack of credit and loans.
- Inadequate Government Response: President Hoover’s administration, adhering to laissez-faire economics, offered limited intervention.
Global Impact and New Policies
The crisis quickly spread to Europe. Reduced U.S. trade and lending severely impacted countries dependent on American credit, like Germany. Great Britain, heavily reliant on trade, also suffered. France and Spain felt the effects later but experienced a longer recovery.
Across Europe, bankruptcies, closures, unemployment, and low economic growth prevailed until at least 1932, and in France, almost until the end of the decade. Many European nations adopted protectionist measures, further hindering trade and fostering aggressive foreign policies, contributing to the climate leading up to World War II.
Falling U.S. prices, particularly for food and raw materials, impacted the global economy, including colonies and overseas territories. The USSR, isolated from the international market and undergoing rapid industrialization, seemed to be the only exception. The Soviet model, contrasting with the capitalist crisis, attracted Western workers and intellectuals, posing a perceived threat to Western ruling classes.
By the 1930s, governments recognized the limitations of laissez-faire economics. New policies emerged, emphasizing increased domestic demand, greater economic planning, and social security systems to mitigate unemployment.