The Impact of the 1929 Stock Market Crash on the Economy
Crack29: It originated in the United States and spread worldwide.
Background
During the First World War, the U.S. was placed in a privileged position compared to the rest of the world, making it the major supplier of raw materials, foodstuffs, and industrial products. Industrial growth was outstanding, based on the theories of Taylor and Ford regarding work organization and production. In contrast, agriculture did not experience parallel growth; agricultural prices were well below those of industry, leading many farmers to sell their land cheaply and migrate to cities. These were prosperous times of high consumerism, and America was seen as the promised land—a society rich and opulent. This confidence led much of the population to buy shares of industrial companies, with Wall Street becoming the center of the global economy, attracting capital from all over the world.
However, because the world was not in the same economic situation as the U.S., the country could not absorb all its industrial output. This imbalance caused stock prices to rise, while accumulated products went unsold. Until late 1929, stock prices had risen nearly 90%. Financial speculation aimed at making quick profits led to an overvaluation of stocks. People began borrowing money from banks to buy stocks, believing that the profits would easily cover bank interest. This prosperity was based on industrial development that relied heavily on speculation.
By 1928, symptoms of an economy in danger began to emerge: the income of the population could not sustain increased consumption, stores were filled with goods that could not be sold, and layoffs increased. Despite this reality, the stock market continued to grow. There was no correlation between the value of a share and the state of the enterprise; demand from speculators kept pushing share values higher.
The Fall of the New York Stock Exchange
On Thursday, October 24, 1929, the New York Stock Exchange crashed. More than 16,000,000 securities were traded at low prices, with no buyers available, causing the ruin of thousands of investors, many of whom had purchased those securities with loans they could no longer afford. Panic ensued as people rushed to withdraw money from their bank accounts. Banks were overwhelmed by bad debts; new loans were halted, and existing debts could not be refinanced. Approximately 600 banks went bankrupt.
Home of the Great Depression
The stock market crash opened a period of global economic downturn that lasted throughout the 1930s and had a profound impact on economic, social, and political structures, known as the Great Depression. In the United States, consumption froze, stockpiles increased, investments were paralyzed, and many businesses had to close. Unemployment affected all social classes, prices fell, and agricultural markets collapsed, forcing farmers to sell their land and migrate. Workers struggled to find jobs, and this issue extended to professionals and business owners. It is estimated that unemployment reached 14 million.
The crisis did not remain confined to American soil; due to the U.S.’s dependence on the European economy, a major dip in world production occurred, creating significant tensions in the labor market. This environment became a breeding ground for fascist ultra-nationalism and authoritarianism.
Solutions: The New Deal
In 1933, Roosevelt became president, with the primary objective of rebuilding the country’s economy. He developed a plan called the “New Deal,” based on the ideas of economist John Maynard Keynes. Although Keynes favored liberalism, he proposed government intervention in certain situations. This plan aimed to encourage investment, credit, and consumption, thereby reducing unemployment. It offered assistance to banks, subsidies to farmers, increased wages, and reduced working hours. Additionally, it created jobs on public works projects and designed health care plans along with a new pension system.
Consequences of the Crisis
Perhaps the most striking consequence of the 1929 crisis was the increase in unemployment worldwide. Those who managed to keep their jobs often faced significant pay cuts. The economic boom turned into widespread poverty that affected both rural and urban areas. Mortality rates increased, and population growth stagnated. In the United States, makeshift villages near cities, made of sheet metal and cardboard, emerged, known as “Hoovervilles.” The dollar was devalued, and governments worldwide implemented protectionist measures, leading to a reduction in international trade.