Causes Of The Great Crash Essay, Research Paper

Causes of the Great Crash

In 1929 there had been a bull market for some time, and it seemed like it would never stop. However, such prosperity would not last forever. In October of that year, the market came to an abrupt halt. It was not a simple matter however. There was no single reason why the market finally crashed as it did but rather there were many factors that had lead to this devastating event.

The first reason that had helped contribute to the stock market crash of 1929 was the huge misdistribution of wealth. The rich 5% elite was controlling the economy as well as about 25% of the nations income. Low wages, horrible working conditions and tremendous hours remained the same, as labor unions were completely ineffective during this time period. Because wages and prices weren t changing, as was the output per worker was, the rich were only getting richer. Since they were the big spenders, they basically decided which direction the economy was going.

The second reason was the fact that the unstable United States economy was part of an unstable world economy. As America prospered in the 1920 s, Europe struggled to rebuild itself from the devastation of the war. America throughout the 1920 s, with its booming economy, helped Europe by lending them millions of dollars. The loans given out by the United States were expected to be paid back by the foreign allies. However, what was really misunderstood by the United States was that the foreign allies were in no shape to repay any loans that had been taken from the Untied States. In addition to that, there was a lot of corruption involved with many overseas loans such as in Latin America and Peru. In light of all this, investors of course realized the danger and in turn simply stopped giving loans out. This created a negative effect for farmers who now had a smaller export market and for bondholders.

Another big reason was the mass marketing of stocks and bonds. The stocks and bonds were being open to anybody, big or small. For the first time, anyone could invest in the stock market. Since everyone was now investing, a bull market, which is an upward trend in stock prices, was created. The stocks kept going up because more and more people were investing their money. Now that there were so many unaware investors the big investors were manipulating the market a lot easier. Large companies would form Pyramids of separate holding companies and they would also form investment trusts. These companies got away with it since the stock market wasn t very well regulated as it is today.

Stock speculation was a major way to get wealthy. People would see others that were prosperous from playing the market. There were many people who would put all of their money on a stock, and hope it went up. Stocks were being bought and sold rapidly, which also helped inflate them, creating prices that were higher than what the stocks were actually worth. Everyone was trying to get rich quick. Fortunes were both made and lost through speculation.

Since the greed of the speculators for money was so strong, they were buying stock on margin to try and make quicker and larger profits. In short, this meant that they were purchasing stocks with other peoples money. All that the investors had to do was put down 10 percent of their money to buy the stocks. This would work if their stock went up, but if the stock that they had purchased had gone down they would be in great debt. The speculators would have no way to pay off their loans, and wouldn t have any hope.

The most important reason for the crash was the fear and greed that was within the people of the period. Through the peoples fear and greed the stock market was very volatile. Everyone had put his or her money into the market in hope of making some back. These people were happy when they first started to make some minimal gains. Soon that happiness would fade away, and the people would want to make just a little more. They would make that little bit and be satisfied for a short period of time. This process would go around in circles and the people would just want more and more. They were never satisfied. To keep making their money, the investors would be extremely nervous and on edge about the companies that they had invested in. If there was a hint of a stock rising, everyone would be buying it. This would completely inflate the price of the stock, and it wouldn t be worth nearly as much as it was selling for. However, this also worked inversely. At any little sign of trouble the people would panic and sell, driving the price of their stock way down. This could possibly manifest itself in that if the economy was doing bad everyone would be selling and there would be nobody to buy which would consequently make stock prices plummet continuously and very possibility turn into a snowball effect.

The crash of 1929 marked an end to a great time of prosperity. No longer were peoples lives going to be worried free. The crash helped spur the greatest economic depression in United States history. Many ask whether it could have been avoided. If you break it down add up all the underlying causes, it seems as though it was merely inevitable. However, the stock market, much like gambling, has and always will make and break fortunes.