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Many have heard about the social and economic turmoil caused by the Wall Street Crash of 1929, but very few are aware of the cause of this event and the full extent of the catastrophic results. The Wall Street Crash of 1929, also called the Great Crash, was a sudden and steep decline in stock prices in the United States in late October of that year. The consequences of the Great Crash had an impact across the globe and affected both economies of an industrialised and non-industrialised nature for approximately 10 years. This period of impact in the 1930s was known as the Great Depression.
Initially, we must look at the root of what caused this economic event. After the First World War, the United States’ economy began to recover from the recession, and its stock market underwent significant expansion. This continued from the mid-1920s until 1929. In 1929, Herbert Hoover was just announced president, and growth was still at an all time high. During what was known as the “Hoover Bull Market”, people from all backgrounds rushed to invest any of their liquid assets (many people even took out loans) into securities, to benefit from such a large economic boom by gaining significant returns.
Do check out this brilliant PBS article which explores the role played by Charles Mitchell, President of the National City Bank and his colleagues in the Wall Street Crash.
As it approached September and October of 1929, prices began to decline. On October 18th, the stock market plummeted, meaning the unruly clamour to buy stocks suddenly paved the way for an unruly clamour to sell them. The main reason for this was to ensure people had re-established the financial security they may have previously had, but also for the large proportion of people that had financed their investments on credit, to pay the loans back. However, the main reaction took just under a whole week to be seen, where on the 24th of October – now known as “Black Thursday” – a massive 12.9 million stocks were traded as these investors aimed to replenish their financial position. These stocks were primarily bought by banks and large corporations which helped alleviate any panic.
However, these attempts failed.
The aim was to ensure the market did not collapse due to a large volume of stocks being sold. If these stocks were bought immediately, it would not have as great an impact on the Dow Jones Industrial Average. Often referred to as the Dow, is an index of the daily price movements of 30 large American Companies on the stock exchange. The attempt to keep this stable was successful on the 24th of October with a decrease of only 6 points, despite the 12.9 million sales. However, as the days passed, on the 28th of October, the stock market saw an additional decrease of 12.8% followed by 16 million stock sales on the 29th of October, breaking the previous record in less than a week.
Politicians underplayed the significance of the event and assured the public that prosperity was just around the corner. Due to insufficient fiscal stimuli and financial aid taking place, the Dow then dropped significantly from over 300 - prior to the recession - to below 200. The ignorance of financial bodies and the government was not the sole cause for the economic downfall, however. The fact that the majority of the investments were made with consumers taking out a loan to buy stocks meant that the value of the stock deteriorated significantly and debt increased. Furthermore, these debts could not be liquidated because the recession started slightly earlier than September of 1929 and because banks were also struggling.
The Wall Street Crash of 1929 is marked by many economists and historians as the trigger of the Great Depression. As a starting point have a look at the video below which explains some of the most important moments of the Great Depression
The impact of this crisis then spanned until 1939, not only in the United States but worldwide, as there were drastic declines in output, extreme unemployment and sudden and malignant deflation. GDP fell nearly 30% with unemployment exceeding 20%. Governments and financial bodies had to understand how to combat significant deflation and high unemployment. The main methods used were to decrease interest on credit, to allow borrowers to pay back borrowed loans. It would also encourage people to start spending again as it would be cheaper. These factors would all cause aggregate demand to begin to increase again and result in less deflation. However, due to the significance of the crash, it was not this simple and wouldn’t alleviate the issue in a short period, resulting in a 10-year-long depression.
Europe was not protected: Germany saw a similar decrease in real output to the US. This was also because these economies were recovering from the war and therefore were in a stable and growing financial situation but then faced the sudden economic crash. However, another reason may also be due to the animal spirits of investors. Animal spirits is a term coined by Keynes, explaining that decisions are based on business confidence and the mood of owners, by considering external factors and the future. After seeing the impact in a multitude of countries, confidence would be extremely low, and as a result, the difficulty of recovering from the recession would only increase.
Eventually, the issue was resolved with a multitude of factors at play. The government gave financial aid to reboot the economy, interest rates were dropped, and several other factors ensured consumption and investment increased. Further to this, the government then understood the severity of the issue and therefore government spending was increased as well. All these factors amalgamated but still required 10 years for the US to recover.
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