Why Did the Stock Market Crash?

Why Did the Stock Market Crash

The stock market of the U.S. witnessed the worst collapse in 1929. During the 1920s’, the U.S. stock market observed instantaneous development, attaining its utmost value in August 1929. After a decade of fantastic speculation in the roaring-20’s, the stock market crashed followed by a long-lasting “asset bubble.”

Stock market crashes timeline 

The early day of the market-crash was the Black Thursday. That day, the Dow opened at a value of 305.85. It directly dropped 11%, suggesting a stock market improvement. Stock exchanging tripled to the expected volume. Wall-Street bankers agitatedly bought shares to back it. The strategy helped.

On 25th Oct, the positive acceleration went on. The Dow increased 0.6% to the value of 301.22.

Ultimately, on October 28 (Black Monday), the Dow dropped 13.47% furthermore to 260.64.

The Dow fell 11.7% to 230.07 On Black Tuesday, 29th Oct 1929. Terrified stock investors sold a gross 16,410,030 shares on that day. This stock market crash has an extended timeline.

  • In March 1929: The Dow dropped, but bankers reassured investors.
  • On 8th August: The Federal-Reserve Bank, NY, increased the interest rate from 5% to 6%.
  • 3rd September 1929: The Dow increased 27% over the previous year at its highest value of 381.17. 
  • September 26, 1929: To protect the gold standard, the Bank of England raised its rate too.
  • 3rd October 1929: The Chancellor of the royal or national treasury of Great Britain, Phillip Snowden called the U.S. stock market “a perfect orgy of speculation.”
  • On October 4: The New York Times and The Wall Street Journal ratified Snowdens’ statement.
  • 24th, 28th & 29th October 1929: sequentially Black Thursday, Black Monday and Black Tuesday.
  • 1933: The Federal Deposit Insurance Corporation was launched by President Roosevelt to insure bank deposits. After the stock market crash, banks just had enough to honor 10 cents for a dollar. Because they had invested their depositors’ money in stocks, without informing them.
  • 23rd November, 1954: Finally, the Dow recovered its high of 3rd September 1929, closing at 382.74.

Other prior stock market crashes led to the recession of 2001 and the 2008 Great Recession. The recent recession in 2020 occurred during the March 2020 market crash, which started in the first quarter of this year.

What Caused the Stock Market Crash of 1929? 

One week earlier of the crash of 1929, the “New York Times daily” headlines aired the panic with articles on short-selling of stocks, margin-sellers, and the exit of foreign investors. A few days later, The Chancellor of the royal treasury of Great Britain, Phillip Snowden, depicted the U.S. stock market as “an orgy of speculation.” The following day, top U.S. newspapers agreed with Snowden. 

It impacted directly, and the Dow dropped considerably on both of those days. According to S&P Dow Jones Indices, the Dow was by that time down 30% from September 3 high values. That signalled a “bear-market.” By the end of September, the British stock market was speculating a massive decline. In U.S. history, it was the worst “bear-market” in terms of loss percentage. But why did the stock market crash specifically?

The exact reason for the stock market crash is still debated among the economists; numerous widely acknowledged theories stand, For instance:

The U.S. favorable economic condition made the stock market & investors overconfident.

A sense of hysterical overconfidence due to a longer period of stability expanded to all communities of investors, pushing to an asset-bubble. People purchased stocks with simple credit and convinced by the stability of the market were unsuspecting debt. 

Evidence indicates that, after 1922, the stock market had expanded by almost 20% every year until 1929. A similar sense of reckless overconfidence developed in ordinary customers and neat investors, too, overseeing an “asset bubble.” The stock market crash happened after a decade of growth that led to consumer overconfidence.

A peak occurred rapidly before the stock market crash

During the “Roaring-20’s,” the United States stock market, as well as its economy, underwent reckless growth. In the meantime, the stock market hit record highs. Besides, the all-around economic condition in the U.S. was healthy in the 1920s. The unemployment rate was low, and the automobile-industry was growing.”

By the market crash time, most common working-class occupants had become interested in investing in stock, and many of them paid for stocks “on margin.” It means that they paid only a fraction of the value and borrowed the rest from a broker or a bank.

Another issue, Investors purchased stocks with lenient credit.

During the early 20s’, there was a rapid increase in bank credit and easily accessible loan schemes. Meanwhile, People convinced by the market’s stability were unafraid of debt.

The idea of “buying on-margin” entailed ordinary people with a little or no financial understanding to get credit from the stockbrokers and put down as little as 10% of the share value. A similar kind of buffer was uncovered in agriculture and manufacturing: production over demand led to an excess of products including harvests, durable goods, steel and iron. This meant that companies had to wholesale their products at a loss, and share prices suffered.

Government suddenly raised the interest rates.

The Federal-Reserve Bank, NY, increased the interest-rate from 5% to 6%. A sudden raise in bank interest decreased investors enthusiasm in stock market investment that affected market stability and unexpectedly affected economic-growth.

Another factor was an ongoing agricultural recession 

Farmers were toiling to earn an annual profit to maintain their businesses running. Some experts believed this agricultural depression impacted the economic condition of the country.

After the crash, panic led a bad condition to worse

Public panic after the days of the stock market crash made innumerable people surging to banks to withdraw their funds in at least a number of “bank openings,” but they could not get their money because bank officials had invested the money in the market.

Many analysts argue that the financial press played a key role in rendering the perception of panic that worsened the stock market crash.

And, at last there was no single cause for the turmoil.

Most economists acknowledge that several, blending aspects dominated the crash of 1929.

A rising, faster evolved economy that was destined to recede like played a significant role. Many investors and common people lost entire savings of their life, while many banks and companies declared to be bankrupt.

What happens when the stock market crashes?

While historians occasionally argue whether the stock market crash of 1929 directly inflicted the Great Depression, it’s beyond doubt that it seriously impacted the U.S. economy for several years.

The market crash heated people out. They were required to trade businesses and cash in their entire savings. Brokers were ordered to take back loans when the stock market began to fall. People hurried to get enough cash to pay for their margins. They have lost faith in Wall Street.

It’s not possible to have a healthy economy with dilapidated confidence in the market. By 8th July, 1932, the Dow was decreased to 41.22. That was an 89.2% loss from the record-high closing of 381.17 on 3rd Sep, 1929. It was the worst bear market upon percentage loss in the modern American economy. 

The Depression shattered the economy of U.S. Unemployment rose to 25% whereas wages fell 42%. U.S. economic growth went down 54.7% and world trade fell 65%. 

Key Takeaways:

  • One of the worst stock market crashes in U.S. stock market history was the crash of 1929. 
  • The 3 crucial trading dates were Black Monday, and Black Tuesday, Black Thursday. 
  • An unsustainable asset bubble was developed by overconfidence in the Roaring-20s’.
  • In a short period, many people lost all their businesses and savings, forming the stage for the Great Depression.