Why Did the Stock Market Crash in 1929? What Were the Underlying Causes?
But why did the stock market crash in 1929? The stock market crash of 1929 is perhaps best known for its devastating consequences, but it all began with one fateful day: October 24th, 1929.
On that day, known as “Black Thursday,” the Dow Jones Industrial Average plummeted, wiping out billions of dollars in wealth and setting off a chain of events that would reverberate for years.
Why Did the Stock Market Crash in 1929?
The 1929 stock market crash had several reasons, including overvalued shares, increased bank loans, overproduction in agriculture, panic selling, margin purchases of equities, rising interest rates, and a bad media landscape.
The Great Depression got its start during this deflationary phase of the American economy. Let us briefly discuss how these factors led to the stock market crash in 1929.
Global Trade and Tariffs
Due to the overabundance of agricultural products, American farmers were unable to sell their products in a crucial market while Europe recovered from the Great War and saw an increase in production.
As a result, the U.S. Congress passed a number of laws raising duties on imports from Europe; however, the tariffs were not limited to agricultural products, and many other countries also imposed tariffs on imports from the United States and other countries.
Tariffs caused overproduction, oversupply, and higher pricing, which had disastrous effects on global trade. Global trade fell by 66% between 1929 and 1934.
Overproduction and Oversupply in Markets
Individuals were purchasing stocks in expectation of rising share prices rather than based on the stock’s fundamentals. More people entered the markets as a result of rising share prices because they believed it would be easy money.
Due to an oversupply brought on by excessive output in numerous industries, the economy faltered in the middle of 1929. In essence, because of the high share prices, businesses could obtain capital at a low cost and invest in their own production with the necessary optimism.
Eventually, this overproduction resulted in an oversupply in a number of market segments, including farm crops, steel, and iron. Businesses were compelled to sell their goods at a loss, and stock values started to decline.
Excess Debt
In bull markets or rising markets, margin trading can result in large profits since the borrowed money enables investors to purchase more stock than they otherwise could have afforded with cash alone.
Because of this, gains on rising stock prices are increased by leverage or borrowed money. On the other hand, stock position losses are exacerbated during a market decline.
The broker will make a margin call, or request further deposits to offset the portfolio’s value loss if it happens too quickly. The broker must liquidate the portfolio if the money is not deposited.
Banks initiated margin calls during the 1929 market crash. Entire portfolios were liquidated as a result of the public’s huge margin purchase of shares and the dearth of cash on hand.
What Happened After the Crash
Nearly every aspect of life was immediately touched by the 1929–1939 Great Depression and stock market crash, which also changed the outlook and attitude of an entire generation to the financial markets.
The period following the market crash was, in a sense, a complete 180-degree turn from the mindset of the Roaring Twenties, which had been a period of intense optimism, robust consumer spending, and economic expansion.
Final Words
Similar to the majority of market crashes, recessions, and depressions, a crash and recession are the result of a complicated web of interrelated causes.
Numerous causes contributed to the 1929 crash, including the post-World War I boom, overproduction in important industries, a rise in the use of margin for stock purchases, the war’s effect on the lack of worldwide purchasers, and more.
While some of the errors have subsequently been corrected and prevented, others have added to collisions in the future.
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