What led to the Stock Market Crash in 1929?
The 1920s were known as the “Roaring 20s” because of great economic and social growth in the US. It was also a time of liberation for women as they broke free of many of the constraints of the Victorian era, which was manifested in the hair styles and fashion of the times. If you run an internet search of “Roaring 20s,” you’ll find pictures and videos of people dancing and having fun.
The twenties were also a time of unprecedented prosperity, experienced not just by those already wealthy, but by the common man. Unfortunately, the rapid rise in financial gain wasn’t sustainable, and led to the terrible Stock Market Crash of 1929.
But why did the market crash so horribly? Many reasons, but here are some of the main ones (simplified):
The Stock Market, where investors buy and sell shares of companies, expanded rapidly in the mid 1920s. Stocks, which consist of divided shares of companies, soared in prices. Everyone from cooks to chauffeurs wanted a piece of this market. The temptation to borrow money to buy more stocks of what was deemed a sure return on investment was widespread, and many who bought stocks with other people’s money did so because they didn’t have the cash to finance their own investments.
If you were around in the 1920s, it is likely that you or someone you knew had invested in the Stock Market – it was that common!
Since it was so easy for companies to get money from high share prices in the market, they invested heavily in their own production, creating a serious oversupply and overproduction problem. Overwhelmed with too much steel, iron, and farm crops, companies were forced to dump their supplies, which caused share prices to falter.
This also had a very negative effect on Global Trade. Nations started to increase tariff prices on their imported goods. From 1929 to 1934, global trade plummeted by 66%. When you start losing access to goods coming in from outside your country, it creates a scarcity of goods within your own country.
Since so many people had borrowed money from brokers, a huge debt problem ensued. When you borrow money from brokers (margin trading), the potential to make money is magnified when Stock Market prices rise… but the opposite is true when it falls.
The awful reality of the Margin Call
Banks and brokers can issue Margin Calls when the shares you bought drop drastically in value, demanding you pay back some or all of the money they loaned you. And if you don’t pay this margin call, they have the right to liquidate everything… sell your shares off!
That’s what the banks did in 1929, and people’s entire portfolios were liquidated, completely wiping investors out. Banks, who gave people bad loans, took significant losses when people started withdrawing all their money from them.
The Stock Market, once booming in the Roaring 1920s, began to crumble down quickly…
A big, complicated mess that affected everyone.
Much of what created The Great Depression can be attributed to this financial mess, and it wasn’t until the early 1940s that people began to see recovery.
Do you have ancestors with stories about the Stock Market Crash & The Great Depression?