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?
Lee – I have a great story. I isn’t so much about the crash & the bad times; but, about the months of the recovery — and you are welcome to it. The folks had put their car up on blocks, let all their servants go – regretfully, and basically stopped demonstrating their money; but the light began to brighten and …. but … then …
As I said, you are welcome to it. To twist it or carve from it or …
It begins with a bridge group who kept playing through the depression, alternated homes, discussed their lives, and now realized they could begin to discuss new dresses or new drapes or — plan a reception for the new bride and groom who were on their world tour.
The Federal Reserve Board let the money supply expand rapidly in the 20’s. In, I think, 1927 they decided it had expanded too much and took action to correct it. As you said, the public demand for stocks kept inflating the stock market for another 2 years, while the economy was cooling off. And, as you said, when the market attempted to correct itself, the margin calls caused it to plummet, wiping out many investors. There was no FDIC bank insurance, so when investors started withdrawing money from their banks to cover their margin calls, the banks ran out of ready cash (banks keep most of their assets in mortgages and loans. They don’t make any money on cash sitting in their vaults). This caused bank depositors to panic and attempt to clean out their accounts, which caused the banks to fail. The scene in “It’s a Wonderful Life” where there’s a run on Jimmy Stewart’s Savings & Loan captures this. My grandfather ran a big feed mill in Indiana. The bank failed and he lost the money on deposit to meet payroll. He opened an account at another bank in town and it failed. My mother said at 1 of those banks, the failure was quickened by the son of the president seeing that the bank was in trouble, cleaned out the vault and escaped to South America. New banking laws and the creation of the FDIC & FSLIC prevented this from happening again in the early 80’s when interest rates got so high that Savings & Loans were failing because they had to pay over 5% on savings accounts & CDs, but had a lot of mortgages that had been made years earlier at low interest rates. The feed mill survived, but the family had some difficult times. They had an English maid (Annie) that had been with them since she was young, and they couldn’t afford to keep her. She had nowhere to go and said she’d stay just for room & board. They later resumed paying her. She stayed until her very old age when she fell & broke her hip. My grandmother helped pay her nursing home expenses until her (Annie) death.
I would beg to differ slightly on the recovery. As you said, the economy did not recover quickly. The number of unemployed continued to grow until 1933, but then it slowly declined, even as the total labor market increased. Consumer demand for things like newfangled electric appliances, and radios helped. By 1939 the economy recovered even more as while the US was not yet in WW2, we were supplying England and building up our military.
My dad was fortunate to work in a foundry. His dad had been dead for a few years. So he was the sole support of a mother, 4 bros, a sister in law a nephew and niece. Thank God he had work.
My mom’s dad was a plumber. People wanted their plumbing so he had work.
Awesome! Its in fact amazing aгticle, I have got much clear idea concerning from this paragraph.