Causes of the Wall Street Crash

What caused the Wall Street Crash of 1929?

The American economy had been enjoying a boom through the “Roaring 20’s”. The introduction of consumer goods, such as fridges, typewriters, radios and also cars, not only created more jobs but helped the American economy rise even more. The ability to buy “on credit” (hire purchase, by instalments) meant that consumer goods were now affordable to the average American. Not everyone, though, enjoyed in the prosperity and affluence the boom promised in the Roaring 20’s. There was an ever widening gap between rich and poor, 42% of all Americans were living below the poverty line, and new immigrants and farmers in the southeast never enjoyed the boom (and so depression and hardship – when it set in – was nothing new to them).

However, the Fordney-McCumber Act (1919) which had placed high tariff on all foreign imports into America, had had its effect on American goods being exported to Europe. European nations responded with their own high tariffs on American exports – a trade protection war was starting. This reduced the volume of international trade and meant that those American merchants who had enormous surpluses had no market within which to sell their goods. Also consumerism (and HP) had ensured that everyone had consumer goods in their home, goods that were now low in demand. This would cause a fall in prices and industrial instability.

This fall in demand led to a fall in production levels, which in turn would lead to a reduction in the amount produced by industry. (See the Cycle of Depression) Industry would also lower the number employed to make that lowered demand. The American economy was falling into a downward spiral.

However, this was not the whole of America’s problems. The grain farmers of the southeast had been suffering for years. The introduction of machines to farming had led to huge over-production (and sometimes unemployment) and farmers found themselves unable to earn a living as the increase in production (WW1) led to a fall in demand. Worst hit were the share-croppers who often ended up with barely enough to live on.

The Dust-Bowl had also hit the farming industry hard. Poor farming methods and bad soil erosion had left the ground infertile and barren. Winds swept the dust all over especially around Oklahoma. Farmers were struggling to survive.

Dustbowl. Agriculture in the 1920's
Dustbowl. Agriculture in the 1920’s

The inflated economy of the “Roaring 20’s” had also led to inflated share prices. People were buying shares ‘on the margin’, whereby they paid 10% of the value and borrowed the rest from banks and speculators. This caused the market to remain abnormally high and over-priced but people, especially the middle classes, the banks and speculators, continued to invest heavily in the market. Unfortunately there were too many small banks who had insufficient funds to cope with the sudden rush of withdrawals. The banks were unable to return the money as it had been invested in the stock market and in building projects.

In the Autumn of 1929 some businessmen decided that the market could not remain and maintain so artificially high for very long and decided to sell their shares whilst the market was buoyant and high. This led to a massive panic selling of shares, which caused a dramatic fall in the value of the market. This caused several more panics through September and October 1929 as people were desperate to sell but no one wanted to buy.

Wall Street

Wall Street Crash

The scene on Wall Street as the stock market crashed.

On Thursday 24th October 1929, Wall Street Crashed. This day became known as Black Thursday as it heralded the end of the Roaring 20’s and sealed America’s decent into depression. Some rich businessmen and bankers were persuaded to invest $250,000,000 in buying up stock but to no avail. In only 37 days the US economy had lost 47% of its value and would fall further during November.

America in the 1920's
USA at the start of the 20th CenturyCauses of the Economic BoomImpact of Economic Growth in the 1920's
Agriculture in the 1920's"Roaring" TwentiesProhibition
Ku Klux Klan in the 20'sCauses of the Wall Street CrashConsequences of the Wall Street Crash
The Great DepressionThe New DealOpposition to the New Deal
Evaluation of the New Deal