The 1929 stock market crash led to the Great depression. Prior to the stock market crash capital in America was represented in form of stocks. Typically, corporations owned capital, which was in the form shares of stock. Investors traded their stocks at the New York stock exchange located on Wall Street. However, the stocks crashed in 1929 and affected the American economy greatly.
Cause of the crash
The value of stocks in the stock exchange market rose sharply to unprecedented levels in the 1920s. Consequently, between 1920 and 1929, the value of stocks more than quadrupled and investors’ interest in the stocks was aroused greatly and many borrowed huge amounts of many to invest in stocks. The investors purchased the stocks on margin. They bought on the margin because they were of the belief that the prices of the stock would remain on an upward trend and thus speculation rose and many investors bought the stocks. Eventually the prices began to fall when perceptive investors traded of their stocks. Thus, the high priced stocks were temporal (Bierman 1). Due to the falling stock prices, panic selling began and the value of stocks dropped drastically.
Impact of stock crash on the economy
The United States economy was greatly affected by the stock market crash. Both individuals and businesses had invested heavily in stocks and thus after the crash they lost their money. Many businesses closed down and individuals did not have money to purchase goods from those businesses that were still operational. The then president Hoover signed a treaty that increased tariff rates with the signing of the Smooth Hawley tariff. Consequently, other nations shunned American goods due to exorbitant prices
The sudden crash of the stock affected investors who had borrowed money to invest in stocks greatly. Generally, the people could no longer afford to buy goods and the demand for the goods declined sharply. People felt poor because their stocks had lost value at the stock market and thus could not afford to buy goods. Furthermore, they could not make new investments because they could not sell the stocks due to people loss of trust in the stocks (Stock Market Crash 1).
Banks were greatly affected by the stock crash and chaos reigned in the banking sector. To begin with, banks rushed out to collect debts from investors who had borrowed to invest in the stock market yet their stocks had very little value. In addition, the banks had not been left behind in investing in the stock market and most had deposited huge amounts of money in stocks.
Consequently, depositors also hurried to the banks to withdraw their money from the banks after learning that the banks also had huge deposits in the stock market in a bid to save their savings. The banks were hit hard by the huge savings collections and the Federal Reserve System could not bail all banks out. Thus, many banks started to fall between 1932 and 1933 (Stock Market Crash 1).
The banking system in American had almost grinded to a halt in 1993 when Franklin Roosevelt took office. The depositors had lost about $140 billion after banks closures. Therefore, people did not accept payments in checks because it was not easy to tell which checks had worth (Stock Market Crash 1).
How long it lasted
The chaos caused by the 1929 stock market crash lasted for about four years. After taking office Roosevelt ordered banks to close for three days and during this period, measures were taken to correct the situation and prevent it from recurring in the future. For instance, few banks that reopened had strict withdrawal limits. Ultimately, sanity and confidence began to return to the banking systems.
The stock market crash in 1929 was great lesson to the American government on how not to run the banking system. Many measures were in place to ensure that banks would not put their customers’ deposits at risk by investing in the stock market. The measures would prevent a crash in stocks with similar magnitudes in the future.
Bierman, Harold. The 1929 stock market crash. eh.net. 05 Feb. 2010. Web. 18 Nov. 2010.
Stock Market Crash. pbs.org. n.d. Web. 18 Nov. 2010.