Wall Street Crash of 1929: Causes, Black Thursday, and Panic

The Great Crash of 1929: Causes and Context

The fall in the overall New York Stock Exchange, commonly known as the Crash of 1929, was a major surprise. Economic indicators pointed to the fact that the American economy had experienced tremendous progress in the preceding years. For instance, between 1874 and 1929, per capita GDP rose significantly, estimated to be between $300 and $900 (in contemporary dollars).

American Economic Progress (1900–1929)

• The American population grew from over 75 million to 120 million.
• The average work week dropped from 60 hours to 44 hours.
• Life expectancy increased by 10 to 13 years.

The general atmosphere was, therefore, one of optimism. However, by mid-1929, there were signs of tension in the American economy, yet few Americans suspected the impending economic calamity. A large proportion of the population had invested heavily in the stock market, viewing it as a place where money grew without effort.

Heightened Speculation Leading to the Crisis

Speculation intensified starting in mid-1928, fueled by the creation of consortia or holding companies that issued large amounts of securities without corresponding underlying assets. This speculation continued throughout 1929 and peaked in late September.

Development of the Speculative Crisis

• Optimism on Earnings Expectations: Major businessmen, the Federal Reserve, and university teachers declared American economic prosperity, inviting people to invest heavily in the stock market.
• Investment Focus: Stock market investments were primarily intended to seek quick gains (speculation), rather than seeking more productive, long-term investments.
• Corporate Behavior: Companies began reinvesting their profits heavily in the financial sector, often abandoning the productive sector due to perceived low profitability.
• Leverage: Stock market investments were frequently made using bank loans, facilitated by low interest rates.

The Fall in Prices: October 1929

The crisis culminated in a dramatic fall in prices during the last week of October 1929.

• October 24 ("Black Thursday"): 13 million shares were offered for sale but failed to find buyers, leading to a massive fall in prices.
• October 29 ("Black Tuesday"): 33 million shares were offered for sale, causing contributions (investments) to relapse further.

Financial Panic and General Economic Crisis

The immediate aftermath of the crash triggered widespread financial panic and ushered in a general economic crisis.

Consequences of the Crash

• Liquidity Panic: A panic for liquidity caused the financial system to collapse.
• Interest Rate Spike: The lack of liquidity resulting from the financial panic caused an increase in interest rates, leading to a sharp drop in investment and consumption.
• Depression Symptoms: This drop in investment and consumption was followed by all the typical symptoms of a classic depression.

The Vicious Circle of Depression

The economy entered a self-reinforcing cycle:

VICIOUS CIRCLE: Falling production and company profits → Business closures → Unemployment increases → Wages drop → Demand drops → Prices drop.