Wall Street Crash of 1929: Causes and Market Collapse

What is Wall Street?

It is the American stock market.

How the Stock Market Works

To set up a company, you need capital. This capital is raised from investors (called shareholders because, in return, the investors own a share in the company), who then get their money back either through receiving dividends on the shares or through selling their shares. Investors buy and sell their shares on the "stock market."

How Shares Work

The value of shares is higher when the company is successful. When more people buy rather than sell shares, their price goes up. But when it is the other way around, the price falls.

Causes

Speculation

Investment on the stock market was attractive during the economic boom since the economy was doing well and people had money to spare. Therefore, there were more buyers than sellers and the value of shares grew. For Americans, the stock market was an easy and quick way to get rich. Anyone could buy shares, wait for the value to rise, and then sell them at a higher price. This is when speculators appeared. They did not keep their shares for long since they borrowed money to buy shares and then sold them again as soon as the prices had risen. They paid off their loans and still made a quick profit. Women became heavily involved in speculation, and banks too, since they lent money to speculators who then had to return it with interest. Confidence was vital for speculators and for the price to keep increasing because, if people were confident that prices would keep rising, there would be more buyers than sellers. However, in 1929, speculators started thinking that prices might stop rising, so there were more sellers than buyers.

Weaknesses in the US Economy

• Banks: Lots of banks were failing due to the fact that they had lent too much.
• Overproduction: By 1929, those who could afford consumer goods had already bought them, and the majority of Americans were poor and couldn’t afford them because workers' wages were not rising and prices were not falling. Europe couldn’t afford American goods either. As a consequence, demand decreased.

By 1929, economic weaknesses were beginning to show. Speculators became nervous about the value of their shares and began to sell. Investors had borrowed money to buy their shares and couldn’t afford to be stuck with shares worth less than the value of their loan.