How far was Speculation responsible for the Wall Street Crash?
Word Count : 916
By,
Preethi Kumar,
Grade 10.
The main aim of this essay is to examine the various factors that caused the Wall Street Crash (The worst period of depression) and to investigate how important each of them were. The main factors, which caused the depression, were Speculation, Overproduction, Lack of Export Market and the Distribution of Income.
Speculation was one of the short-term causes, which gave way for the Wall Street crash. Speculation can be defined as a gambling of the shares in the stock market. It was mainly dependent on the credit system. Suppose ‘A’ speculates (or predicts) that the share prices would increase constantly through out the day. He buys 100$ share in the aim of making a profit by selling it to ‘B’ at a higher price. He succeeds in doing so. He sells it for 200$. However, ‘B’ does not pay ‘A’ the money. Instead he issues a credit note that he would pay ‘A’ back when he gains a profit. ‘A’ would accept the credit note only if he was confident enough that the share prices would increase and ‘B’ would gain a profit. This was the system of credit. Even though it proved to be a good source of income, it did not last long. It caused many problems. People would buy and keep shares if they are convinced that they will go up in value. When confidence was booming, it presented no problem. Shares were in demand, and hence those who choose to sell got high prices. The investors started to lose their confidence that the value of their shares would increase. Hence, they were less interested in buying the shares. Since they bought shares on the margin, they wanted to sell them at a good price(Before they fell down to a drastic extent) so that they could pay back their own loans and bids. This time, they did not want a credit note, but money paid in cash. Since a majority of people chose to sell, the prices got lower. This in turn caused the share holders of various companies (whose share prices were falling)to get nervous. Hence, they decided to sell the shares too. The final result was that shares collapsed and became worthless because no-one is prepared to buy them. This was an important cause to the Wall Street Crash.