WHY DID THE STOCK MARKET CRASH IN 1929?

This brings me onto my next point, Tariffs and the export market. The industries were highly economic and therefore produced an abundance of goods; too many goods for the American market. To overcome this problem the industries exported their goods internationally. The other countries especially the European countries were still affected from the war and their industries were not yet fully operational. The Fordney-McCumber tariff of 1922 kept foreign goods out but this prevented Europe from making profits, which they needed to buy American goods. Europe then had to put up tariffs and the export of American goods slumped. As well as the tariffs the already critical situation due to World War One that Europe was in meant that they could not buy the American exports. Therefore the American industries had to decrease production, by decreasing production they put many people out of work and this increased the unemployment level. There was no unemployment benefits in America so there was less people to buy the industries goods again; a vicious cycle.

Some people then began to buy shares on credit. They bought the shares with two possible aims in mind - to get the dividend or to make a quick profit by selling the shares for more than they had paid for them. There were not only experienced professional stockbrokers buying and selling shares now, everyone wanted their piece of the profits. In 1920 there was only 4 million investors in the stock market. By the crash in 1929 there was a grand total of 20 million shareholders in the US. Most of that 16 million increase was inexperienced buyers. The Inexperienced buyers were buying shares purely for a quick profit they did not have confidence in their shares. Stockbrokers will hang on to their shares until they climb in value again. Inexperienced buyers would not.

The farmers did not experience 'The Golden Twenties.' They can only sell their produce for what people will buy it for. In the 1920's these prices were very low and because of this many farmers were either bankrupt or deeply in debt. One quarter of North America's unemployed were farmers. Over one quarter of the farmer's income came form export to foreign countries. When America cut back on export like it did before the Wall Street Crash farmers were ruined. The cause of the farmer's problem was themselves; they were producing too much food. They were flooding the home market with food, and competition from Canada. The government in power at the time had a Laissez-faire policy. This means that they leave the country to run its own business and interfere as little as possible. This was good for some industries but definitely not for the farmers. The government did little to help the farmers. Even when the McNary-Haugen Bill was passed; in which the government would have bought the farmers' surplus crops did not help. Coolidge vetoed it twice because he said it would encourage the farmers to increase production, which would worsen the problem. Other industries inversely affected by the boom was the coal industry, which was largely replaced by the oil industry. Synthetic fibres such as Nylon were replacing cotton and putting many black workers in the south out of jobs.

As we know the economy was in a boom period during the 1920's. For example Union Carbide shares increased in value from $145 to $413 in the period from March until September. People had money to buy luxury items, if they did not have the money for luxury items they would buy them through credit. Not everybody had the money for luxury items though. The poor population, which was a massive 46% of the population, did not have the money. It was only the upper 1% of the population, which could pay for the luxury items without credit. The middle class paid for their goods over an extended period of time. So the market was not large enough to buy the goods the industries were producing. As I said before there were ways around this problem such as increasing the wages or by decreasing the price of the goods. The economy then began to slow down, this was due to a limited and saturated market, to export due to the tariffs, and Europe's situation after World War One. On Wednesday the 23rd of October 2.6 million shares were sold in the final hour. This frightened people. They sold their shares as quickly as they could. Inexperienced buyers in the market also made the stock market very fragile. In 1920 there was only 4 million investors in the stock market. By the crash in 1929 there was a grand total of 20 million shareholders in the US. Experienced traders would have stuck with their shares and not sold them because they knew that they would rise again. Since there was so many inexperienced buyers though everyone sold and the price of shares across the board plummeted. There was so many inexperienced buyers because the stock market was portrayed by the Newspapers as a quick and easy way to make money and there was little risk involved. Unemployment became a problem due to the low wages given by the companies. The goods produced by the factories could not be sold. Everyone was petrified of loosing their money, because they had no money in the bank it was all invested in the stock market. People noticed that the profits of the companies had started to decrease and they began to start selling their shares. The downwards spiral of the Wall Street Crash and begun and the Great Depression was on the horizon.

Fraud was another huge problem and a way of making quick money. Some people set up businesses, which did not produce any goods to sell to any customers. They set them up so that people would invest in them and then they could create profit from what they invested. Charles Ponzi is a fine example of this. The 'Old Colony Foreign Stock Exchange Company' was what he named his company. He was making millions until the fraud police finally caught onto it. When the banks started to run into trouble they called in all their loans. The people who had taken out the loans, and bought all these goods on credit could not pay back the loans as quickly as the bank needed. The interest rate also fluctuated during this time, so people who took out a loan on 5% interest could end up paying it back on 15% interest. The banks were very short sighted when they gave out loans, especially loans to foreign countries. They would give them more money than they had asked for and then when they wanted it back the country could not pay it back and there was nothing the banks could really do about it. When economists and bankers became worried about the loan situation Coolidge stated, "Their increase showed a natural expansion of business." He believed that the prosperity would continue.

To conclude this first section of my essay we can say that there were many massive weaknesses in the American economy. These weaknesses were subtle though so people were not able to pick up on them and respond to them. On Thursday 24th of October 1929 the day of the crash itself 13 million shares were sold and on Tuesday the 29th 16 and a half million were sold. These shares were sold for a meagre price of 10 million dollars far less than what was supposed to be in the market.

23/04/07 CA ANGUS O' CALLAGHAN