THE WALL STREET CRASH AND THE GREAT DEPRESSION

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           History Coursework-1                                                                                 Devanshi Sodhani

           IGCSE May 2008                                                                                       Centre No. IN-405

                                                                                                                             Candidate No. 0293

THE WALL STREET CRASH AND THE GREAT DEPRESSION

Q1: The stock market collapsed dramatically in October 1929. Why did this happen?

Ans: The period in America between 1920 and 1930 was known as the ‘roaring twenties’. This term was applied to the US because of the economic boom in the country. The World War I ended in 1918 after which there was a great change in the American society. The mindset of Americans changed greatly during the post-war period and thus began a new age of possibilities. Everybody in America wanted a bright future for themselves and their families and so they began investing in the American stock market. Industries at that time in America were booming because of new technologies, increased man-power and a promise of prosperity for the investors. People had a high rise in income during this period. Therefore, they were convinced that they would come out richer if they invested their money in the stock market. There were a number of reasons for this new trend and spending habits of people.

1920’s was a period of industrialization. Productivity in industries increased greatly during the roaring twenties. There were new methods of production that helped step-up production and made it safer. The ford car company was one such industry that prospered during the boom. They made cars using the assembly-line production and thus the speed increased. In 1900, only 4000 cars were being produced and the production increased rapidly over the years. In 1929, 4.8 million cars were being made. There was a low rate of unemployment because as the industries grew, manpower needed also increased. The rate of unemployment decreased from 5 million in 1921 to only 2.5 million in 1929. The government also aided America in this rapid growth. They cut down taxes on imports and exports due to which trade boomed. Within the country it helped the richer section of society who bought land and assets because of which the economy would get a boost.  People of the middle-class also began investing in the share market because they had a high income. In 1920, there were about 4 million investors and this figure rose to a staggering 20 million in 1929.

Speculation was a very important aspect of the rapid increase of share prices in America. Speculation means a financial transaction that involves risks but is potentially profitable. The Americans wanted to make as much money as they could in the stock market. Whenever a new public limited company was formed, people would buy as many shares as they could and then would wait for the share prices to rise. However, if the price kept rising inexplicably because of the demand, it would blow the stock market out of proportion. This was known as a ‘mania’ because people were buying large volumes of shares anticipating a profit everywhere. They would never keep shares for long and sell them after the price rose considerably. Due to this buying, the market was bullish because the share prices kept rising. If they did not have enough money to buy shares, they bought them on margin. Buying on margin meant paying only 10% of the cash needed to buy the shares and borrowing the rest. Women too, were speculating in the 1920’s. They owned 50% of a company called Pennsylvania railroad which was thus called ‘the petticoat line.’ The prices of shares grew at such a fast rate that even the ticker-tape (a piece of paper on which share price are recorded) was being printed 2 hours behind time.

Speculation caused over-confidence in American investors. The over confidence of people was seen as a mood of optimism. There was a very low rate of unemployment because of the industrial boom where more manpower was needed to sustain the high level of production. People got high wages even though the prices of goods remained stable. People felt that the market will continue to be bullish and thus they kept taking the risks. They were fascinated by the sudden and steep rise in the market and knew that they would become richer.

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Even though the country was seeing a rapid growth, there were major weaknesses in the US economy. After the great boom, the decline of the economy started in 1926. Although at that time it was very slow, its effect showed later when the Wall Street crash actually occurred in 1929. The main reason for the economic boom was due to industrialization and sale of consumer goods. When people got high incomes, they bought the goods and this market was mainly meant for the rich and the middle class people. However, a time came when the people who could afford had ...

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