Why did the Wall Street Crash and subsequent Depression occur?

For seven years share prices had risen steadily and more and more people had invested money, however the system was rigged by gambling, and was totally undemocratic, leading only to its failure.

Many factors played a role in bringing about the depression and Wall Street Crash, The results of WWI and overproduction had a major influence. During WWI, farmers were encouraged by the Government to raise as much cotton and wheat as possible while also maintaining a very high level of livestock. This stress upon high productivity continued up until Nov 1918. As a result this period witnessed the emergence of new technology and equipment which evidently led to an increase in output. The demand for food however was not increasing at the same rate; prices fell, and farmers incomes dropped steadily. Historian J. Freeman (1990) notes that “Many farmers simply gave up... Thirteen million acres of cultivated land were abandoned.” In 1920, 27% of the overall labour force were employed in agriculture and by 1930, this fad fallen to 21.2%. This ultimately led to the Crash and Depression as in order to sustain a livelihood many farmers were forced to sack their workers. This in turn led to the workers falling below the poverty line and the demand for these new consumer goods- radios and washing machines also fell. The textile and rail road industries were also badly affected by the diminishing demand and excess capacity.

One reason why consumption struggled to match production was the great unequal distribution of wealth throughout the 1920s. Paul Alexander Gusmorino 3rd attributes the mal-distribution of wealth as the main cause of the Crash and Great Depression. Traynor (2001) records that “In 1929, one-third of the nation's income was in the hands of only 5% of the population and just over 70% of the population received an income below $2500 a year.” Wealth was inequitably dispersed. As a result many were too poor to purchase goods, and too poor to even think about repaying their debts. With fewer and fewer consumers purchasing the goods on the market, 1000's upon 1000's were being laid off, and the failure to repay debts also led, in part, to the collapse of the banking sector.

Furthermore, much of the Depression and Crash can be attributed to an over exuberance and a false sense of expectations. In the years prior to 1929, the stock market offered the average American the  opportunity of “winning big.” People speculated on the market, many for the first time. As shares continued to rise there was only optimism among the Stock Market. As share prices rose, many turned to loans, or buying on margin. “Buying on the margin” allowed people to put down only a percentage of the money and the brokers would finance the rest. This slowly allowed people to become engulfed in huge amounts of debt which ultimately led to poverty. Investors were forced to sell their businesses in order to pay off their loans and in addition the vast influx of borrowed money into  the Stock market resulted in more demand for shares in turn pushing prices upwards. In 1928, the prices went up by 50%. 

Associated with this was also the weaknesses in the banking system. Benjamin M. Friedman states that “in the US most economists today assign the highest importance to systematic mistakes by policy-makers at the Federal Reserve System.” Benjamin puts the blame on new managers who were still finding their way following the institutions creation together with the complete collapse of the banking sector. Had the Federal Reserve eased injections of cash flow into the system and made funds more “readily available” to banks then possibly the outcome may not have been so severe. Furthermore Government policies such as the Emergency Tariff Act that raised tariffs to record levels contributed greatly. In the first 10 months of 1930 alone, 744 US banks went bankrupt, and by 1932 nearly 6,000 banks, with assests of $4 billion had failed. The absence of deposit insurance resulted in many investors and families losing their life savings, gradually pathing the way for a complete collapse in confidence amidst the American people with regard to the finance sector.  Many people withdrew their money from banks and the few surviving banks, also affected by the lack of assurance and concerned for their own future became reluctant to create new loans. This exacerbated the whole American situation leading to fewer and fewer expenditures.

In addition, another major cause of the Depression and Crash was the apparent problems in the international economy. America was a major creditor nation and US banks lent heavily to European borrowers as Europe struggled to pay back war debts. However this was made increasingly difficult by the introduction of prohibitive tariffs such as the Smoot-Hawley tariff 1930 which made tariffs the highest in US history. As Shane Hall stated, “This made for an unsustainable combination.” If foreign countries, such as Europe were unable to sell their goods on the American market then they would not have the money to repay loans to the US banks, and it subsequently raised prices for consumers in America also. Traynor, (2001) notes how in May 1931 the collapse of the Austrian Kredit-Anstalt bank signalled the general collapse of the European economy. American assets were frozen. 

Finally, in conclusion, Benjamin M.Friedman (2007) states that “nearly 8 decades later, debate continues over the relative importance of the forces that combined to make what would otherwise have been an ordinary business downturn so deep and long lasting.” The Wall Street Crash of 1929 was an indication of serious, underlying problems in the US economic structure, but it was not the exclusive cause of the Great Depression. The Crash merely highlighted the cracks already apparent in Americas superficial prosperity. The 1929 Stock Market Crash and subsequent Depression were the result of various economic imbalances and structural failings. Excessive speculation and credit, coupled with a weak banking and Gov. system, a complete mal-distribution of wealth, a breakdown in international trade and finally huge problems within the agricultural sector would appear to have caused the Stock Market Crash and subsequent Depression. It is clearly evident, that an answer to this question is still an ongoing debate, however one cannot attribute one sole cause to either the Market Crash or Depression. It was a conglomeration of all these problems which led to such a disastrous result.

Bibliography 

Books:

Jones, A. Maldwyn., (1995) cited in Traynor, John. “Mastering Modern United States History.” (Hampshire, 2001)

Evans, Harold., “The American Century.” (United States, 1998)

Kennedy, David., “Freedom from fear.”(New York, 1999)

Freeman, J., (1990) cited in Traynor, John. “Mastering Modern United States History.” (Hampshire, 2001)

Traynor, John., “Mastering Modern United States History.” (Hampshire, 2001)  

Carroll & Horowitz., “On The Edge: The US in the 20th century.” 2nd edn., (United States of America, 1998)  

1. Internet Sources:

 

3rd  Gusmorino, Alexander,  Paul., “Main Causes of the Great Depression.” <> Last updated: 13th May, 1996. Accessed on: 30th November, 2009.

Payne, Will, cited in Rennell, Tony., “1929: What the Great Crash can teach us about today's credit crunch..” <> Last updated: 18th March, 2008.  Accessed: 08th December, 2009.

21, Pyroflame., “Stock Market Crash of October 29, 1929.” <> Last updated: 11th October, 2005. Accessed on 02nd December, 2009.

Hall, Shane., “What Caused the Depression in 1929?” <> Last updated: 16th February, 2009. Accessed on: 08th December, 2009.

Articles in Newspapers:

Friedman, M. Benjamin., “FDR & the Depression: The Big Debate.” (New York Review, 8th November, 2007.)  

Documentaries:

BBC Documentary

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