In the short term, buyers were content with the stock market, the economy was flowing. However, the long term effect of this was to be seen in the year to come. Instability in the market meant there were falls through the year from March 1928 building up to the Wall Street crash. The market had always recovered, yet in September 1929, Roger Babson warned that a crash was foreshadowing which would lead to massive unemployment and economic depression. However, Babson faced criticism for being too pessimistic and undermining the economic well-being of the nation. Regardless, President Coolidge had actually been warned since early as 1927 that there were to be serious problems with the stock exchange, he did not believe it was the job of the government to involve itself in the stock market. Moreover, even president Hoover felt to shift the blame on Governor Roosevelt of New York, placing the idea that it was his responsibility to regulate Wall Street. Roosevelt did little to show concern about the stock exchange; many say that Roosevelt should have done more to control the market. It can be assessed that there was little worry over the oncoming crash, people had essentially acquired a confidence over the stock market to be strong and not one to doubt. For example, on 17th October 1929, Professor Irving Fisher stated that the prices had reached "what looks to be a permanently high plateau” this shows that people felt far too relaxed in terms of worrying about the crash of the economy as they had a false optimism and faith in the strength of the economy, allowing the crash due to such instability and essentially, lack of control over it.
Another aspect which could be seen as the cause of the Wall Street crash, rather than the lack of confidence, is the banking system. This was the government control over the systems. For instance, the great bull market was under the policy of “laissez-faire” meaning the government had no effective control over its activities. The Federal Reserve board could raise the rediscount rate in order to discourage further borrowing; however, the board reduced the rediscount rate from four per cent to 3.5 per cent in 1927. This of course encouraged the bull market, a factor in the crash. In December 1928 however, it finally raised the rediscount rate to five per cent, yet this had little effect on the market running out of control, therefore it was a decision made too late. The Federal Reserve board was in fact quite powerless at this stage as the proposal to raise the rediscount rate to six per cent had been over ruled by the New York reserve bank as there were plenty of takers at twice that level of interest. Eventually in August 1929 the rediscount rate had been raised to six per cent, ironically the board was worried that if the rediscount rate was increased too much, a crash might result. The higher interest rates would not be a satisfactory option for bankers albeit in the interest of the country to control credit through these high interest rates. This contributes to the cause of the crash as it shows the lack of the actions from the Federal Reserve board to control credit, which became delicate and prone to a collapse due to actions and decisions not conducted rightly.
The board however were in a situation where they would not be granted the power needed to control the market. The mood of the country was in general, against regulation in any aspect of economic life, this was because the bull market was associated in the public eye with prosperity. It had not collapsed, so to the average man it seemed to be in a healthy state. This provided no need for any regulation therefore there would be no support for the Federal Reserve Board. Moreover, the main policy of the board was to encourage movement of funds to Europe through increased trade. This meant they had to in fact lower interest rates so investors could afford to borrow funds to invest in Europe. This was not possible as the economy was in need to higher the interest rates to control the bull market. The lack of support and power for the Federal Reserve Board is in fact a huge factor leading to the crash. It meant there was no room for control over the activity of the bull market, therefore causing major instability and frenzy in the stock market.
On the other hand, some may argue that the loss of confidence in the market is what actively caused the crash. Throughout the years the market had been maintained by the confidence that people had in it. During October 1929, the British financial empire collapsed. The owner of it, Clarence Hatry went to jail after its collapse. This made clear that enterprises financed by debt like his, were vulnerable and prone to collapse. Investors in the USA began to look with concern at some of the businesses in which they themselves had stock. This caused fear amongst USA enterprises, as they felt their businesses were prone to collapse, thus causing a lack of confidence. Moreover, there were rumours that the biggest players on the stock market, such as Bernard Baruch who had made a huge fortune on the stock market was selling his stock, this lead to people questioning the strength of the stock market, once again, a lack of confidence. People increasingly became uncertain as lenders began to call in credit, making it difficult for people to borrow. On the weekend between 25th and 28th of October 1929, banks began to demand repayment from the brokers whom they had lent money to. In this cycle, the brokers began to pressurise clients to sell stock to repay their loads. This brought down prices. The pressure for repayment meant that credit was evaporating, prices were plummeting. This could be argued as a final push to the crash of the Wall Street. People started to panic after hearing rumours; they began questioning the market thus resulting in a fear of collapse.
Overall, the idea that the loss of confidence in the stock market caused the Wall Street crash is only true to a minimum extent. The build-up and instability of the bull market is presented as the main reason. To start with the stock market was a product of extreme confidence, making it vulnerable in itself to begin with. The loss of confidence was a factor of the stock market being at such a high, as it meant people had more to fear, the idea that the “higher you are the further you fall” seems to fit in line, as the confidence shattered once people realised just how prone to a collapse they could be, seeing the British enterprise collapse made them fear their own Bull market. The main cause of the crash was the great bull market and lack of government control to keep credit in check, which led to loss of confidence, the loss of confidence is not a sole cause, it is in fact a product of other factors.
By Georgia Markou