Why did the Wall Street Crash and subsequent Depression occur?

Authors Avatar

Why did the Wall Street Crash and subsequent Depression occur?

There has been much debate among economists and historians regarding the causes of the Crash and the ultimate depression, and a consensus surrounding the issue still remains elusive. In the following essay I intend to outline the main arguments surrounding these causes. These include the effects of the Stock Market crash, weaknesses in the banking system, overproduction, the subsequent effects of WWI, a mal-distribution of income and finally, the corrupt Government system which was in place.

Jones (1995, cited in Traynor, 2001) has described the 1920's in America as an era of “unparalleled prosperity”. 1929 however experienced, arguably the worst depression ever in U.S history. Thousands of people lost large sums of money due to the Wall Street Crash and many were financially wiped out, losing everything. Millions of people were left homeless, jobless, and bankrupt. The Crash subsequently led to the Great Depression. This period served to show the harsh reality between that of the “booming 20's” in which a culture of wealth and luxury epitomized many livelihoods (such as “flappers,” the Jazz age and also saw the introduction of many industries into the market) contrasted with that of poverty and deprivation at its deepest. People lived with only the bear essentials, unemployment was at its peak, and within only one year 23,000 had been driven to commit suicide. The Wall Street Crash of 1929 was an event that virtually crippled the American economy sending it into a state of panic and impoverishment.

Before one can construct an answer to “the causes of the Depression and Crash,” it is vital to acknowledge the relationship each has to one and other. The common interpretation that the stock market crash led to the Great Depression is in need of modification. Harold Evans (1998), states that “The crash did have a bearing on events in America, but it was certainly not the single trigger so often described.” Therefore, although in many cases, many of the causes of the two will overlap, with regard to the Crash there are slightly different causes which also need to be taken into account. Will Payne stated that “It was so easy to make money on the Wall Street Stock Exchange that it was no longer a gamble. A gamble is when someone loses and someone gains, here everybody was winning.” This summed up one cause of the Crash. Many people came to see the Market as a safe and successful way of making money. First time investors spent huge amounts of money to speculate on the market and nearly 50% of these had almost no experience in this field or any idea of how it worked. In addition, following the US' victory in the War, peoples uncertainties were over. There was a mood of optimism. Other countries were financially exhausted and people were more willing to take risks. Furthermore a huge contributing factor to the  American Crash was the Gov. policy of “laissez faire.” There was little or no Gov. supervision of the banks and no regulation was enforced. The Coolidge policy, that carried on to that of Hoover's Presidency that the only business of America was business, allowed for a huge amount of manipulation and corruption of the market by the elite bankers such as Charles E. Mitchell, and Joseph Kennedy. The investors had no role, and the Market was in the hands of these immoral brokers who in many cases used the investors money to their own free-will ends. David Kennedy, author of Freedom From Fear, describes the Wall Street of the Kennedy era: “It was a strikingly information-starved environment. Investment bankers like J.P. Morgan, commanded a virtual monopoly of the information necessary for making sound financial decisions. Especially in the secondary markets, for the average investor, opportunities abounded for insider manipulation and wildcat speculation.” 

Join now!

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 ...

This is a preview of the whole essay