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What were the main causes of the stock market crash?

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briibrii23 | Student, Grade 11 | eNotes Newbie

Posted June 9, 2012 at 10:34 PM via web

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What were the main causes of the stock market crash?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 9, 2012 at 10:50 PM (Answer #1)

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I assume that you are asking about the stock market crash of 1929.  If so, there were a number of major causes.  They included:

  • Excessive faith in the market.  People were not buying stocks because they thought some particular company had good prospects.  Instead, they were simply buying on the idea that all stocks would go up forever. 
  • Buying on margin.  People were buying stock using borrowed money.  They were only required to put down 10% and they could pay their brokers the rest when their stocks went up.  This allowed for higher stock prices.

These things led to a huge bubble in the stock market where prices went up much more than they should have.  Then a few indicators went down and some people started to worry.  That started a panic in which people tried to get out of the market.  All the selling caused the crash.

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larrygates | College Teacher | (Level 1) Educator Emeritus

Posted June 10, 2012 at 12:43 AM (Answer #2)

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Actually, the only margin required at the time of the crash was five per cent. Industry in general had entered a period of extended expansion and the common belief was that the stock market would follow industry. There was also the common belief that the economy had entered a period of permanent growth; no downturn would ever happen again. In 1927, the market entered a period known as the Great Bull Market. People who knew nothing about the market were investing wildly buying large amounts of stock on margin. When the stock paid off, they raised their bets by purchasing even larger amounts on margin.

There is a famous story that J.P. Morgan was offered a "hot tip" on a stock by a shoe shine boy. Morgan immediately called his broker and removed all his investments; he commented that when shoe shine boys were investing in the market, it was time to get out fast.

By the beginning of 1929, it was obvious to financial experts that the situation had become unrealistic; however the wild profits that were being earned in a short time prevented any type correction. The market was rising on nothing but pure speculation. When it finally reached the point that investors had no confidence in its continued rise, it collapsed suddenly.

Sources:

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dancer4life15 | Student, Grade 11 | (Level 1) Honors

Posted June 12, 2012 at 7:34 PM (Answer #3)

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Underlying Causes:

Lack of Financial Regulation-banks made investments using depositors money, the market crashed, people demanded their money back and banks went broke

Easy Credit- business borrowed money, prices dropped, lenders demanded repayment, companies went broke

Shrinking Demand- global demand led to overproduction, demand/prices dropped, that devastated countries that relies on trade

Economic ties- USA was Canada's biggest trading market, their market crashed, orders for our products dropped, thousands unemployed

Protective Tariffs- countries imposed to protect their industries, exporting countries had fewer markets

the Immediate Cause is the Stock Market Crash

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luiji | Student, Grade 11 | (Level 1) Salutatorian

Posted October 22, 2012 at 8:17 AM (Answer #4)

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Easy credit... you only had to pay 10% and get a loan for the rest. This meant that there was a mountain of 'pretend' money being supported by only a small pile of real money.

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