The crash of the stock market was a major factor leading to the start of the Great Depression. There were several factors leading to the crash of the stock market. One factor was that people began to invest in the stock market without doing the proper research. The prices of stocks had been rising for so many years, people just expected the stock prices to continue to rise. If they had done proper research, they would have seen that the stock prices were overvalued.
Another issue with the stock market was that there weren’t many new investors coming into the stock market. By 1928 or 1929, most people who wanted to invest were already invested in the market. Thus, without new investors, it was hard to keep the demand for stocks at a high level. When stock prices began to slip, this was a big issue since new investors weren’t coming into the market to buy stocks.
Finally, the practice of buying stock on margin was questionable. Many people went into debt to buy stocks. They paid ten percent of the total cost and would pay the balance on an installment plan. People weren’t worried about the debt they had incurred because they believed the stock prices would continue to rise. When the prices fell, many people were in serious financial trouble.
The Glass-Steagall Act and the Securities Act were two laws that tried to prevent similar conditions from arising in the future that could lead to a serious economic crisis such as the Great Depression. The Glass-Steagall Act prevented commercial banks from investing in the stock market. Part of the issue regarding the crash of the stock market was that banks also invested in the market. When stock prices dropped, banks lost their investments, which involved the money people had deposited in the banks. Many people couldn’t get their money from their bank accounts because of the losses the banks incurred in the stock market. This law also created the Federal Deposit Insurance Corporation. This insured saving accounts up to $2500. People could feel confident that their money was safe in their bank accounts with this insurance. Along with declaring a bank holiday and allowing only the strong banks from a financial standpoint to reopen, the government took steps to try to make sure banking practices wouldn’t lead to another economic crisis.
The Securities Act was designed to regulate and to reform the stock market. Companies had to provide investors with complete and accurate financial information about the stock of their companies. The Security and Exchange Commission was created to regulate the stock market and to prevent fraud. This law also was passed to establish controls to prevent a future stock market crash.
After the stock market crashed, steps were taken to try to prevent actions that could lead to future crashes of the stock market.