One of the largest factors that led to the stock market crash in 1929 was the buying of stocks on margin. Due to the high price of many shares, many people did not have the funds right away to get into the stock market. Banks were willing to loan the...
One of the largest factors that led to the stock market crash in 1929 was the buying of stocks on margin. Due to the high price of many shares, many people did not have the funds right away to get into the stock market. Banks were willing to loan the money, provided that the loan would be repaid when the stock increased. Since everyone believed that the stock market would only improve, people took out loans, hoping to get rich quickly. If the stock fell past a certain point, people either had to come up with more money or sell the stock. At the time of the crash, many people could not put up more money, thus leading to massive sell-offs. This in turn drove the market down further. Banks were also hurt by the stock market collapse, since they used a lot of their deposits in these loans. This led to a lack of confidence in the banking system, thus making the crash worse.
Another related issue was the amount of personal debt taken on by individuals and businesses. People bought radios and cars on installment plans. This allowed factories to keep creating consumer goods, which kept people employed. When government tightened credit, it forced demand to decrease, thus leading to economic hardship. People could not afford their loans and were forced to default when they lost their jobs—this damaged the housing and auto sectors the most. Loan defaults and a lack of consumption also drove down the market.
There was a stock market bubble in 1929. Throughout that summer, the market gyrated wildly with massive point swings. Many people did not intend to stay in the market; rather, they hoped to make money and get out quickly. People often sold off in a panic whenever the market went too low, or they were forced to sell off whenever they could not meet their margins. The stocks were not tied to the actual value of the company but rather to how speculators perceived the company's prospects. Even after the crash in October 1929, many people thought that the market would rise again soon as it had throughout the summer; however, this was not the case even with direct financial assistance from some of the largest investing houses in New York.