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The primary reason for the crash was unrestrained buying of stocks on margin, a process by which a buyer pays only a portion of the purchase price of the stock and the broker pays the difference and holds the stock as collateral. The buyer anticipates that the stock will rise in value, and he can then resell it, repay the broker loan, and make a profit. This is still done and is quite legal; however now the maximum margin that can be borrowed is fifty per cent. At the time just before the crash, the maximum margin was just five per cent. The result was the Great Bull Market of 1927 when prices of stock were climbing wildly. This type growth was a bubble, very similar to the recent real estate bubble which triggered the most recent economic recession, or the dot.com bubble of several years past. The market was out of control with cab drivers, janitors, etc. who knew nothing of the market buying huge amounts of stock on margin, selling and reinvesting their entire proceeds in even larger purchases, again with the minimum margin.
The situation was so out of control that the Federal Reserve was urged to step in, but did not do so. Finally, investors began to worry that the rally was not sustainable, and began to unload stocks. This resulted in a sudden flurry of selling which forced prices down precipitously. Although the major crash was on October 29, 1929, (Black Tuesday) prices continued to spiral downward. By March, 1933 market value had lost 80% of its pre-crash value. Most of the investments in the market had been on large margins, thus investors not only lost their investments, they were in tremendous debt. The brokers who made the loans also sustained traumatic losses.
The historians still argue on the reasons for the wall street crash. However, some of the main reasons are clear.
1) Overconfidence: People were overconfident that the prosperity would last forever. But, now or then, the prosperity had to end because the economy of U.S.A was not as healthy as it seemed.
2) Unequal distribution of wealth: Wealth was not shared equally amongst the people.The company owners kept a large amount of money for themselves and gave little to the workers.
3) Glutt in market: Alot of goods were being made. But the people didnt had enough money to buy those goods. And due to this there was a glutt in the market and people weren't making great profits.
4) Wall street: Alot of people, unwisely, invested alot of money in the wall street. The rich people invested all they had, in hope of making more money.And the poor also wanted to try their luck in the wall street so they took huge loans from the bank.
And when the wall street crashed, the people were shaken with surprise.The banks, which had given loans to people, collapsed.
Great answer. How did 1) There being no export market for US goods and 2) The poor distribution of income between the rich and poor in the US .. play a role in the 1929 Crash?
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