What were the forces that caused the stock market to crash in 1929?

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The stock market crash which began on what has become known as "Black Thursday," October 24, 1929, had multiple causes, but underlying them all was an overvalued, excessively bullish stock market. This "irrational exuberance" as some have termed it, existed in spite of a steady decline of aggregate demand, the...

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The stock market crash which began on what has become known as "Black Thursday," October 24, 1929, had multiple causes, but underlying them all was an overvalued, excessively bullish stock market. This "irrational exuberance" as some have termed it, existed in spite of a steady decline of aggregate demand, the total amount of financial demand for all finished goods and services, in the latter part of the decade.

Due to technological advances, such as the mass-production of automobiles and the first widespread use of electricity in US homes, business and employment boomed in the first half of the 1920s. This great surge, in turn, drove the stock market to ever more dizzying heights, attracting not only wealthy investors, but also a general public ill-equipped to fathom its pitfalls.

Stock speculators, quick to seize on this giddy climate, ran so-called "pump and dump" operations. After wildly promoting the value of worthless stock, which would be snapped up by an unwitting public, they would then dump it, harvesting the profits. At the time, the public could leverage an investment with only ten percent down (compared with the Federal Reserve requirement of fifty percent currently), adding to the fragility of the market.

The beginning of a downturn came with the bursting of the Florida housing bubble. As with stocks, speculation on the growing appeal of a warm part of the country that was becoming more accessible by car and plane, accelerated in 1925, as property values quadrupled in less than a year. Investors assumed that this rate of growth in the value of the land would continue unabated. But after a blistering summer was followed by a Category 4 hurricane that left thousands in the Florida panhandle homeless, the bubble finally burst; an omen ignored by many.

As the decade wore on, the purchase of relatively expensive consumer durables, such as automobiles, radios, and washing machines, suddenly became more readily available to the public due to easy installment credit, despite, and partly to counteract, sagging employment. Since most of these products were financed in this manner, as unemployment increased, and borrowers defaulted on their loans, the investment credit companies and banks who had financed them either went under or were forced to raise their rates on all other forms of lending.

With the disappearance of these easy rates, fewer people were able to buy these products, causing further jobs losses. As the house of cards of leveraged debt continued to crumble, millions lost their jobs and were unable to pay off their loans, and an epidemic of bank failures followed.

In what might have been a final blow to financial stability, in August of 1929, the Federal Reserve Bank of New York raised the interest rate from five percent to six percent. In October, the exuberance of the markets finally collided with the reality of a weakened economy, and on October 29th, "Black Tuesday," it came crashing down.

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There were a number of factors behind the Wall Street Crash of 1929. Here are just a few of them.

  • Credit boom. In the years leading up to the Crash, it seemed that the good times were here to stay. The stock market was booming, and many people wanted to get in on it. However, as many of the new investors didn't have enough money to buy shares, they bought them on credit instead. As more people became heavily indebted, they also became susceptible to a sudden downturn in confidence. And when this happened, those who'd borrowed money to buy shares joined the massive rush to sell their shares and try to redeem their debts.
  • Over-supply. In many industries, most notably the auto industry, the demand for goods couldn't keep up with the supply. As a result, firms struggled to sell their products, with the damaging consequences to their bottom line. Inevitably, lower profitability led to a sharp fall in share prices, precipitating the Wall Street Crash.
  • Agricultural recession. While the rapid development of new technologies revolutionized the agricultural sector of the economy, it also meant that many farmers were driven out of business, unable to compete in the new economic climate. In turn, this led to a rash of failures among small to mid-sized rural banks, which contributed to the overall weakness of the American banking system.
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