The Great Depression

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What caused the stock market crash during the Great Depression?

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The main cause of the stock market crash was the stock market boom that had preceded it.

During the 1920s, the stock market experienced a tremendous boom.  Essentially everyone believed that the stock market would keep gaining more and more value.  Everyone wanted to buy in because they believed they could make a lot of money with essentially no risk to themselves.  Because stock prices continued to go up and up, banks and brokers were willing to lend money to people so that they could buy stocks “on the margin.”  All of this demand drove stock prices ever higher.

The problem is that the stock prices were completely out of synch with the actual values of the stocks.  Price to earnings ratios were exorbitantly high.  People were buying because they thought all stock prices would inevitably go up, not because they thought a particular firm was in a good economic position.  This created a bubble.  Bubbles can pop for no discernible reason.  This bubble might have popped in part because Congress was debating the Smoot-Hawley Tariff and leaders in the stock market might have worried that the tariff would hurt the economy.  Overall, though, the stock market crashed simply because it was a bubble and all bubbles eventually pop.

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