In the 1928 Presidential Election in the United States of America, it was widely anticipated that Herbert Hoover and the Republicans would win – and they did.
During this time, the US economy was flourishing. President Hoover confidently stated that “We in America are closer than ever to overcoming poverty. The number of impoverished individuals is decreasing among us.” However, only six months later in October 1929, the Wall Street Stock Market collapsed. This event led to the downfall of the American economy and plunged the USA into a prolonged depression that ended the prosperity of the 1920s.
The reasons for the Wall Street Crash vary. Some argue that Hoover and the Republicans should have predicted and taken appropriate action to prevent it, while others claim that such an event was impossible to foresee and no one can be held responsible. Nonetheless, I believe that speculation was the primary cause of the Wall Street Crash. In this essay, I will further explain why.
During the 1920s economic boom, investing in the stock market was highly appealing. The strong economy resulted in more buyers than sellers, causing share prices to increase. Many Americans saw investing in the stock market as a swift and effortless means to become wealthy. It promised higher returns than traditional banks and was accessible to all, making it the apparent choice for investment.
These individuals participated in buying and selling shares, watching their worth rise before selling them at a higher price. Their main goal was to make quick profits from the stock market rather than long-term investments. At the beginning of the 1920s boom, there were 4,000,000 shares available; however, by the end of the boom in 1929, this number had increased to 20,000,000. Most of these new investors were speculators who essentially took financial risks.
Both individuals and banks, known as speculators, had a common goal of making quick profits through short-term shareholding. To achieve this, they borrowed money from various sources including banks, purchased shares, and promptly sold them at higher prices. Despite repaying loans and interest, the speculators still managed to generate profits effortlessly. The involvement of banks in speculation was evident as they actively participated without hindrance or intervention.
In 1929, American banks loaned $9 billion for speculation as share prices continued to rise. However, by 1928, speculation intensified and there was a high demand for shares. Prices rapidly increased to unprecedented levels, with Union Carbide shares rising from $145 in March to $413 in September. This indicates people’s confidence in the market led them to purchase more shares.
The level of confidence in share prices impacts the interaction between buyers and sellers. If there is an anticipation of price increase, buyers will have higher demand while sellers will have lower supply. Conversely, if there is a belief that prices will decrease, more sellers will emerge potentially leading to a market crash. The October 1929 crash was caused by this shift from optimistic sentiment after a period of growth when companies started facing difficulties.
The boom started when consumer goods like cars or electrical appliances began selling more. This was thanks to the introduction of mass production techniques by Henry Ford, which other industries later adopted. With these techniques, many goods could be sold at affordable prices and produced efficiently. However, the mass production line eventually became too efficient, causing an oversupply situation. In other words, American industries were making more goods than they could sell, resulting in factories filled with unsold products. The main market for these goods mainly included the wealthy and middle class.
By 1929, the wealthy had purchased consumer goods while the less fortunate could not afford them, even with the availability of hire purchase and credit schemes. Moreover, import tariffs posed additional challenges as the American surplus goods could no longer be sold to foreign countries due to these tariffs.
Despite the absence of tariffs in America, Europeans did not have sufficient wealth to purchase these goods. Additionally, European nations imposed their own tariffs after nine years of American tariffs. The effects of these vulnerabilities became evident in the summer of 1929 when car sales started declining. In June of that same year, industrial output experienced its first official decrease in four years. Consequently, speculators in the American stock market grew concerned about the value of their shares and began selling due to a lack of confidence in their investments.
In September 1929, astute investors like Roger Babson became aware that the ongoing boom in share prices was unsustainable and could result in a significant crash. This realization was followed by a considerable 10-point drop in the Dow Jones index. October did not bring any relief, as on Monday 21st, a staggering 6,000,000 shares were traded, so many that the ticker was unable to keep track of the exact number sold. On the infamous ‘Black Thursday,’ which occurred on the 24th of that month, a massive 129,000,000 shares were sold. The only reason a collapse was avoided on that day was due to the intervention of major banks, led by the House of Morgan.
The week after, investors were in a state of panic, hastily divesting themselves of stock before the end of the day. On the 28th, the index dropped by 43 points, and the subsequent day, dubbed ‘Black Tuesday,’ marked the implosion of the US economy—a severe economic crash. The Wall Street Crash had numerous consequences, including the transformation of America, previously the wealthiest nation in the world, into a home for millions of indigent individuals.
Nobody could repay the banks, resulting in their inability to recover the full amount of money they had loaned for share purchases. Additionally, individuals were forced to sell their homes as they were aware of their inability to make mortgage payments. This was further compounded by business and factory closures, leading to widespread job losses and financial strain. Consequently, millions of people became homeless, plunging the nation into poverty. All of these dire circumstances originated from the speculative practices of the American population.
Overall, I believe that speculation played a significant role in the Wall Street crash. If individuals had considered the possibility of share prices decreasing and not been so confident in buying excessive shares, the crash could have been avoided. The confidence in their speculation also contributed to the crash. Additionally, had people remained calm and followed the lead of knowledgeable individuals like Babson, they would have recognized that if everyone began selling, supply would surpass demand and the stock exchange would collapse. Taking into account other factors, speculation emerges as the primary cause of the Wall Street Crash.