In the United States of America, in 1928, there was a Presidential Election. Nobody doubted that the Republicans would win again, and this time the Republican candidate was Herbert Hoover, which he did.
The US economy was still booming at this period in time and one of Hoover’s opening statements was, “We in America are nearer to the final triumph over poverty than every before. The poor man is vanishing from among us. ” Only six months later, in October 1929 the Wall Street Stock Market crashed, the American economy collapsed and the USA entered a long depression that put an end to the prosperity of the 1920s.
There are many reasons for the Wall Street Crash; some say that Hoover and the Republicans should have saw what was to come and taken appropriate action whereas others simply say that there was no way to foresee what was going to happen, and that no one is to blame, however, I believe that the main cause of the Wall Street Crash was speculation and in this essay I am going to explain why.
During the economic boom of the 1920s, investing in the stock market was very attractive. This is because the economy was doing very well at this time and due to this there were more share buyers than sellers which caused share prices to rise.Most Americans believed that investing in the stock market was a quick and easy way to get rich. It would produce much more money than the interest in normal banks and anybody could buy shares, so it seemed like the obvious choice to do so.
They would buy shares, watch their value rise, and sell them later at a higher price. These people were only in the stock market to make a quick profit, and not for the long-term. At the beginning of the boom in 1920, there were only 4,000,000 shares, by 1929 towards the end of the boom, this figure had risen to 20,000,000.Most of these new investors were speculators, in other words, they were gambling with their money.
These speculators didn’t intend to keep their shares for too long, in order to make a quick profit. They would borrow money from places such as banks, and then sell the shares they had bought with the borrowed money as soon as the value had risen. Even after paying off their loan and the interest as well, they would still have a profit, and this was seen as a way of producing money for free. However, it was not only individuals who speculated, banks also got involved and the certainly did nothing to hold it back.
In 1929 alone American banks lent $9billion for speculating. Through most of the 1920s share prices rose at a fairly steady rate, with a few downturns, but in 1928 speculation had really taken hold and demand for shares was at an all time high. Prices were rising at an unheard-of rate; for example, in March Union Carbide shares stood at $145, by September this figure had increased to $413. As we can see from all the information provided above, the main reason for people to buy so many shares was confidence.
If people were confident that the only way that share prices would go was upwards, then there would be more buyers than sellers. However, this psychological thinking worked in the other direction as well, for if the people believed that the share prices would go down, then suddenly there would be many more sellers and the entire structure would come falling down, in other words, a crash would take place. This is exactly what happened in October 1929. After the boom years, companies started to show signs that they were struggling.
The boom was based on the increased sale of consumer goods such as cars or electrical appliances. Due to the mass production techniques adopted by Henry Ford, and then copied by just about every other industry, many of these goods could be sold at affordable prices and made at a very efficient rate. However, the mass production line soon became too efficient and the cause of this was that supply outstripped demand, or in other words, the American industries were producing more of these goods than they could sell, and so factories were full of unsold goods.The market for these goods was mainly the rich and middle class.
By 1929, those who could afford consumer goods had bought them and the poorer had not. They could not even afford to get these consumer products on generous hire purchase and credit schemes on offer. Another problem was the import tariffs. In the past the American’s would just sell surplus goods to foreign countries yet this was not possible any more due to the tariffs.
Even if the Americans did not have tariffs at that time, the Europeans would still not be rich enough to be able to purchase these goods and besides, after 9 years of American tariffs, the European countries introduced their own. These weaknesses were beginning to show by the summer of 1929. Even car sales were slowing, and in June 1929 the official figures for industrial output dropped for the first time in four years. Speculators on the American stock market became nervous about the value of their shares, and because they were no longer confident, they began to sell.
Wiser investors such as Roger Babson realised, in September 1929 the boom just could not last and that there would soon be a crash or huge fall in share prices. The Dow Jones index then dropped by a serious 10 points. October was no better and on Monday 21st October 6,000,000 shares changed hands, this was so much that the ticker could not keep count of how many had been sold. On the 24th, which is now known as ‘Black Thursday,’ 129,000,000 shares were sold and the only reason that there wasn’t a collapse on that day was due to the intervention of the major banks, led by the House of Morgan.
The following week there was a huge panic as investors rushed to off-load stock before the day had finished. On the 28th the index fell by 43 points and the next day, which is now known as ‘Black Tuesday,’ the US economy imploded, in other words, an economic crash. There were many effects of the Wall Street Crash. America, the worlds richest country, now had millions of very poor people as its citizens.
Nobody could pay back the banks and so they could not regain all the money they had lent to people to buy shares with.Also, people had to sell their houses, as they knew that they would not be able to pay the mortgage. The people now knew that they would not be able topay for anything as business and factories (they places in which they worked) had cut workers to save on money, as they had also lost out in the crash. Millions became homeless, and the nation was in poverty, all due to the speculation of the American people.
So to conclude, I believe that speculation was very responsible for the Wall Street crash.If the people understood that there was a possibility of share prices going down as well, then they would not have been so confident in buying so many shares, and it was also this confidence in their speculation that was also a part of the crash. Also, if they had not panicked, and been more understanding like people such as Babson, than they would have known that if they all started selling then supply would outstrip demand and that there would be a collapse of the stock exchange. So, with other factors also included, speculation was the main reason for the Wall Street Crash.
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