Causes and Consequences of the Wall street Crash

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How Far was Speculation Responsible for the Wall Street Crash?

Overconfidence/Speculation

Much of the raised prices were because investors thought they could make money easily without risk by buying shares and selling them as soon as they gained in price. 'Playing the Market' became so popular in the 1920s that the number of people investing in the stock market had increased from 4million in 1920 to 20million by 1929. Some shares worth $50 had increased to $200.

Speculation - Buying shares and gambling on the price going up

Speculation was so popular because you didn't have to pay in full for shares but by them 'on the margin' which meant they paid 10% and borrowed the rest.

What Impact did the Crash have on the economy?

Causes of the Wall Street Crash

Long Term Causes

1. Overproduction in American Industry

Because of new production methods, Industry was churning out goods which couldn't be sold. Therefore there was a drop in sales and profit.

2. Wealth of 1920s not evenly distributed

Even in 1929 millions didn't have cars and electricity bu Companies spent masses on advertising even though they were unable to increase sales. 42% lived below the poverty line

Short Term Causes

1. No Market for US goods in other countries

Two factors meant companies couldn't sell their surplus goods. Firstly the Fordney-McCumber Act placed tariffs on foreign goods which led to retaliation from other countries. America's goods were too expensive for other countries to buy.

2. Speculators 'Playing the Margin' with borrowed money

It became increasingly easy for people to get into the stock market . American's saw it as an easy way to get rich and more and more started 'Playing the market'. They didn't even have to pay in full for shares they could borrow 90% and pay for 10%

Immediate Causes

1. Panic Selling of Shares in October 1929

On the day of the crash sales prices were dropping rapidly which caused panic. Thousands of people were trying to sell there shares at any price meaning the cost of shares fell.This started a vicious circle of panic selling because people panicked they wouldn't be able to pay their debts to the investors who gave them 90% of the cost

The Wall Street Crash was a major contributer to the Great Depression.

1. After the crash, banks called in loans and there was a fall in demand for goods

2. Less money Spent so further fall in demand

3. Companies cut back on production, they sack workers and pay lower wages.

4. Companies go bust so more unemployed

5. The more people unemployed the less money spent on goods

6. More companies go bust, more workers unemployed and a further fall in demand and so on.

The economy crumbled with unemployment reaching a peak of 13million. Many people blamed the current president (Herbert Hoover) for the crash and not realising it was going to happen. Many people lived in shanty towns that were nicknamed Hoovervilles.

Speculation

Impact

Causes