Readers Question: The question is that how did a flawed capitalism of the 1920’s American economy lead to the 1929’s stock market crash?
The 1929 Stock Market crash was a result of various economic imbalances and structural failings. These are some of the most significant economic factors behind the stock market crash of 1929.
Agricultural Recession.
Even before 1929, the American agricultural sector was struggling to maintain profitability. Many small farmers were driven out of business because they could not compete in the new economic climate. Better technology was increasing supply. But, demand for food was not increasing at same rate. Therefore, prices fell and farmers incomes dropped. There was occupational and geographical immobilities in this sector. It was difficult for unemployed famers to get jobs elsewhere in the economy.
Boom and Bust.
A lot of the Stock Market crash can be blamed on over exuberance and false expectations. In the years leading up to 1929, the stock market offered the potential for making huge gains in wealth. It was the new gold rush. People bought shares with the expectations of making more money. As share prices rose, people started to borrow money to invest in the stock market. The market got caught up in a speculative bubble. – Shares kept rising and people felt they would continue to do so. The problem was that stock prices became divorced from the real potential earnings of the share prices. Prices were not being driven by economic fundamentals but the optimism / exuberance of investors.
This was not the first investment bubble, nor was it the last. Most recently we saw a similar phenomena in the dot com bubble. Here, the effects were much less because it was confined to a small sector of the stock market.
The weakness of capitalism is people’s irrationality. i.e. people stopped judging shares on economic potential, but, got caught up in a speculative bubble.
Therefore, in October 1929, Shares were grossly overvalued. When some companies posted disappointing results, some investors started to feel this would be a good time to cash in on their profits. This initial selling caused a fall in prices; this change in market sentiment soon spread as other investors started to panic and follow suit. Before long the market was falling very rapidly. The bull market had been replaced by a bear market.
Mismatch between production and consumption
The 1920s saw great strides in production techniques, especially in industries like automobiles. The production line enable economies of scale and great increases in production. However, demand for buying expensive cars and consumer goods were struggling to keep up. Therefore, towards the end of the 1920s many firms were struggling to sell all their production. This caused some of the disappointing profit results which precipitated falls in share prices.
Inequality
One reason why consumption struggled to match production was that the benefits of economic growth were not equally distributed. The majority of Americans still earnt less than $2000 per year. Wealth was inequitably distributed.
Weaknesses in the Banking System
Before the Great Depression, the American banking system was characterised by having many small to medium sized firms. America had over 30,000 banks. The effect of this was that they were prone to going bankrupt if there was a run on deposits. In particular, many banks in rural areas went bankrupt due to the agricultural recession. This had a negative impact on the rest of the financial industry.Between 1923 and 1930 5,000 banks collapsed
Note: If the question was – What Caused the Great Depression? the answer would be slightly different. This is because some believe the Stock market crash was only partly to blame for the Great Depression (although a significant factor in precipitating it.)
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5 comments ↓
You should mention the FED artificially reducing interest rates. That is what lead to the overabundance of credit. Same as the recent stock market crash.
The Great Depression is upon us! Few Americans realize that by trusting us, a whole country was bankrupted – Iceland is bankrupt! We did it! Worse than using guns, We, the proud, noble, dignified, just, honest, fair-minded, worthy people, LIED! and cost these people their COUNTRY for trusting us! If China squashes us like a bug, we can hardly complain, and China holds enough of our money, if they dump it, we will be sent to economic Hell for decades! Our ass-kicking is not over! We offended our best allies with lies and subterfuge! When this is done, we will be lucky to be able to buy a gallon of gasoline for 16.00 Euros, NOT dollars on the barrel head. We see tent-cities of poor people rising as we speak, and you can expect huge religious communes, set up for survival under their own laws to rise up soon. Our streets will fill with the hopeless defenseless folk from the apartments and condos, looking for food and work, and our jails will seem like gentle health spas compared to their street life! To prevent ANARCHY we must be gentle and giving, and provide for those among us suffering most – otherwise, our once great nation will perish in anarchy and disorder and a dog eat dog lifestyle will prevail.
lyk who cares i mean my great great grabdad was in America dat tym
he survived till i was 3 mnths old
he died @ da age of 102
spell properly ’sama’ – and i think its important to know these things as something like this might happen again you never know..
I Agree with everyone. terrible times.
bean to the rescue!!!
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