From the Roaring Twenties to the Wall Street Crash: How did it go so wrong?

The Roaring Twenties

 The Wall Street Crash took place after a period of prosperous economic growth. The 1920's was a period  of dramatic, social and political change. The US economy was booming, and the nation’s wealth had more than doubled between 1920 and 1929. Unemployment was low, at around 4%, and many working-class Americans were now living a much more lavish lifestyle.

Herbert Hoover had faith that this period of economic growth would continue and claimed during the 1929 Presidential election that, "We in America are neared to the financial triumph over poverty than ever before in the history of our land."

The Wall Street Crash

However, on 23^rd October 1929 the Dow Jones Index fell from 326.51 to 305.85. The following day the Dow Jones Index fell by a further 2.1%. On the 29^th October, the stock market plummeted even further, and the Dow Jones Index had fallen by 25.17% over two days. 

The Dow Jones Industrial Average, 1915-1965 

 

The Cause of the Crash

The cause of the crash is a very heavily debated topic.

 One reason that has been discussed widely is the fall in consumerism. Mass production rapidly increased in the 1920's. Consumerism increased rapidly and industries such as the automobile industry became more popular. Eventually supply outweighed the demand and profits fell leading to stock prices to fall.

 Banks were willing to lend a lot more money to people and individuals were using this money to buy stocks at leveraged positions which caused the prices to rise.

As the stock prices rose, more people were borrowing money to buy stocks. Americans became overconfident that this increase in share prices would continue and became caught up in a speculative bubble. This rapid increase up until 1928 was driven by fundamentals. Stock prices were high as earnings were high and the economy was growing. However, from 1928, managers noted that the stock prices were unjustified and did not increase dividends at the same rate. By October 1929, shares were extremely overvalued.

As the market was overvalued, many margin traders believed this was a good time to sell, this led to a rapid fall in prices. This caused many inexperienced traders to panic and sell causing  to fall sharply. Some financiers such as JP Morgan did try and buy shares to increase the prices, but the plunge was so rapid they were unable to make a significant impact. As a result, share prices continued to fall until 29^th October when the market eventually crashed.

 

Following the Wall Street Crash was a decade which became known as the Great Depression. In my next blog I will discuss what triggered the Great Depression.