The Main Factors that Influenced The Stock Market Crash of 1929

The stock market crash of 1929, one of the darkest times in American history, almost seemed to come as a surprise to those who happened to live through it. Due to the luxurious spending habits of the aristocratic, it was a time of opulence and excess. These habits were quickly followed by a time of carelessness, apathy towards restraint, a lack of frugality with a focus on instant gratification. In the days leading up to the official declaration of the crash, the panicked mobs only exasperated the problems at hand by hurriedly selling or buying stock at a frantic rate. These factors along with the popularity of bonds and credit cards are some of the main reasons for the crash (History.com Staff. "Stock Market Crash of 1929.").

The roaring 20’s, an exciting time after the tragedies of World War I, remained one of the more frivolous decades in US history. There was a huge rush of buying. (Stern, Laurence. "Wave of Buying Sweeps Over Market as Stocks Swing Upward Radio Flashes High; General Motors and Steels Soar.) Even common men and women were trying their hand at the stock market which was previously left to the professionals. This abundance of new investors in the game led to a superfluous amount of stockholders constantly changing the market (Brennan, Kristine. The Stock Market Crash of 1929). This inconsistency within the market, prevailed many mistakes to occur. These antecedents may have ushered in the Great Depression (History.com Staff. "The Roaring Twenties.").

One of the foremost factors within the crash was caused by bonds, a debt investment in which an investor loans money to an entity such as a business. There are a variety of bonds in which an investor can bankroll, one being liberty bonds. Liberty bonds, originally a very popular purchase, were initially supposed to help the Allied movement in World War I. This patriotic duty swept through the US during the rise of nationalism. The bonds were to promise financial security during later times after the war. During the unfortunate circumstances of 1929, stockholders anxiously began to cash in their liberty bonds in such mass amounts that banks did not have the money at hand and could not reimburse them. Other investments such as brokerage houses, investment trusts, and margin accounts also had insidious consequences during this time. These investments bought with borrowed funds caused stock prices to initially soar until the month leading up to the stock market crash. This borrowed money, in which 90% was unpaid for, was invested within equity markets. All this led to unnecessary expenditures which had unlucky ramifications later on for the common people (Richardson, Gary, Alejandro Komai, Michael Gou, and Daniel Park. "Stock Market Crash of 1929.").

The excess of credit allowed people of all sorts and status to spend their money in ways they thought were wise investments. Advice on investments was given by anyone, from brokers to neighbors. One popular idea was to buy cheap land. Buyers were told promises of good land being sold for cheap rates, making them richer when the time came to sell it. Florida was a fashionable place to buy land in and to the disillusionment of investors later on, the land was shoddy, infertile, and near worthless during this time period. When the time came for investors to sell the land, they no longer could. This left those who had bought on credit, deficient in funds and unable to payback their loan, which in turn also destroyed the economy of real estate (Brennan).

Buying on credit became a popular idea due to the fact that money would not have to be paid upfront, thus allowing those to indulge in their every whim. Since many were beginning to spend on their every whim, majority had confidence in the economy and felt that they were going to be able to pay later. Of course, when they weren’t capable to pay off their loans; like a snowball effect this would begin to affect the stocks. The gap between the rich and the poor also happened to play a big part within the crash. Because the rich had put the most money into Wall Street, when they rapidly took all their funds out of the banks, Wall Street was doomed to crash; the remaining money, belonging to the poor was unable to save it. (Brennan.)

Black Thursday foreshadowed the tragic events that were about to come. October 24, the day started off with stocks selling rapidly as they always have. Then air pockets began to show up in the stocks. The term air pocket refers to when people weren’t coming forward to buy stocks at any price. (Brennan.) Even the most popular of stocks weren’t able to sell as they usually had. Things had gotten so bad in the New York Street Exchange, also known as the NYSE, the gallery was closed by 12:30 that day, in an attempt to hide the panic which was happening on the floor. Quickly after, those who occupied the gallery were thrown out and into the crowd that had already gathered on Wall Street. ("Stock market crash of 1929." Britannica School.)

As time went on, the situation at hand only began to deteriorate, coming to a day known as “Black Tuesday”. The situation worsened on October 28, 1929. Most investors unfortunately took advice from their bankers and they traded nearly 16.5 million stocks that day. The board of the NYSE of Governors also had met that day ruminating on closing down the exchange itself. The board did not officially come to a decision. Afraid they public would panic in this situation, they left it as it was. Between the first and second meetings, the exchange had become steady enough to convince the board to keep up the exchange. The next day the press had realized that the heyday of the stock market was coming to an end. City banks had decided to fill in the gaps and began to recall their money. They limited cash percentages and forced brokers to put down loans from 40 percent to 25 percent. Brokerage firms reduced their margins to no more than 25 percent. On Halloween that year, the Federal Reserve lowered the rediscount rate from 6 to 5 percent to discourage bank runs. They also began buying bonds to keep people from rushing to banks to withdraw cash. From November 1st to November 4 the NYSE closed. This was not a holiday for the brokerage firm. Instead, during this break they worked to correct accounting issues made during the chaos of the last week. They also continued to sell orders though trading was suspended. (Brennan.)

Black Monday and Black Thursday were both preceded by thirty years before by Black Friday. Black Friday was an early indication of all that could go wrong within the stock market, caused by many factors, the main one was a man named Gould. Wall Street experienced its first “Black Friday” on September 24, 1869. The reason behind this panic was not the stockmarket, but instead gold. Though trading gold was forbidden in the NYSE, the collapse of gold prices at nearby Broad Street and exchange places plunged the stock market into a dramatic money panic. In 1869, Jay Gould formed a syndicate to bull up the price of gold. Quietly the financier gathered up over $100 million worth of gold certificates and chose an opportune time to try cornering the gold market. To make sure they would be able to make high profits off the gold, they requested that the national treasury withheld all gold for commercial sale, therefore would keep the prices of gold overseas very strong. The treasury was blind to Gould’s ulterior motives. (Brennan.) Speculation in gold had become so popular that investors were redirecting the money they would have typically spent on stocks into gold certificates. Due to this frenzy, Wall Street had close to no money. On September 24, at 11:00 A.M. the situation came to an end when President Grant declared that the next day, at noon, the Treasury would put up $4 million in gold up for sale. In addition to that, the Treasury would also be buying $4 million in bonds. The news sent Broad Street and the Exchange Place’s gold room into a frenzy, even though gold prices would hardly be dropped. The message of Grant’s announcement reminded everyone that gold prices were artificially high and were bound to fall. Investors that bought gold on credit lost indescribable amounts.

This was an early warning for the inevitable crash of the stock market. The blend of both investments banks and commercial led to people losing their money in bad investments just like the gold crisis of 1869, otherwise known as Black Friday. This beginning factor was barely noticed by anyone, especially so in the 1920’s. During that decade the feeling of invincibility did not allow the people to see these clues. By the time people took stock of what was happening, it was too late. (Brennan.)

Due to many different factors of the stock market crash, a lot of companies seemed to go bankrupt in return, forcing many American businessmen to stop in Europe and opening up shop there. Which further lead into the Great Depression. The Stock Market crash tends to be very significant due to how it affects modern banking today. Before the 1920’s investment banks and commercial banks were one thing, but after the crash, the two banks separated up until the 1980’s. The government than passed a law saying investment and commercial banks could be once again combined. Just like before the Great Depression, it took a couple decades to lead up to the recession. Just like the people in the twenties, the people of the twenty-first century ignored the warning signs, and were doomed to repeat history. The Great Recession, a title aptly named after the Great Depression, had many of the same factors. (Brennan.)