What Led to the 1929 Stock Market Crash?
What Led to the 1929 Stock Market Crash?: In August 1921, the Dow Jones Industrial Average (DJINDICES: DJI) stood at 63 points. Over the following eight years, it grew six-fold, reaching a peak of 381.17 points on September 3, 1929.
The biggest continuous bull market the United States had ever experienced peaked on that day in September.
The market’s decline from its peak was so severe that it plunged the country into an extended period of economic depression. Here is a detailed look at what transpired during the 1929 stock market meltdown.
What transpired when the stock market crashed in 1929?
Even though the stock market started to fall after September 4, 1929, the worst of the crisis wasn’t until more than a month later. The Dow Jones Industrial Average fell by nearly 13% on Monday, October 29. The index dropped by nearly 12% the following day. Black Monday and Black Tuesday are now common names for these two tragic days.
The stock market lost value during the coming weeks, months, and years. Midway through November 1929, the Dow had nearly completely fallen. Midway through 1932, when it closed at 41.22 points, 89% below its peak, it reached its lowest point. It took until November 1954 for the Dow to reach its peak of September 1929.
What led to the stock market crisis in 1929?
- The numerous enthusiastic investors of the Roaring Twenties generated a stock market bubble. Consumers were more optimistic about the economy as a result of the consistently rising stock prices, which led them to spend impulsively on items like phones and cars.
- They frequently made credit purchases because they had such faith in the future. 15% of all significant consumer purchases were made on instalment arrangements by 1927. In the 1920s, credit was used to purchase six out of every ten automobiles and eight out of ten radios.
- This debt-fueled spending spree was made possible by the thousands of banks and new “instalment credit” businesses that provided loans to pretty much anyone who needed them.
- Foreign lenders anxious to capitalize on the expanding American economy gladly provided gold and other assets to American banks, and many instalment credit organizations were merely the lending divisions of significant American industries.
- Over the course of the decade, the ratio of consumer debt to income more than doubled. The United States’ total non-corporate debt reached 40% of its Gross Domestic Product by September 1929. (GDP).
- Consumer spending was fueled by easy access to credit at the same time as the booming stock market created a large number of new brokerage firms and investment trusts that made it possible for the average individual to own stocks. Along with outright stock purchases, these novice investors also started opening margin accounts, which allow stock purchases made with borrowed funds.
Typically:
- margin account holders are only required to deposit 10% of the initial cost of a stock; the remaining 90% is secured by the company itself. Stock prices rose as new money poured quickly into the stock market as investors increasingly used margin accounts to purchase stocks they couldn’t afford.
- By utilizing borrowed funds to buy assets, both individual investors and investment trusts multiplied the readily available leverage several times over. Some investment trusts, which were themselves highly leveraging, also made investments in other trusts that were also highly leveraged. And those trusts then made investments in other trusts that were equally extremely leveraging.
- Each of these trusts consequently became disproportionately impacted by changes in the stock holdings of others. All of the interconnected investment trusts failed at the same time when the stock market crashed in September 1929.
- The banks and other lenders who supported the stock-buying frenzy had few options for recovering their losses after the catastrophe. Stocks served as their sole form of security, but the debt they owed outweighed the value of those stocks.
- These institutions were forcing to start restricting all other types of lending. Including credit for consumer purchases, because they had no other option.
- Consumer spending drastically decreased since fewer people could afford to buy expensive things due to the reduction in consumer credit availability. Millions of people lost their jobs as a result of business closures or shrinking. Making it impossible for them to pay back their own bank obligations. Thousands more banks also failed as a result of the borrowers defaulting on their loans.
