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‘Wall St. in panic as stocks crash’ (Brooklyn daily eagle, 1929). The New York Stock Exchange is considered to be the biggest stock exchange in the world with a market capitalization of $19.6 trillion. What took place in this Stock Exchange came like a bolt from the blue. It was the Wall Street Crash of 1929, also popularly called as Black Tuesday and the Great Crash. It is still considered to be the most severe downturn in the history of the United States. A stock market crash is a sudden dramatic drop in stock prices across a significant cross-section of a stock market and is generally aggravated by panic (Cunningham, 2017). Traders and investors that comprise the stock market are in a perpetual state of dread as the stock prices are constantly changing due to fluctuations in the investor’s expectations from the concerned companies. During the roaring twenties, the stock market of the United States experienced a speedy expansion until 1929 which was a period of excessive speculation. A stock market crash is usually followed by a series of events and further would lead to momentous fallouts. Fall in production levels, rising unemployment, huge amounts of debt in the stock market for trading on margin, large bank loans, market manipulation and minimum government control over the Wall Street are some of the major causes for the crash. The crash affected the United States to a large extent where the lives of people who had never been associated with the stock market were adversely affected and even the confidence of the lenders in the economy fell, who thought their investment would be secure. (1929,2017 and BBC2 Documentary 1929 The Great Crash 1929, 2014). What followed the stock market crash was the Great Depression. It began in 1929 and lasted for almost a decade. It is the period where the economic activities decline which implies that there is a substantial fall in the gross domestic product and employment which leads to a shrink in the growth. Since every country is interconnected due to globalization, the stock market crash led to a worldwide economic collapse. The effects of the crash were spread all over the United States. This essay will discuss the extent to which the stock market collapse was responsible for the decade-long Great Depression from 1930 until the World War II.


After emerging victorious from World War I in 1919, the American confidence multiplied and they hoped that the prosperousness would last forever but the Europeans struggled. The Americans began to look for ways to become wealthier but little did they know that a financial disaster was coming their way. The early 1920s was a period of electrifications and the consumer credit system came into existence. Since the stock market had not gone down in a very long time, investors not only began to invest in the stock market recklessly but did so by borrowing money. By August 1929, there was widespread unemployment due to decline in production levels. On October 24, which is also called Black Thursday, about 12,894,650 shares were traded. Some leading bankers tried to uphold the stock market by buying the stocks in bulk. But on Black Tuesday, October 29 the stock market collapsed completely. The trading floor of the New York stock exchange on this single day witnessed the trade of 16,410,030 shares and later many of these ended up being worthless.

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The confidence of the investors in the economy fell. People who had never been associated with the stock market and never traded in shares were victimised as well because over 2000 banks failed. With the fall in prices, all the money disappeared and there was no production as companies were out of funds to buy inputs or pay their suppliers as a result of which they laid off their workers. The United States witnessed poverty all around with many suicides being committed. People became homeless. Farmers found it difficult to sell the surplus crops as people in the cities could not afford to buy food (BBC2 Documentary 1929 The Great Crash 1929, 2014). Though the United States prospered during the early 1920s, its overall downfall was a sum of decline in stock prices in October 1929 and the decline in output between 1929 and 1933.




A further series of events led to the 1929 crash, some of which include the stock prices being overpriced, small levels of illegal manipulation and the Federal Reserve Policy. Under the federal reserve policy, the monetary policy was tightened to lower down the stock prices. This was done by the Federal Reserve Board member, Adolph Miller. He thought that the stocks were overpriced due to a high degree of speculation. Under this policy the broker loans were reduced and the liquidity of dealer corporations (, n.d).


The Great Depression is known to be the most extensive depression that has ever taken place. The Gross Domestic Product per capita declined by one third in the United States. It is a general theory that the Great Crash led to the Great Depression in 1930. However, some economists like Dornbusch and Irving Fisher were of the view that the crash did not cause the depression. The real output started to decline before the stock prices fell and the massive fall in output only occurred until two years after 1931. It is as if the stock market crash accelerated the global economic collapse because decline in output was accelerated further after the collapse. The industrial production declined by 1.8 percent between August and October 1929, it further fell by 9.8 percent between October and December 1929 and finally by 23.9 percent in the next year which was December, 1929 to December, 1930. The aggregate income fell through a Keynesian mechanism. Post the crash, a huge amount of wealth was demolished and this too resulted in depressed consumption. Another conjunction was investigated by Mishkin who proposed that the consumers feared for their richness as there was a decline in their liquidity due to increase in liabilities. They postponed the purchases of irreversible durable goods since they were uncertain about future economic conditions. Romer said that there is a trade-off between purchasing the durable good and waiting for economic stability. This means that the consumer can enjoy the utility derived from the durable good. However, in this situation there is no going back as this transaction would be irreversible. They would be stuck with the durable without knowing about their future earnings. On the contrary, if the consumer waits until the economic stability is regained, he can choose the most appropriate durable good. It is the most advantageous for consumers to wait until they are certain about their future income (Romer 1990). Furthermore, the downfall in the United States also occurred due to diminishing consumer demand, financial panics, the government policies which were misguiding and the gold standard was a major factor in imparting the recession to the rest of the world. Fall in aggregate demand led to lowering down the production as there were large amounts of unsold goods. There were banking panics during 1930 and 1932. Banking panic is a financial crisis which means simultaneous cash withdrawals by many depositors due to fall in their confidence. A bank can shut down due to excessive withdrawals. About one fifth of the banks had failed. There was a decline in the prices of the agricultural produce due to which the farmers found it difficult to repay the bank loans which were taken during World War 1. In addition, The Federal Reserve increased the rate of interest in terms of the discount rate. A Discount rate is a rate at which the central bank lends money to the commercial banks. The general public is charged a higher rate of interest. This minimises the credit availability in the economy and discourages the banks from borrowing due to high interest rates. There was a decline in the American money supply due to the federal reserve policy of preserving the gold standard. In each country the value of the currency is set in terms of gold. Every country took monetary actions to defend the fixed price since the depression was a global event. The Federal Reserve took over to a tight money policy. The money supply by the Federal Reserve came to a halt due to adherence to the gold standard which would rather have funded the banks which were declining and stimulated the economy. The international trade of the United States fell due to the flourishing stock market and high interest rates. Since there was no export or import from the country this meant that there was decline in output as well as in credit supply. The contradictory monetary policy under which securities held by the US government were sold in order to reduce the money supply in the economy was another monetary factor that led to the Great Depression (Encyclopedia Britannica , 1998).

Herbert Hoover became president of the United States just before the stock market crashed in 1929. He was indifferent to the fate of the stock market. He thought that using government aid to solve economic problems would not help the economy and he was dependent on leading industrialists to solve the basic issues. He asked them to maintain the same wages and production levels since most of the economists believed in ‘laissez-faire’. He believed that restoring peoples’ confidence in the economy would resolve the crisis. Hoover was reluctant to spend the federal money for providing comfort as he thought it would lead to a deficit in the budget. He wanted people to do things for each other rather than seek government assistance (, 1974).

The Smoot-Hawley Tariff Act, formally known as the United States Tariff Act of 1930 was passed by the United States Congress. This act was passed to protect the domestic farmers and other business against excessive imports after the World War I. After the 1920s there was massive agricultural production in Europe and in countries outside Europe. Herbert Hoover who was America’s thirty-first president, proposed to aid the farmers by raising tariffs on agricultural products. Over a period of time, tariffs were raised on all sectors of the economy. This tariff did not end the sufferings but it worsened the situation (ThoughtCo, n.d.). It is known that the economic growth began to plunge before the stock market crash. Many follow Keynes’s theory that the slowdown was due to the high-interest rates proposed by the Federal Reserve and some believe that monetary policy shocks were also responsible for the Depression. From April to July, 1932, there was an increase in the money growth but a decrease in the period of January to March, 1933. These define the ‘double dip’ nature of the Great Depression. This was the Friedman and Schwartz hypothesis (The Great Depression and the Friedman-Schwartz Hypothesis, 2004). According to JK Galbraith, there were some weaknesses that had a bearing on this economic disaster. There was an unequal distribution of income. This meant that the economy was dependent on a high level of investment and a high level of consumer spending. It is suspected that these spendings led to severe economic fluctuations. A Bad corporate structure is one of them. The holding companies controlled railroad, utility, and entertainment business. He called it ‘devastation by reverse leverage”. The dividends from subsidiaries were passed on to the corporate holding companies and they had to pay interest on debts. It would lead to bankruptcy if the dividends were interrupted. The company executives, therefore, wanted a lockdown on investment which aggravated depression. Galbraith further pointed that the banking structure was bad as 346 banks failed. The fourth weakness was the doubting state of the foreign balance. The US economy faced a budget crisis as the payments exceeded the receipts. Many of the loans given to the government abroad were corrupt. Lastly, the economic intelligence was in a poor state. The Keynesian theory, governments must stimulate demand when there is an economic crisis. The spending was reduced as a result of an increase in taxes but the government’s actions led to decline in the economy (Galbraith,2009).

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