The collapse of the American stock exchange in 1929 caused the global economic crisis and the beginning of the Great American Depression. But what were the reasons for this collapse?
Reasons for the stock market crash
Researchers name several main reasons as prerequisites for the 1929 crisis. First, the crisis was associated with a shortage of cash, since the volume of production in the 20s in the United States increased, and the money backed by gold was not enough to purchase the products of this production. Secondly, the immediate collapse of the stock exchange on Wall Street was caused by the desire of many Americans to make money on investments, which led to the emergence of the so-called speculative bubble - a lot of transactions with securities at clearly inflated prices.
Typically, bubbles result from heightened excitement, resulting in increased demand, which in turn leads to rapid price increases. Investors, seeing the growing quotes, begin to buy even more shares, trying to make a profit in time. In the case of the US crisis, the situation was worsened by the fact that many players bought shares on credit.
It was the stock market crash of 1929 that became the reason for the emergence of a rule under which trading on the stock exchange is suspended in the event of a rapid drop in stock prices.
The crisis and its aftermath
On October 24, 1929, when the stock indexes reached their maximum historical values, the speculative bubble burst, leading to panic. The owners of the shares began feverishly to get rid of them in the hope of saving at least some of the funds. Over the following days, called Black, more than thirty million shares were sold, which naturally led to a catastrophic fall in prices.
The situation with the so-called margin loans added fuel to the fire. This offer, popular in the 1920s, made it possible for investors to buy certain shares, paying only a tenth of the cost, but the seller of the shares has the right to demand payment of the remaining 90% at any time. The usual scheme looked like this: an investor buys shares for 10% of their value issued on a loan, and when it becomes necessary to repay the rest of the loan, he sells the shares on the stock exchange.
As soon as the collapse of the indices began, all brokers began to demand the return of loans, which led to an additional release of shares on the market, and, consequently, to a fall in their prices. As a result of the stock market crisis, the American economy has lost over $ 30 billion. About 15 thousand banks went bankrupt, which could not pay off their loan obligations.
During the entire First World War, the United States spent less money than was lost in three days of the stock market crisis.
Many businesses were deprived of funding, leading to an economic crisis that affected the entire world. Despite tough anti-crisis measures, such as a 30% duty on any overseas goods, the Great American Depression lasted a decade. Industry in the United States returned to 1911 levels and the number of unemployed reached 13 million.
