7_The Wall Street Crash

How the Stock Market Is Supposed to Work

  • Companies need money to start/run → raise money from investors

  • Investors buy shares → become shareholders

  • Shareholders make money in two ways:

    • Dividends (share of company profits)

    • Selling shares at a higher price

  • If a company is successful → share value rises

  • Shares are bought/sold on the stock market (Wall Street)

  • Share prices change daily:

    • More buyers than sellers → prices rise

    • More sellers than buyers → prices fall

  • During most of the 1920s, share prices rose steadily

Speculation

  • 1920s economic boom made share buying very attractive

  • Many Americans believed shares were an easy way to get rich

  • Share ownership:

    • 1920: 4 million shareholders

    • 1929: 20 million shareholders (population ≈ 120 million)

  • Around 600,000 were speculators

  • Speculation = gambling on shares

    • Buy shares short-term

    • Sell quickly for profit

  • Buying on the margin:

    • Only 10% deposit

    • Rest borrowed → very risky

  • Women heavily involved:

    • Owned over 50% of Pennsylvania Railroad (“petticoat line”)

  • Banks encouraged speculation:

    • Lent $9 billion for speculation in 1929

  • 1928–29:

    • Demand for shares at record levels

    • Prices rose unrealistically fast

    • Example:

      • Union Carbide: $145 → $413 (March–Sept 1928)

  • Confidence was crucial:

    • Confidence → buying continues

    • Loss of confidence → mass selling → crash

Weaknesses in the US Economy

  • Construction industry declined from 1926

  • Farming already in crisis

  • Decline in coal, textiles, traditional industries

  • Unequal distribution of wealth

  • Weak banking system:

    • Over 500 banks failed each year before 1929

  • Overproduction:

    • Too many consumer goods (cars, appliances)

    • Rich/middle class already owned goods

    • Poor could not afford them

  • Wages not rising, prices not falling → falling demand

  • Hire purchase & credit reached limits

  • Advertising failed:

    • $3 billion spent in 1929

  • Exports failed:

    • Europe too poor to buy US goods

    • European tariffs retaliated against US tariffs

The Wall Street Crash – October 1929

  • Summer 1929:

    • Economic weaknesses become visible

    • Car sales slow

    • June: industrial output falls for first time in 4 years

  • Timeline:

    • June – Factory & steel production decline

    • 3 Sept – Last day of rising share prices

    • 5 Sept (Babson Break) – Crash predicted → prices fall

    • 6 Sept – Temporary recovery

    • Mon 21 Oct – Heavy selling; ticker 1½ hours behind

    • Thu 24 Oct (Black Thursday) – Big falls; banks intervene

    • Mon 28 Oct – Index drops 43 points; bank support ends

    • Tue 29 Oct (Black Tuesday) – Panic selling; 13 million shares sold

  • Why the crash happened:

    • Many investors had borrowed money

    • Shares fell below loan value

    • Investors rushed to sell

    • Banks refused to intervene

  • Result:

    • Worst day in Wall Street history

    • Share prices collapsed

    • Confidence completely destroyed