Saturday, 21 September 2013

The Wall Street Crash of 1929

By Bisade Asolo

The roaring American Twenties, the age of Jazz and of course, the prestigious title of being the wealthiest country in the world. America was the place to be. At one point, the current president at that time, Herbert Hoover stated: ‘America has all but rid itself of poverty.’

In order to understand why The Wall Street Crash of 1929 happened, we must first look at events leading up to the day that has been dubbed 'Black Tuesday'.

There are various factors that contributed to the Wall Street crash but the most prominent factor was the way in which people obtained money to purchase shares. The system of borrowing was known as: ‘buying on margin’ which meant you only had to pay for 10 – 20% of the shares you wanted, while you borrowed 80 – 90% of the value of the shares from a broker. Many hoped that the price of the shares purchased would rise enough to cover the cost of purchasing the shares and still make a decent return. This system enabled an enormous amount of money to be placed into the market, subsequently leading to market prices skyrocketing. However, this left the investor extremely vulnerable because if the price of the shares purchased did not rise, then the investor would be left in heavy debt. This was further exacerbated by the fact that the majority of investors were investing money when they could not afford to. However, it also left the brokers equally as vulnerable because they were loaning an immense amount of money in the belief that the returns would be monumental.

After all, this was the Roaring Twenties and investors were over optimistic about the intrinsic value of the shares that they bought. Furthermore, the potential to make huge gains in the stock market proved too tempting, and as the prices of shares went up, borrowing increased; the borrowed money being reinvested into the market to maximise the amount of money that could be made. There was a sense that the rising prices would never cease. As the Dow Jones Industrial Average (DJIA) peaked at 381.17 points on September 3, 1929 and economist Irving Fisher famously proclaimed ‘Stock prices have reached what looks like a permanently high plateau.’


September 20th, 1929: British investor Clarence Hatry was jailed for fraud and forgery and £24 million worth of shares of the Hatry group suspended.  The London Stock Exchange (LSE) had officially crashed.

The crash of the London Stock Exchange, coupled with recent market instability led to wide spread panic amongst investors, prompting many to panic sell as they tried to avoid or limit losses.

October 24th (Black Thursday): The DJIA lost 11% of its value at the opening bell. Leading Wall Street bankers tried to stop the chaos by placing large bids well over market price in order to re-establish confidence in the market.

October 28th (Black Monday): Weekend reporting on the dire state the DJIA was in exacerbated the situation, ultimately shattering confidence in the market. The DJIA lost a further 13% of its value.

October 29th (Black Tuesday): Approximately 16 million shares were traded; this figure would not be surpassed for another 40 years. Furthermore, The DJIA plummeted another 12%. In total, the market lost $30 billion in the space of two days, whilst $16 billion alone was lost on October 29th, 1929.

What followed the Wall Street Crash of 1929 was even worse. It crippled the American economy, crippled European economies and would result in the worst economic crisis in the world, The Great Depression.



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