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On October 24, 1929, Black Thursday, a series of bankruptcies on the stock exchange ended the general fun and lightness that reigned in the United States in those years. On Black Monday, October 28, the Dow Jones Industrial Average fell nearly 13%. The next day, Black Tuesday, the market fell another 12%. By mid-November, the Dow had lost nearly half its value. The fall continued through the summer of 1932, reaching 89% when the index closed at $41, the lowest level of the twentieth century (Richardson et al.). The United States experienced an era of optimism in the 1920s, with automobiles, airplanes, radios, electrical appliances, and other technologies ubiquitousthe decade after World War I was a time of opulence and excess. Building on post-war optimism, rural Americans migrated to the cities in huge numbers hoping to find a more prosperous life in Americas ever-growing industrial sector. Americas GDP grew by 14% from $90 billion to $103 billion (Richardson et al.). The rapid growth also led to an increase in the standard of living and well-being of citizens, which financial players immediately used to develop and attract investment in the financial sector. A new industry of brokerage houses, investment trusts, and affordable banks allowed ordinary people to buy corporate stock. The severe dependence of the world economy on the dynamics of the economy in the United States provoked a global crisis due to the collapse of the stock exchange on Wall Street.
Fueled by the general hysteria, it was widely believed among ordinary people and even professional investors that the stock market would continue to rise forever. However, sustainable growth skeptics still existed: the Fed and Federal Reserve Bank governors believed that stock market speculation was distracting the economy from its primary goals trade and industry (Cecchetti). The Fed also argued that the Federal Reserve Act did not provide for the use of the resources of the Federal Reserve Banks for speculative loans, which ordinary banks and their investor clients were happy to use. In the months leading up to the crash, Wall Street saw a surge in sales. Brokerage houses sprang up all over the country and were always full of people eager to make a profit. Hazardous was the particular system of buying shares on a deposit, which allowed ordinary people to buy shares on credit. When prices began to fall sharply, the owners of the shares, who bought them on the security, realized that their security was decreasing, so they were forced to pay increasingly increasing interest to brokers (Cecchetti). Customer accounts were cleverly forged, bank and brokerage books were double-entry bookkeeping and meant nothing, and financial controllers and supervisory services were led by the nose or bribed.
By 11 oclock in the afternoon on October 24, 1929, just an hour after the exchanges opening, the market was in the grip of panic. Investors who had previously bought the companys shares, which were recommended to them as prosperous, ordered brokers to sell them at any price. Although some bankers tried to save the day by investing millions of dollars in stocks, the effect of the intervention was short-lived. A large preponderance of sellers over buyers against the backdrop of significantly falling prices led to the selling of more than 14 million shares at negligible prices (Klein 344). Human tragedies accompanied the crisis. Unable to come to terms with bankruptcy, people preferred to take their own lives. Shares selling for thousands of dollars a week ago were now selling for as little as $1. The economic bubble burst, and the consequences were indeed severe.
After the crash, it turned out that in September alone, bank employees had embezzled more than $1.5 million at prices in the 20s. The perpetrators were arrested, charged with embezzlement, and sentenced to terms ranging from a few months to 10 years. In addition, the statistics are incredibly eloquent: the US GNP fell by 1.8 times from 103.9 to 56 billion dollars, the volume of investment in the economy fell by 85%, unemployment grew from 3% to 25%, about 17 million people found themselves without work, about 2.5 million Americans were left without a roof over their heads, about 100,000 private companies went bankrupt (Klein 348). In addition to private enterprises, industry and agriculture suffered, and those citizens who kept their jobs lost their wages. Finally, real estate prices have fallen significantly. Europe did not stand aside, and a wave of bank failures swept through it, up to the National Bank of Germany (Cecchetti). England abandoned the gold standard and devalued the pound, which in the aggregate, had global consequences: the economies of South Africa, Australia, Indonesia, and Brazil were shaken. Considering the extent and duration of the effects of the 1929 financial crisis, it was the most devastating stock market crash in the history of the United States and the world.
A financial crisis occurs when customers, banks themselves, brokers, and other participants in financial markets, in pursuit of exorbitant profits, begin to ignore and underestimate risks, which ultimately causes assets to depreciate. Consequently, the connectedness of the world economy generates a domino effect, causing a chain reaction of non-payments among all market participants and across all sectors of the economy as a whole. Each financial crisis triggers the redistribution of property, clearing the economy and related industries from inefficient owners and the processes they create. However, every decline is followed by an inevitable rise.
Works Cited
Cecchetti, Stephen Giovanni. The Stock Market Crash of 1929. Department of Economics, Ohio State University, 1992.
Klein, Maury. The stock market crash of 1929: A review article. Business History Review, vol. 75, no. 2, 2001, pp. 325-351. Web.
Richardson, Gary, et al. Stock market crash of 1929. Federal Reserve History, 2013.
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