The USA in Depression, 1929-33 » The Causes of the Wall Street Crash

A boom with weak foundations

By the summer of 1929 America looked richer than any country in history. Share prices had been rising for years. Many people thought they would carry on rising for ever. On 15 October 1929 the well-known economist Irving Fisher told a dinner in New York that stock prices had reached 'what looks like a permanently high plateau'. Nine days later the market collapsed.

The Wall Street Crash was not caused by one thing. Underneath the boom were several weaknesses. Together they meant that when confidence in shares broke, there was little to stop the fall.

Key terms:

• Inequality: a big gap between the richest and the rest in how much money people have.
• Export: a good sold to another country.
• Confidence: people's belief that prices, jobs and businesses are safe, which makes them willing to spend and invest.
• Panic selling: a rush to sell shares at any price because everyone fears prices will fall further.
• Black Thursday and Black Tuesday: the names given to 24 October and 29 October 1929, the worst days of the crash.

Over-production

Mass production meant American factories could make huge numbers of cars, radios, fridges and other goods. Output per worker rose sharply during the 1920s. The trouble was that wages rose much more slowly than output.

By 1928-29 many factories were making more than customers could buy. Shops and warehouses held unsold stock. Some firms cut back production, slowed down hiring and laid off workers. Over-production had already hurt farmers, who grew more than they could sell at good prices. By 1929 it was hurting industry too. If firms sell less, their profits fall, and falling profits make shares less valuable.

Unequal wealth

The boom did not reach everyone. Profits and the incomes of the richest rose fast, but many workers, farmers and black Americans stayed poor. Historians often quote the figure that around 60 per cent of families earned less than $2,000 a year, a sum thought to be about the minimum for a decent standard of living.

This mattered because the economy depended on people buying goods. Poorer families could not afford a car or a radio unless they borrowed. Rich people could buy only so many. Once the market for new goods was full, factories had nowhere to sell the extra. Wealthy Americans put much of their spare money into shares, which pushed prices higher still.

Falling exports

Europe had been a good customer in the First World War, but it recovered afterwards and began to produce more for itself. America's high tariffs, such as the Fordney-McCumber Tariff of 1922, made it hard for other countries to sell goods in America. Without those dollars, they struggled to pay for American goods, and some put up tariffs of their own.

So American firms could not rely on foreign buyers to take the extra goods. Farmers suffered most, but other exports also stopped growing. That added to the problem of over-production at home.

Speculation and buying on the margin

Many people bought shares not as a long-term investment but to sell them quickly at a higher price. This is speculation. The Dow Jones index reached about 381 in September 1929, and rising prices tempted even more people to join in.

Buying on the margin meant paying only a small part of the price and borrowing the rest from a broker. Billions of dollars were lent in this way. It worked while prices rose. But if prices fell, brokers made a margin call and demanded their money back. Borrowers who could not pay had to sell, and that pushed prices down further.

Share prices had also climbed far beyond what the companies were really earning. Prices were high because people expected them to go up, not because firms were making enough profit to justify them. That kind of boom is fragile. It lasts only while confidence lasts.

The panic: October 1929

Prices wobbled in September and early October. Then on Thursday 24 October (Black Thursday) a huge wave of selling began. Around 13 million shares changed hands, a record. The ticker machines that showed prices ran hours behind, so investors did not know what their shares were worth. That made the fear worse.

Around midday a group of leading bankers met, and then bought large amounts of shares to steady prices. It worked for a short time. But on Monday 28 October prices fell sharply again. On Tuesday 29 October (Black Tuesday) around 16 million shares were sold, a new record, and many buyers had disappeared.

Margin calls forced people to sell, and every sale pushed prices lower. By mid-November the Dow had dropped to about 200, nearly half its September peak. Savings, and for margin buyers their borrowed money too, had been wiped out.

Exam-style question

This is a Paper 2 Section A (a) question. You must describe two features, and each needs added detail.

Describe TWO features of EITHER the panic selling of October 1929 OR unequal wealth in the USA in the 1920s. [6 marks]

You only answer one of the two topics. What gains full marks: two separate features, each explained with precise detail, not a general comment.