What were the factors that led to the stock market crash and the Great Depression.?

Question

What were the factors that led to the stock market crash and the Great Depression.?

Answer 1

The main factor that caused the actual market crash was the lax margin requirements of the day.  People with stock market accounts at brokerages were allowed to "buy" shares by paying only 10% of the value.  Their broker would loan them the other 90%, at interest.  This was "buying on margin".  Not everybody did it, but the attraction was almost irresistible.  Say there is a share worth $50.  You could pay only $5, borrow the other $45 from your broker, and control the share.  If it goes up $1, youve made a 20% return on your $5, less the small interest you pay your broker.  If instead you buy the $50 share outright, using all your own money, when it goes up $1, youve only made a 2% return.  This margin buying works great AS LONG AS THE MARKET IS GOING UP.  If the shares instead go down, you get a call from your broker demanding that you deposit additional cash into your brokerage account.  This is a "margin call".  If you werent able to "cover your shorts", your broker would sell the shares, and by the time that happened they might not even be worth enough for the brokerage to recoup the 90% they had loaned you.  So your investment could be totally wiped out, plus you would be liable if sued by the brokerage for the deficiency in their repayment.

There had been a prolonged rising "bull" market through the 20s.  People who had little sophistication, and had never been in the market before, were lured in by the continually rising prices, and bought as much as they could, all on margin.  They had no cushion in their accounts to cover the possibility of a downturn.  In the month leading up to the actual crash, there was a lot of volatility, very high volume, and a "choppy market" - swings up and down.  Then came "Black Thursday", "Black Monday" and "Black Tuesday" (October 24,28, and 29, 1929).

The market started down.  Margin calls went out.  People could not cover.  Brokerages began to sell the shares.  There were no buyers.  Share prices plunged.  This actually went on for a month.  Many brokerages and investors were completely bankrupted.  There was some recovery in 1930, followed by a severe bear market in 1932.

Historians are divided on the cause and effect on the crash and the subsequent depression.  After the crash, many industrial companies were bankrupted and closed, banks also went broke and closed, with depositors getting only many years later, ten cents on the dollar for what they had in the bank.  People were thrown out of work, and nobody had any money to spend, and the ripple effect spread throughout the economy.  There was actual deflation, and a rare period of decline in real estate values.  The main reason it was so prolonged is that people continued to have no money to spend, so there could be no business recovery.  Roosevelt's New Deal policies put some people back to work, but it really took the huge buildup of industrial activity immediately preceding and during WWII to clear up the situation.

You can still buy on margin today, but under the rules established by the Securities and Exchange Commission, created in 1934 and first headed by Joseph Kennedy ("It takes a thief to catch one" said Roosevelt), the margin requirements today are 50%, instead of 10%.

Answer 2

One of the biggest factors for the Stock Market Crash was buying on the market, and then not being able to repay the loan.

One of the biggest factors for the Great Depression was risky bank loans to people, without asking for a deposit. Thus, when they couldn't repay the loans, the bank lost tons of money. Similar to the recession today.

Also, post-WWI the US gave an enormous loan to Germany to help pay off the $31 billion reparations forced upon them in the Treaty of Versailles. The Germans couldn't repay the loan, nor would they have considering the future turmoil between the two nations. The US lost a lot of money by not receiving repayment, thus contributing to the Great Depression.

Answer 3

one of them is the outstanding debt that the united states owed to other nations, much like it is right now

Answer 4

There is seldom one factor that determines the event.  The economy was unstable,   There was something that is known as false prosperity.  The  national income rose greatly, however only a small margin of people was getting richer.  For most - the real income increase slightly.  Then there was a massive speculation (something like recent mortgage loans or gas).  Stock market crashed. People felt very uncertain about the future and this led to bank withdrawals on a big scale, thus the banks collapsed.  Then there was a high unemployment although one can argue that it was an effect not a cause.  In addition to all this, foreign countries raised the trade tariffs and this created the collapse of the trade.  Finally, there was lack of any fiscal policy on the the government side.  

Doesn't it sound like a domino effect?