What were the causes and consequences of the Wall Street Crash? | History for GCSE/IGCSE - Year 11 PDF Download

How far was speculation responsible for the Wall Street Crash?

What are Shares?

A share represents a portion of ownership in a company or a financial asset. Individuals who possess shares in any given company are referred to as shareholders.

• During the prosperous 1920s, the American stock market witnessed a consistent upward trend.
• Speculators, enticed by quick profits, engaged in the rapid buying and selling of shares.
• Particularly in the mid-1920s, speculators resorted to purchasing shares "on the margin," leveraging borrowed funds from banks for their investments.
• This practice involved repaying the loan from the profits made upon selling the shares, with banks often offering loans amounting to 90% of the share value.

In October 1929, a frenzy of share selling in the market triggered a "crash" that signaled the onset of the Great Depression.

Timeline of the crash

• 18th October - prices began falling.
• 19th October - 3.5 million shares sold. Prices fall.
• 21st Oct - over 6 million shares change hands.
• 24th Oct- Black Thursday - 13 million shares sold. No buyers
• 26th October - President Hoover, the fundamental business of the country is on a spend and secure basis
• 29th Oct - 16 million shares sold. No buyers.
• Prices on the stock market collapsed

Causes of the Wall Street Crash

• The actions of speculators
  • As people began to sell stocks en masse, the market collapsed. The fear of declining stock prices led to panic selling.
• Exports
  • The US faced limited opportunities for exporting its products.
  • European customers were still financially strained and had not yet recovered from the First World War.
  • American tariffs made it difficult for exporters to compete in foreign markets.
• Uneven distribution of income
  • Between 50 and 60% of Americans were too poor to participate in the consumer boom of the 1920s.
  • Traditional industries, along with Black and immigrant populations, faced low wages and unemployment.
  • In 1929, 5% of the population received 33% of the income.
  • Wealth was concentrated in too few hands.
  • Mass production required mass consumption, which demanded higher wages.
• Overproduction
  • By 1929, consumer goods production exceeded the number of consumers.
  • The market was saturated as Americans with disposable income had already bought what they needed.
• Signs of an economic slowdown
  • Signs of the boom ending appeared before October 1929.
  • By 1927, the construction of new houses had decreased, car sales were declining, and wage increases were stagnating.
  • Increasing stock levels in warehouses indicated an economic slowdown.
  • This made investors nervous and eager to sell shares at the first sign of major trouble.

What impact did the Crash have on the economy?

• First bank and business failures - resulted in a widespread decrease in trade and demand for American products.
• Companies downsized operations by laying off employees and cutting wages, leading to further economic strain.
• This created a detrimental cycle by draining more money from the economy and diminishing the need for goods.
• Confidence among businesses plummeted, causing the suspension of growth initiatives.
• Consumers hesitated to make significant purchases due to job instability and financial concerns.
• The U.S. could no longer afford to purchase foreign imports, causing a deficit in American exports.
• Escalating unemployment rates in Europe and Japan had a ripple effect on American joblessness.

What were the social consequences of the Crash?

• The crash resulted in the direct failure of banks and businesses, leading to a surge in unemployment.
• By 1933, a quarter of the workforce was unemployed.
• Households had no welfare benefits to rely on when facing income loss, while still having to meet rent and mortgage payments.
• Some individuals coped by seeking assistance from family, friends, and neighbors.
• Others faced eviction from their homes, being forced into a state of destitution and resorting to begging on the streets.

Impact on Living Conditions

• Impoverished communities, known as "Hoovervilles," emerged on the outskirts of urban areas, comprising makeshift shelters like huts and tents.
• These settlements heavily relied on soup kitchens and relief programs initiated by local governments.
• By 1932, over 100 of these local authorities had depleted their funds, exacerbating the crisis.

The "Bonus Army" Protest

• The "Bonus Army" Protest was a gathering of World War I veterans demanding immediate payment of their service bonuses.
• In 1945, 25000 army veterans were guaranteed a war service bonus, but due to economic challenges, they demanded it to be paid earlier, in 1932.
• The veterans initiated a peaceful demonstration in front of the White House as a response to Congress's rejection of the Bonus Bill.
• Viewing the demonstration as a threat, President Hoover instructed the military to disband the protest site.
• The encampment was forcefully dismantled using tanks, machine guns, and tear gas, resulting in two veterans losing their lives and numerous injuries.

Why Franklin D. Roosevelt Emerged Victorious in the 1932 Election?

• In November 1932, Franklin D. Roosevelt, the Democratic Party nominee, secured a resounding victory over Hoover's bid for a second term.
• Roosevelt garnered 7 million more votes than his opponent, who only managed to win in 6 out of 48 states.

Hoover's weaknesses

• He assumed office as the prosperity of the 1920s was coming to an end, leading to a period marked by bank failures, business shutdowns, economic distress, and escalating joblessness.
• Initially, he misinterpreted the depression as a typical business downturn, delaying appropriate action.
• His response, when he eventually recognized the severity of the economic crisis, was widely criticized for being inadequate and tardy.
• He opposed government aid for the unemployed, viewing it as conflicting with American principles of self-reliance and individualism, portraying him as apathetic and detached from human suffering.
• During the 1932 campaign, he struggled to present himself as a forward-thinking leader willing to innovate, instead coming across as stern and conservative.

Hoover's Efforts to Address the Depression

• In 1930, tax reductions totaling $30 million were implemented to boost purchasing power within the economy.
• The Hawley-Smoot Act of 1930 introduced protective tariffs to safeguard American products.
• Funds were allocated for construction projects to generate employment opportunities, including the construction of the Hoover Dam on the Colorado River.
• Voluntary agreements between employers and workers were encouraged to sustain wage levels.
• The Reconstruction Finance Corporation, established in 1932, provided loans of up to $1.5 billion to struggling businesses.
• The Federal Farm Board was created to purchase excess agricultural produce, stabilizing market prices.

Roosevelt's Strengths

• He belonged to the Democratic Party, thus avoiding direct blame for policies preceding the Great Depression.
• In 1928, he assumed the role of Governor of New York State, initiating programs to aid the elderly and jobless. This effort earned him a reputation for empathizing with the impoverished.
• His affable demeanor, exuding warmth, charm, and optimism during his campaign engagements, garnered admiration.
• Roosevelt's battle against the polio he contracted in 1921 was revered.
• The public was inspired by his unwavering confidence and resolve to confront challenges.