3. Causes of The Wall Street Crash

Question 1

Buying on the margin

Answer 1

Banks would allow people to buy stocks ‘on the margin’ with credit - bank payed 90% of funds to buy stock, investor only paid 10% Allowed too many people to buy shares (1920: 4million total investors -> 1929: 20million total investors - 19million=amateur guessing)
Ordinary Americans involved in the stock market became overconfident in the market increasing - Evangeline Adams’ newsletters predicting market would rise indefinitely

Question 2

Evidence of speculation

Answer 2

Radio: 1928=94cents -> 1929=505cents

Question 3

Federal Reserve Board

Answer 3

Didn’t step in and cool frenzy by increasing base interest rates - ignored commentators who said stock prices no longer represented company value and pointed out that the market would not rise indefinitely
1927 - Fed lowered interest rates from 4% to 3.5% further fuelling the frenzy of the market

Question 4

Insider Trading

Answer 4

Billy Durant made $5million in a week using Joseph Kennedy’s RCA company’s stock

Question 5

Lending Crisis

Answer 5

As many could not pay back their loans the banks that loaned too liberally were put under great strain - reckless lending led to lending crisis

Question 6

Overproduction

Answer 6

Mechanisation and highly efficient mass production methods meant that production rates has rised exponentially and more was being made
Too many products entering market but not enough being bought
Those with the money to buy had already bought most of what they wanted
Boom was consumerist, consumerism had driven growth - crash without consumers

Question 7

Painting the tape + pump and dump

Answer 7

Wealthy investors pool together their money to buy stock in bulk, then create excitement regarding the stock causing the price to inflate due to keen to buy smaller investors, quickly dump all if their stocks to make big profits whilst small investors were left in possession of over-priced stocks
e.g. Billy Durant with Anaconda Copper in 1928 (1928: $40 -> 1929: $150)

Question 8

Panic Selling

Answer 8

People would pay back loans with profits made by selling stocks after stock went up - if stock went down they would panic sell their stocks in order to be able to pay back the banks
Panic selling caused market to further decrease, causing others to panic sell to pay back loans - vicious cycle driving market down

Question 9

Poverty

Answer 9

48% of Americans lived below the poverty line (below $2000 per year)
Available market in America was halved - faster to saturate

Question 10

Speculation

Answer 10

Random guessing that a share price would increase and investing in hopes the market would increase to make a ‘quick profit’ rather than investing because of quality of company
Caused “bubble” between stock price and actual company value to grow too large
People would buy and sell stocks solely based on the stock price increasing/decreasing rather than actual company value

Question 11

Tariffs

Answer 11

Cut off European markets and delayed their rejuvenation

Led to market saturation