Causes and Consequences of the Wall Street Crash of 1929

Many thought that the stock market was the wisest place to make investments to secure their future. As more people invested in the stock market, the prices of stock continued to rise and with the rise of stock prices, more people were encouraged to invest because they believed that the rise in stock prices would continue indefinitely and that they would eventually get very high returns for their investments (Svaldi, 2004). By nineteen twenty eight, the rising stock prices had brought about the stock market boom and this changed the way investors viewed the stock market. The stock market was no longer a place where long term investments were made but had now become a place where people could get rich quickly by making short term investments due to the high interest rates given for their stocks (Klein, 2001, 325 – 351). The news of people having made millions from their investments in the stock market, even common people who would normally not have been a part of the stock market environment, encouraged many more people to invest. Many of those people who wanted to invest in the stock market did not have the money to do so and many chose to buy stock ‘on margin.’ This meant that the potential investor would put down his own money to buy the stock while the rest was borrowed from a stock broker, and this tended to be about ten to twenty percent of their own money. Buying stock ‘on margin’ was a very risky venture because if the prices of stock went down below its buying price, then the broker from whom the money to buy the stock was borrowed would issue a ‘margin call’ which meant that the investor had to come up with the money to pay back his loan almost immediately. Buying stock on margin was very popular for those people who did not have enough money to invest, and the continued rise in stock prices encouraged many more people to invest in this manner, not thinking of the risks which they were exposing themselves to through their ventures (Williamson, 2008). By the early nineteen twenty nine, many Americans were scrambling to make investments in the stock market because the profits from such investments seemed to be assured. This assurance of profits led many companies to invest their money in the stock market and these were not the only major investors. Banks were so confident in the stock market that they, without consulting their customers, invested their customers’ money in the stock market because with stock prices continually rising, the environment seemed perfect for investment (Mclynn, 2002). When the Wall Street crash occurred in October of the same year, many people and institutions were taken by surprise. A prelude to the crash occurred in March nineteen twenty nine when stock prices began to drop and there was an overall panic when stock brokers began making margin calls. However, confidence in the stock market was restored when banker Charles Mitchell made the announcement that his bank would continue lending to those who wished to invest (Burke, 2001). Mitchell and other bankers tried to again reassure the public to have confidence in the stock market but this was not enough to stop the great crash that occurred later that year. During the spring of nineteen twenty