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The 1929 Stock Market crash
As, no consensus has been reached about the causes that made the crash possible, we are going to analyze all previous and significant events and prepare a theory, answering the question “how could it happen?”.
Early in the twenty century the USA economy was becoming more and more powerful. And, around 1914and after the end of World War I, this economy became the most important of the moment, so that this crash was not unthinkable. The stock market crash is thought to start in October 24, also called “Black Thursday” (In a total market value of $87 billion the market declined $4 billion — a 4.6% drop). People afraid to loose money, after a down in the stock values, started selling. But, the worstmoment was reached in 1932 with the lowest value of the stock, 59 points. Even there is not consensus in the cause of the crash; it is thought to be consequence of: the speculative bubble (probably the main reason), crisis in banks, overproduction and low foreign commerce, industrial crisis, investment trust and mistakes in the policy of the president Hoover.
But it is necessary to pass throughsome antecedents to understand the causes of the crash. Those antecedents started after World War I, when USA was the principal economy of the moment. As a consequence of the war, Europe was poor and run out of money, so that, USA as principal economy and producer country started lending money and selling their products to Europe. But as consequence of poverty of those countries and because of theirincapability to pay back the money stopped buying from USA. So that, the scarcity of demand due to the overproduction of USA industries, caused a great debt (internal and external). At the same time, people in the USA started asking for loans in banks to invest, banks ask for money to Federal Reserve of gold, but, as there was not a demand, country and banks got in debt as well as the investors.By the other hand, inflation kept on rising as well as debts.
That is what happened during the start of 20s. As a consequence of the antecedents I commented previously, a bubble was created. The causes of the bubble were the speculation (practically all the gains of firms were designated to easy and quick business such as stock inversion, instead of improving the productivity. On the other hand,some people think in 1929 stock prices were not out of line with the real economics of the firms that had issued the stock) and the overpriced Stocks (From 1925 to the third quarter of 1929, common stocks increased in value by 120 percent in four years, as consequence of a massive investment in the market. And then, the stock market lost 90 percent of its value from 1929 to 1932, what shows thatthe stock was overvalued). Keynes, one of the greatest economists of the time, noticed it and wrote about this phenomenon in the New York Evening Post (25 October 1929) "The extraordinary speculation on Wall Street in past months has driven up the rate of interest to an unprecedented level.”.
Another cause was the crisis in banks. In that moment, the use of credit loans given by the banks wasgeneralized, in order to improve consumption. But instead of that, people kept on investing in stock market that helped the increase of the speculative bubble. As consequence of lending money that then people couldn’t give back because of the interest rates, banks went into a crisis and started closing branches.
The commerce with foreign countries decreases a lot, which implied deterioration in theoverproduction situation. One of the principal zones to export was Europe, but because of the bad situation after the World War I (during the war countries received large quantities of money form USA and bought USA products) they stopped buying products to USA. So that, industries, without a buyer, had overproduction, and in consequence, a lot of them started to close, leaving a big mass of...
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