Why Did the Stockmarket Crash in 1929?

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The stock market crash in 1929 kicked off the Great Depression.
The stock market crash in 1929 kicked off the Great Depression. (Image: Stock Market Crash image by Paul Heasman from Fotolia.com)

The most devastating U.S. stock market crash of all time, the Wall Street Crash of 1929 led to the Great Depression, a 10-year economic slump that affected every industrialized nation. Like many economic activities, the causes of this crash were numerous, and many are still debated today. However, there are certain causes that are generally agreed on by most economists and historians.

Speculation

The decade prior to the crash was a time of unprecedented growth and market speculation. Irving Fisher, a famous economist of the time, claimed the market had reached a "permanently high plateau." These numbers, however, were inflated by the constant influx of new money into the market, in the belief that such high returns would continue. When the market drop began, it had much further to fall, and more money lost, because of these high levels of speculation.

Real Estate

Real estate prices had peaked in 1925, and lower values by 1929 led to less wealth invested in property. Many had even borrowed money against their property in order to invest in the market. When the crash occurred, people lost not only their cash, but the properties they had mortgaged to invest in the first place.

Excessive Loans

With investment seen as such a sure thing, brokers loaned excessive amounts of money to small investors secure in the knowledge that the high market levels would allow borrowers to pay back their loans with little risk. But when the crash occurred, borrowers were forced to default on their loans, and because of the real estate downturn, even property forfeiture wasn't able to pay of the loan amounts.

Panic Selling

When the initial stock market downturn occurred, investors immediately began to sell their stocks to get as much as they could in the short term. However, this panic selling, without any regard for the stock price, simply led to an even sharper market drop. Human emotion, fear without any consideration beyond the immediate future, was a huge part of the crash.

Newspapers

The stock market crash actually occurred on two days. The initial crash was on a Thursday, and a number of wealthy bankers attempted to solve the problem by investing heavily in blue chip stocks above the market value. This temporarily calmed the market, but over the weekend, newspapers reported on the crisis, and on Monday, even more investors, spurred on by several days of newspaper reports, inactivity and fear, began a fresh round of panic selling.

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