Essay on the Stock Market Crash of 1929: Causes and Effects

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Essay on the Stock Market Crash of 1929: Causes and Effects

The Stock Market Crash of 1929 was very important and crucial to everything as during the times of the 1920s the U.S market itself actually was benefiting and profiting by immense numbers and statistics, making this inevitable crash worse than what it would’ve been, if things weren’t skyrocketing up the board.

Now stocks and their prices rose to levels that weren’t reached before, and because of this the general idea and practice of investing in stocks rose to an intense beneficial level that created some cause of worry, but overall was greeted with happiness as individuals are making good wealth; leaving it to be seen as a very easy and very quick way of making money. Due to this common people spent a considerable amount of their average disposable income and some even went to mortgage their house to purchase stock and try to increase the value of what they doubled down with. As stated, before the Stock Market Crash there wouldn’t been as big of a concern had it not been due to the popularity of stocks because at the end of the decade (1928) there were up to hundreds of millions of shares that were being carried on a margin, making the purchase price being made with loans in order to then have profits be repaid with an ever-increasing share price then came the dreadful decline that started in October 1929. Once this decline began millions of the already overextended shareholders started to panic and irrationally rushed themselves to liquidate their current holdings, however as they thought this to be benefiting themselves it instead increased the decline and cause panic to be more common spread leaving individuals to follow in the same footsteps, and come September and November these stock prices fell 33% (an incredibly dangerous %) and because of this drop it causes a problem of confidence in the current economy among the consumers however worse it was also spread among the businesses as well. This new lack of confidence problem led to consumer spending for durable goods, and business investments to be drastically reduced, then leading to a reduced amount of production industrially and in turn led to a heavy increase in unemployment.

The secondary point that came from this chain of terrible events was the bank panics and the dreadful monetary contraction that ensued. The problem actually occurred after the stock market crash but was directly correlated with it as it only happened 1 year later (1930-1932) starting off with four U.S banks having a large amount of their customers, fearful of their own bank solvency, all trying to withdraw all their deposits in cash. Looked at as irony as the frequent effect of this panic was about to bring the very crisis that these customers tried to protect themselves against, even large banks were threatened by this big panic. This panic and things have gotten worse as by 1933 one-fifth of the banks that existed in 1930 had failed, leading the new Franklin D. Roosevelt administrations to forcefully declare a four-day bank holiday (which having to be extended by three days due to the still concerning issues), during which all of these banks were to remain forced closed until these banks proved their solvency to government inspectors. One of the biggest problems being that due to the result of widespread bank failures there were intense decrease in consumer spending and business investment (even lower than before!) as there were fewer banks to lend money, and as one could imagine as there were fewer banks that means there was less to be lend (partly due to individuals hoarding their money in cash). Shamefully, instead of seeing this problem and deciding to do something smart and better things, the Federal Reserve exacerbated the problem by raising interest rates therefore further depressing lending and intentionally reduced the money supply with their strong belief that doing it would be necessary to maintain the gold standard.

Now, this gold standard was considered to be bigger than both the bank panics and the stock market crash as it spread outward to other countries. Now since during these times the United States was experiencing a continuously declining output along with a deflation in turn the U.S had to run a trade surplus with other countries as Americans were certainly buying way fewer imported goods, and due to this their exports were also very cheap. These imbalances had no choice but to give rise to a significant foreign gold outflow to the U.S which then threatened to devalue the currencies of countries whose gold reserves had been declining. To combat this these foreign central banks attempted to counteract this imbalance by skyrocketing their interest rates, which affected things by reducing their output and prices however while increasing unemployment in their countries. This resulted in international economic decline, the most prevalent being in Europe nearly as bad as the U.S.

Finally, there is also no consensus about the sources of recovery, though few factors also play an obvious role. In general, countries that abandoned the gold standard or devalued their currencies or otherwise increased their money supply recovered first (Britain abandoning the gold standard in 1931, and the United States effectively devaluing its currency in 1933). However, even after the recovery, there are still plenty of things that point to a possible return to that state, so it’s always our duty to ensure such a travesty never happens again.

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