• 1920s 'Boom' → high confidence; speculators sought quick profits → bolder trading → 1924-29 shares rose 5x.
• Share prices exceeded firm values; speculation was inflating prices.
2. Insider Trading & Corruption
• Unsound firms floated shares (eg a fake South American mine) /Buyers focused on profits, ignoring risks.
• Senate Committee found corruption & INSIDER TRADING between banks & brokers.
3. Speculation
• 600k speculators by 1929 /Poorer investors bought 'ON MARGIN' (borrowing 90% of share value).
4. Panic
• March & Sept 1929: Loss of confidence after ROGER BABSON predicted crash.
• Banks stabilized market by buying shares temporarily.
• 24 Oct 1929: 13m shares sold in panic → prices crashed.
• 29 Oct 1929: 16m shares sold → banks stopped intervention → total collapse.
• Speculators stuck with loans & worthless shares.
Why was there a Great Depression 1929–33?
Crash ≠ automatically cause Depression, but factors combined → economic collapse.
1. International Trade
• 1930 SMOOT-HAWLEY Tariff → 60 retaliatory tariffs → global trade fell → US agriculture & industry damaged by shrinking exports (Hoover blamed 1931 European financial collapse).
2. Maldistribution of Wealth
• Top 5% owned a THIRD of the wealth (so saved not spend); yet 40% of Americans in poverty = fall in demand → price crashes.
3. Bank Failures
• 1929 crash → speculators defaulted → 7,000 bank failures, 1929-33 (inc. 1931 BANK OF THE UNITED STATES) → 400k depositors lost savings → mass withdrawals → economy starved of credit → fall in spending.
4. Underlying Economic Weaknesses
• 1920s: coal, iron, textiles weak; agriculture overproducing; depression hit ∵ these sectors collapsed.
• Over-production → too many goods → low profits → job losses.
5. Gold Standard
• The GOLD STANDARD linked the $ to US gold reserves → limited supply of money & govt spending.
• Countries leaving gold standard (e.g., Britain, 1931) recovered faster.
6. Great Crash
• Only 1.5m shareholders, 600k speculators → limited direct impact.
• However, the bull market had been financed by $8.5 billion in loans to speculators.
• When speculators DEFAULTED → destabilized banks bank failures → economic collapse.
7. Expectations – Cycle of Depression
• Loss of CONFIDENCE → people saved 'just in case' → fall in spending → firms closed → job losses.
• 1929-33: 109k companies folded → mass unemployment → fall in wages & spending → worsening recession.
Economic Theories
8. Reduced Demand (Keynes)
• KEYNES (1936): $500m hoarded → drop in spending = key cause → firms closed, workers unemployed.
