Wall St Crash iGCSE Revision Notes

Why did the USA fall into depression in 1929?

Background knowledge:

• Companies sell shares as a way of raising money, and they attract buyers by giving them a share (hence the name) of the profit at the end of each year (this is called the ‘dividend’).
• In America in 1929 about 1.5 million people owned shares. If a firm is doing well, the value of its shares rise, and people can sell them for more than they bought them.
• When there is a ‘bull’ market (when share prices are generally rising) people buy shares solely hoping to make a profit.
• These people are called ‘speculators’ and in 1929 about 600,000 of the 1.5 million shareholders were active speculators.
• A ‘bear market’ is one where prices are falling.
• Speculators fuel a bull market by gambling on future price rises, but they can turn a bear
  market into a crash by desperately trying to get rid of their shares before they fall any further.
• Why was there a Great Crash in 1929?
• Historians are fairly much agreed why the Wall Street Crash of 1929 happened.
• Wall Street over-heated.
• Between 1924-29 the value of shares rose 5 times.
• Share prices rose way beyond what the firms they were shares were worth; only speculation
  kept up the over-inflated prices.
• Speculation: Many people became speculators – 600,000 by 1929.
• Many people were buying shares ‘on the margin’ (borrowing 90% of the share value to buy
  the shares, hoping to pay back the loan with the profit they made on the sale). American
  speculators borrowed $9bn for speculating in 1929.
• Some firms which were not sound investments floated shares (e.g. one was set up to develop
  a South American mine which did not exist), but people still bought them, because they
  expected to make a profit in the bull market.
• Corruption
• The Senate Committee set up to investigate the Great Crash found that there was a corruption and ‘insider-trading’ between the banks and the brokers.
• Panic:
• There were losses of confidence in March and September (when the economist Roger Babson
  forecast a crash), but the banks papered over the cracks by mass-buying of shares to help the
  market.
• On Thursday 24th October 1929, nearly 13 million shares were sold in a panic, and prices
  crashed.
• The banks tried to shore up the market again, but on Monday there were heavy selling; the
  banks realised it was hopeless and stopped buying shares.
• Speculators panicked at the thought of being stuck with huge loans and worthless
  shares. On Tuesday 29th October the market slumped again, when 16 million shares were sold.

Worksheet Task:

• Aimed at Students studying across AS/A2 or equivalent
• Premium resource
• Use as you wish in the classroom or home environment
• Lesson fact file on the Wall street crash and the Great depression.
• Includes challenging questions.