It wasn’t as if though a gigantic wall fell and alarmed citizens the end was near. No, it was worse, the Great Depression was a progressive disease and the Wall Street Crashing was one of its several causes. To examine the extent to which the Wall Street crash caused the Great Depression, it is necessary to investigate specific effects “that the crash had that subsequently led to the economic recession” (The Stock).
There were limited regulations that governed the stock market and unchecked speculation allowed investors to buy stocks on margin or using borrowed money. Over time stock prices began to fall, culminating with the massive sell-off that banks were powerless to stop; they could not lend enough money, causing them to fail. The U. S. economy that had been masked by the boom years of the 1920s was suddenly revealed and showed individuals not being able to keep up with the purchasing power as economic failure rose, leading to overproduction in the goods that could not be bought.
Some have argued that speculation was the main cause. When purchasing with the assumption that the stock, in hope, will become more valuable in the future, it is called speculative buying. Speculative buying caused the share prices to increase in value above their true value, which means that the true values were overstressed. Confidence in the economy was measured by share prices and when individuals wanted to sell shares at any point in time, the price can fall along with the confidence. As individuals continued selling their shares, the panic level grew, and this caused prices to fall even further.
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In the United States, the amount of speculative buying caused prices to rise high prematurely, and what led after that was a great amount of speculative selling as individuals tried to make their money off it. The general public was thinking that the economy was failing, which may have caused many to withdraw money from banks, and is why the trend did not die off. Yet, it may have contributed to the bank failures in which many people lost everything.
Banks in the United States had also made investments in clients’ deposits and savings in the stock market as a method of reinvesting the cash (S 36). Most of these banks had no other option but to shut down operations when the market crashed. Bank closures sparked panic among citizens who rushed to the remaining banks to make withdrawals out of fear of losing their money. Massive withdrawals of cash led to additional banks closing (S 36). Throughout the Depression, around nine thousand banks closed. Since bank deposits were never insured, people lost savings due to failed banks. Remaining banks resisted issuing more loans to the people due to uncertainties in the economy. The market had lost trust, and so people were losing hope. (Calomiris 73).
The confidence that was widely shown in the American boom of the 1920s denoted that more and more consumer goods were being manufactured to sell, which meant overproduction. Companies were manufacturing more than they could sell, saying that the stock that was already paid for was not being sold and companies had to pay to preserve what they had in warehouses. The weakened American economy reduced the consumption of goods and services. Due to losses of savings from banks, citizens feared to lose more money.
Due to the scare of further economic problems, people from all classes significantly reduced the consumption of goods and services that were not basic (Calomiris 74). This subsequently led to a massive reduction of products produced in the market which eventually led to workers getting laid off. Enterprises, individual businesses, and different industries were all affected. This created a domino effect and led to even more consumers spending less, thus causing more companies to make a loss on the remaining stock, which caused shares to fall as deficit increased.
The Wall Street crash was among the significant symptoms of the Great Depression. Over speculation in stocks caused the prices to ride higher and as investors panicked, they began to sell the stock in high quantities. The crash led to a lot of loss of savings made by the citizens to the banks, which subsequently led to some banks collapsing. People not having enough cash led to the underconsumption of goods, thus resulting in more workers getting laid off. This continued in a cycle until the Depression reached its climax.
