THE STOCK MARKET CRASH
The prices of stock crested in early September of 1929. The price of stock fell very gradually during most of September and early October. Some investors noted that some factories were beginning to lay workers off; whispers were heard around Wall Street that perhaps the price of stock was too high, and that it might be good to sell before prices began to fall.
The first signs of panic occurred on Wednesday, October 23, when in the last hour of trading, the value of a share of stock dropped, on the average, 20 points. On October 24 a massive amount of stock was sold, and prices again fell dramatically. Stockbrokers told nervous investors not to worry; Herbert Hoover announced that the stock market and the economy “is on a sound and prosperous basis."
A group of influential bankers and brokers pooled resources to buy stock, but this was unable to stop the downward trend. Prices fell again on Monday, October 28, and on the following day, Black Tuesday, the bottom fell out of the market. Prices fell by 40 points that day; it is estimated that total losses to investors for the day was over $20 million. Stockbrokers and banks frantically attempted to call in their loans; few investors had the money to pay even a fraction of what they owed.
How the Stock Market Crash Caused the Great Depression
In the weeks immediately following the crash, important figures from the banking world and President Hoover all assured the American people that America was still economically sound, and that the crash was no worse than other stock downturns that had had little long-term effect on the economy. In retrospect, it can be seen that through both direct and indirect means, the stock market crash was a fundamental cause of the Great Depression. As a result of the crash:
1. Bank closings increased. As stated previously, many banks in rural America had to close when farmers couldn’t repay loans. The exact same thing happened to many city banks after 1929 when investors could not repay their loans. In addition, the news of even a single bank closing had a snowball effect; thousands of people went to banks across the country to withdraw their life savings. Banks did not have this kind of money (it had been given out to investors as loans); soon urban banks began to fail as well. It is estimated that by 1932 approximately 5000 banks fell, with the life savings of over 5 million Americans gone forever
2. Income fell for industrialists. Many large industrialists invested heavily in the stock market. They had less available cash, and some started to close or reduce the scale of their factory operations. Workers were laid off or made much less money; as a result, they were able to buy fewer products made in other industrial plants, causing layoffs there as well. By 1933 nearly 25 percent of the labor force was out of work.
3. Effect on the world. Many European countries, especially Germany, utilized loans from American banks and investment houses in the 1920s and 1930s to remain viable. When American financial institutions were unable to supply these loans, instability occurred in these countries. Some historians make the argument that, perhaps indirectly, the American stock market crash opened the door for Hitler to come to power in Germany.