Wall Street Crash
The main aim of this essay is to examine the various factors that caused the Wall Street Crash (The worst period of depression1) and to investigate how important each of them were. The main factors, which caused the depression, were Speculation, Overproduction, Lack of Export Market and the Distribution of Income. Speculation was one of the short-term causes, which gave way for the Wall Street crash. Speculation can be defined as a gambling of the shares in the stock market. It was mainly dependent on the credit system. Suppose ‘A’ speculates (or predicts) that the share prices would increase constantly through out the day. He buys 100$ share in the aim of making a profit by selling it to ‘B’ at a higher price. He succeeds in doing so. He sells it for 200$. However, ‘B’ does not pay ‘A’ the money.
Instead he issues a credit note that he would pay ‘A’ back when he gains a profit. ‘A’ would accept the credit note only if he was confident enough that the share prices would increase and ‘B’ would gain a profit. This was the system of credit. Even though it proved to be a good source of income, it did not last long. It caused many problems. People would buy and keep shares if they are convinced that they will go up in value. When confidence was booming, it presented no problem. Shares were in demand, and hence those who choose to sell got high prices. The investors started to lose their confidence that the value of their shares would increase.
Hence, they were less interested in buying the shares. Since they bought shares on the margin, they wanted to sell them at a good price(Before they fell down to a drastic extent) so that they could pay back their own loans and bids. This time, they did not want a credit note, but money paid in cash. Since a majority of people chose to sell, the prices got lower. This in turn caused the share holders of various companies (whose share prices were falling)to get nervous. Hence, they decided to sell the shares too. The final result was that shares collapsed and became worthless because no-one is prepared to buy them. This was an important cause to the Wall Street Crash.
Nevertheless, there were other important causes like Over production of goods, decrease in trade and uneven distribution of money between the rich and poor of the country. According to me, it was the uneven distribution of money that proved to be the main cause of the Wall Street Crash. The roaring 20s was not fruitful to majority of the American population. The rural farmers, mine workers, black population and the immigrant population were not even touched by the consequences of the boom. Unfortunately, the above mentioned groups of people formed America’s major part of the population.
60% of the American families had a per capita income less than 2000$(440)2, the minimum sum of money required for basic elements of living. As only a very restricted percentage of population were rich, it was only this restricted amount that would buy the mass produced goods. Once all of this population finished buying their goods, there was no need of producing more as no one else could afford to buy it. Hence, it resulted in over production.
Modern mass production technologies like the assembly line that were invented and practiced during the American boom were still in use. However, the goods produces were not welcomed by the public then a lot because they could not afford to buy it(as discussed above). Hence, there was a surplus production.
The over produced goods could not be exported and sold to other countries because of the tariffs that the government imposed on the foreign goods being imported to America. The government adapted this plan so that people do not buy foreign goods that became expensive. However, it became a great advantage in the late 20s and the early 30s when the other countries adapted the same method too. As a result, America could not sell her surplus goods to other countries.
Speculation was not the most important cause of the Wall Street Crash. It was just a factor supporting the WSC. Had there been no speculation but the uneven distribution of wealth among the American population, the WSC would have taken place even then. The wealth of America was not divided evenly. The rich % of population had finished with all their purchases and money spending. The major population of America could not afford the mass produced goods. Hence, there was a surplus. Many companies could not sell their commodities. Consequently, the price of the goods decreased. As a result, the company profits lowered.
This in turn meant that the share dividends decreased. Hence, the Investors of the shares were not interested in buying the shares. As a result, there was a fluctuation in the share prices. Thus, the selling of shares increased drastically. Contradictorily, buying of shares decreased. The doubt in the mind of investors which fuelled them to sell their shares was caused by over production of goods. This was in turn caused by the uneven distribution of wealth amongst the population. In other words, it can be said that, if the American wealth was distributed properly and evenly, there would have been no over production, the prices would have remained booming and increasing hence, the Wall Street crash would not have occurred.