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The Stock Market Crash of 1929

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By — McGraw-Hill Professional
Updated on Feb 4, 2012

The Stock Market Crash

The Jazz Age literally ended with a crash. On October 24, 1929, investors suddenly began selling their shares of stock. Since no one was buying, prices immediately plummeted. October 29 saw another round of frantic selling—sixteen million shares by the end of the day. By the end of December 1929, investors in the stock market had lost more than $30 billion—more than it had cost the U.S. government to contribute money, weapons, and troops to World War I.

The simple cause of the stock market crash was that people all over the country had gotten into the habit of buying things they could not afford. The practice of buying on credit had become common during the 1920s. People did not buy stocks on credit, but they did borrow money to buy stocks—a practice called margin buying. Speculators would borrow money and buy stock, then keep an eye on its value and sell it as soon as its price went up. The large number of speculators meant that share prices were constantly fluctuating, usually upward.

The market was booming, but only on the insubstantial foundation of unpaid debt. When buyers suddenly lost confidence in the market and began selling their shares, the prices dropped, but the debts still fell due. Banks failed because people could not repay their loans. There was no mechanism in place to protect a bank from failing—when this happened, all the bank’s depositors lost whatever money they had saved. Many people panicked at the news of the bank failures and tried to withdraw their money from their own banks, only to be told that the money was no longer there.

Like individuals, businesses lost money when the banks closed. Many businesses failed because they could not pay their debts. When a business failed, all of its workers were left without jobs. By 1933, the U.S. gross national product was only about half of what it had been in 1929. More than 50,000 businesses had failed, and 13.5 million people—more than 20 percent of the wage-earning population—had lost their jobs.

The era ushered in by the stock market crash was known as the Great Depression. An economic depression occurs when prices and wages fall and unemployment rises. The Great Depression got its name because it lasted for more than a decade—highly unusual for an economic crisis.

Practice questions for these concepts can be found at:

The Great Depression Practice Test

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