Wall Street Crash 1929

The worst period of the Depression followed the crash of the Wall Street financial markets in 1929. In Britain, unemployment peaked just below three million in 1932. A year before, in August, the Labour government had resigned and been replaced by a Conservative-dominated National Government. Although the British economy stabilised under the National Government and unemployment began a steady decline after 1935, it was only with re-armament in the period immediately before the outbreak of World War Two that the worst of the Depression could be said to be over.

What caused the huge crash?

Boom-bust theory

Keynesian, Monetarist, and Austrian economists agree that the Crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, even borrowing money to buy more stock. Banks lent heavily to fund this share-buying spree.

The rising share prices encouraged more people to invest, as they hoped the shares would rise further, thus fueling further rises, and creating an economic bubble. On October 24, 1929 (with the Dow just off its September 3rd peak from at 381.17), the bubble finally burst and panic selling set in. 12,894,650 shares were traded in the space of one day, as people desperately tried to dispose of their shares before they became worthless.

Over the following few days another thirty million shares changed hands and share prices collapsed, ruining many investors.

The banks which had lent heavily to fund share buying found themselves saddled with debt, which caused many banks to fail.

While millions of people lost their savings, businesses lost their credit lines and customers and were forced to close, causing massive unemployment.

The crash dramatically worsened an already fragile economic situation, and was a major contributing factor to the Great Depression. There is a good deal of controversy among economists and historians about the nature of that contribution, though. Some hold that political over-reactions to the crash, such as in the passage of the Smoot-Hawley Tariff Act through the US Congress, caused more harm than the crash itself.

Explanation from supply-side economic theory

Many commentators view the Smoot-Hawley Tariff Act as a consequence of the Crash, since the act was not signed by President Hoover until June of 1930. However, supply-side economists (and others) argue that stock-market prices