Question

2. John Kenneth Galbraith described several historic episodes of asset markets going through boom and bust. One episode that he described was the stock market crash of 1929. Separately answering as parts A, B and C, identify and explain three different causes of the crash of 1929. With each cause that you explain, include how it contributed to the 1929 stock market crash.

Answer 1

There were several causes that lead to the 1929 crash. Three causes which contributed to the market crash are as follow:

A) CREDIT BOOM - During the 1920s there was a rapid growth in the lending sector i.e. banks started giving credit for the purpose of strengthening the economy in the US. This allowed people to take loans and buy shares in the stock market as they thought it was an opportunity to place their bets and earn money. As the market went down due to a change in confidence in 1929 several investors got trapped as they started selling their shares. It leads the way for a crash in the stock market.

B) PURCHASING ON MARGIN - It was a practise to purchase share by paying 10 or 20% of the total value of trade. This enabled the rise in share value as more worth of share could be purchased with lesser money. But this left the margin investors exposed to the risk of downward movement of the stock price. So when the bulls arrived many investors got wiped up and this lead to huge selling or exit from the stock.

C) Agricultural Recession - The agricultural sector was struggling due to lesser growth rate of demand for food. Hence many farmers were unemployed and many agricultural banks went bankrupt during thiss period. This also affected the financial system