1929: The Great Crash

Starting in 1919, the United States entered a period of high prosperity, with a thriving stock market. But on October 23, 1929, stock prices in the United States fell at an ever-increasing rate and 2.5 million shares were sold within an hour but no one took them. Since then, the American economy has faced its darkest days. According to the chart below, the Dow Jones index reached 381.77 on September 3, 1929. However, 34 months later, the average is only 41.22,drop 89%.

The reason for this is the American concept of over-consumption. In 1920, after America entered the electric age, people's demand for new products such as cars and refrigerators kept increasing, thus giving rise to a new consumption mode -- installment plan. In terms of performance, it reflects the improvement of American living standards. But this has created an illusion of economic prosperity. After the economic collapse, people did not have savings or even negative savings, which made them unable to cope with the financial disaster.

Not only that, people also are attracted to spend money on the stock market. Those financial institutions on Wall Street launch a large number of financial products and use margin trading to attract people to invest. The exaggeration is that people only need 10% money to get 100% stock price. This means that the loan rate can reach 90% of the original price and cause the bubble of stock prices. For example, A buys $1000 stock in company B, but the par stock value is $10000. If the stock goes up to $11000, then A can pay company B $9000 and double its assets. But if stocks fall, the bubble will be infinitely enlarged. In 1920, about three million Americans invested in stocks, which laid the foundation for the economic crisis.

Lack of regulation is also one of the reasons for the crisis. In the 1920s, there was almost no federal law regulating financial institutions such as banks. Banks invest their customers' money in the stock market, using their savings to buy shares and lend them to investors. When Wall Street collapsed, small banks defaulted on their loans and they run on banks that have no assets to respond to customers' requests for withdrawals. This led to the collapse of 659 banks. In addition, the bank's review process for personal loans is very loose. Even people who don't have deposits and jobs can make loans, but they can't repay them.

The actions of the people, the greed of financial institutions and the inaction of government departments led to the crisis.

References:

1929: The Great Crash, 19:00 09/09/2009, BBC2 England, 60 mins. Available at:https://learningonscreen.ac.uk/ondemand/index.php/prog/00D7E2C7?bcast=33324967. (Accessed 27 Feb 2020).

Sniper Market Timing (2018). ‘The stock market crash of 1929’. Available at:https://snipermarkettiming.com/stock-market-crash-1929/.  (Accessed 27 Feb 2020).

BBC Bitesize. ‘The Wall Street Crash, 1929’.  Available at: https://www.bbc.co.uk/bitesize/guides/zxhpb82/revision/1.(Accessed 28 Feb 2020).