One of the oft-cited causes of the Great Depression was the speculation craze on Wall Street. But what does this actually mean? What is speculation, and what sorts of practices on Wall Street led to the market crash of 1929 that marked the start of the Great Depression?
Buying on Margin
Buying on margin is a fancy way of saying that you are buying stock with loaned money. The money is loaned by a stock broker. People often do this when they want to buy a lot of stock, but they don't have enough money for it themselves, so they get loans. If the price of the stock you buy goes up, then when you sell it, you have more money than what you bought it for, so you can repay your loan with interest and still make money. But, when the stock price goes down, you can lose money and possibly be unable to pay back the loan. Nowadays, we have restrictions on buying on margin, but in 1929, there were no such safety nets.
Speculation
Trading risky stock in the hopes that the stock price goes up is called speculation. It is little more than gambling: investors they buy stock and simply hope that it goes up in value. When stock prices were increasing, this seemed like an easy, surefire way to make money: you buy some stock, and then sell it when its price goes up. These investors are bullish, which means they expect the stock price to increase. During the 1920s, there were hardly any bearish investors, which means they expect the stock price to decrease. This imbalance meant that one fall in the market was enough to send everyone selling. And sure enough, on October 24, 1929, the market crashed.
While Wall Street was an easy scapegoat for the Depression's economic woes, investors were hardly the only people at fault. The Depression, and the stock market crash of 1929, were due to lack of market regulation, overproduction, concentration of wealth, and a poor banking system as well.
Sources:
https://www.investopedia.com/study-guide/series-4/introduction/bullish-vs-bearish/
http://www.investopedia.com/university/margin/margin1.asp
http://eh.net/encyclopedia/the-1929-stock-market-crash/
http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/causes-great-depression-0
https://www.investopedia.com/terms/s/speculation.asp
Great post, Anya! I liked how you discussed a specific factor to the Great Depression and went more in depth. Later on, Roosevelt recognized that speculation was a huge problem in American economics. He enacted legislation to regulate banks and supervision of credit. This would be an important step in recovery and making sure that people's money were being treated fairly.
ReplyDeletehttps://www.democracynow.org/2008/9/29/adam_cohen_on_nothing_to_fear