Why Did The Stock Market Crash Of 1929

While the overvaluing of stock and the panic generated by the media was enough to lower stock prices, both market crashes were exacerbated due to a lack of government regulation. In both the 1929 and 1987, new trading techniques emerged that would have dire consequences for the market yet were left almost completely unregulated. While the specific trading techniques varied between the two crashes, both ended with the same result. For the crash in 1929, the trading technique in question took the form of buying on margin. Buying on margin allowed people to pay a portion of the stock value up front while the rest was paid through credit and broker loans. Buying on credit became such an important part of the market that the economist Galbraith estimated that by 1929
“Brokers’ loans during the summer increased at a rate of about $400,000,000 a month” (Galbraith 66-67). Having to only pay part of the cost was alluring to many potential investors and allowed for a larger population to partake in the stock market.
Due to this, buying on margin fueled the excessive speculation and only added to the overpricing of stock. However, these were not the only consequences of buying on margin. In his book, Klein stated that if there was ever “large scale liquidation”, the result would be one of the largest drops in stock values ever seen due to 8 million shares a day being forced on to the market (Klein). In October, when prices decreased, this is exactly what happened. Brokers started calling in margins and many investors were forced to sell their stocks in order to pay for back the loan. In attempts to make money, brokers were forced to sell the stocks, further decreasing market values (Klein). This created a cycle that drove prices down further and further, exacerbating the effects of a drop in price and causing the market to crash. Despite the danger that buying on margin presented prior to the crash, the technique went largely unregulated before October of 1929. The only exception to this was an attempt by the Federal Reserve Board to halt the speculation and broker
loans. To do this, the Federal Reserve Board raised the rediscount rate to 6 percent from its initial 5 percent, hoping to prevent the market from becoming even more overvalued. However, this decision did little to help that market (Galbraith 31). Following the crash, the market faced little regulation or assistance from the Federal Reserve. The Federal Reserve failed to enact “easier monetary policies”, worsening the effects of the crash and preventing an easier recovery. This is one of the few details that would change in the crash of 1987. However, prior to the crash, the 1987 market still received little regulation from the Federal Reserve in the face of an emerging trading technique.