What was the major cause of the stock market crash of 1929?
Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. In a 1998 article The Economist argued, “Briefly, the Depression did not start with the stockmarket crash.” Nor was it clear at the time of the crash that a depression was starting. On November 23, 1929, The Economist asked: “Can a very serious Stock Exchange collapse produce a serious setback to industry when industrial production is for the most part in a healthy and balanced condition? … Experts are agreed that there must be some setback, but there is not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression.” But The Economist cautioned: “Some bank failures, no doubt, are also to be expected. In the circumstances will the banks have any margin left for financing commercial and industrial enterprises or will they not? The position of the banks is without doubt the key to the situation
The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying. Over $8.5 billion was out on loan,[21] more than the entire amount of currency circulating in the U.S.[citation needed] The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929,[22] clearly above historical norms. Most economists view this event as the most dramatic in modern economic history. On October 24, 1929 (with the Dow just past its September 3 peak of 381.17), the market finally turned down, and panic selling started. 12
