top of page
  • Writer's pictureLawrence Cummins

What was caused the Wall Street Crash of 1929. and the formation of SEC

Updated: Aug 26, 2023



The American economy in the late 1920s was characterized by an unprecedented period of growth and prosperity. This era, commonly known as the Roaring Twenties, saw a surge in industrialization, consumerism, and a rising standard of living. However, despite the apparent signs of growth, underlying economic imbalances and flaws were brewing beneath the surface, paving the way for one of the most significant financial crashes in modern history. During this period, the American economy experienced several notable advances. With the advent of mass production techniques and assembly lines, industries such as automobiles, electronics, and appliances saw a rapid expansion in production, leading to the growth of conglomerates such as the Ford Motor Company and General Electric. Furthermore, the construction of urban infrastructure, such as highways and skyscrapers, fuelled the development of cities and the rise of white-collar jobs. Amidst this boom, the American middle class also experienced a newfound sense of affluence and luxury. With higher wages and better employment opportunities, more individuals had access to modern amenities such as cars, televisions, and radios. This increase in consumer spending, in turn, spurred the growth of industries such as advertising and marketing, providing further stimulation to the economy. However, the 1920s also witnessed disparities in wealth distribution. While the wealthy were accumulating vast fortunes, most workers' wages stagnated, leading to income inequality. The agricultural sector was grappling with low crop prices due to overproduction, leading to the growth of poverty and debt. Meanwhile, the practice of buying stocks on margin, where individuals borrowed money to invest in the stock market, led to a speculative bubble and an overinflated stock market. This bubble eventually burst, resulting in the infamous Wall Street Crash of 1929, which marked the onset of the Great Depression. The collapse of the stock market was a severe blow to the American economy. Banks and lending institutions, which had invested heavily in the stock market, suffered significant losses, leading to a financial crisis. As a result, many individuals lost their life savings, and thousands of businesses closed. The ensuing economic downturn lasted for several years, characterized by high rates of unemployment, a decrease in consumer spending, and a shortage of credit. In conclusion, the American economy in the late 1920s was a period of remarkable growth and advancement. However, the emphasis on consumerism and the stock market's speculative practices blinded policymakers and investors to the underlying economic weaknesses, ultimately leading to the devastating Wall Street crash and the Great Depression. The events of this period serve as a cautionary tale, underscoring the importance of careful economic planning and regulation, to ensure a stable and equitable economy that benefits all segments of society.


Government policies and regulations

Government policies and regulations had a significant impact on the American economy in the 1920s. The Federal Reserve, created in 1913, played a crucial role in stabilizing the economy by regulating interest rates, controlling the money supply, and influencing credit conditions.


The government also implemented policies that encouraged business growth and expansion during this time. One such policy was the reduction of tariffs on imported goods, which stimulated foreign trade. Additionally, the government passed tax laws that favoured businesses, resulting in an increase in investment and job creation. However, not all government policies were beneficial. The Federal Farm Board, created to support agricultural prices, ended up exacerbating the agricultural crisis by encouraging overproduction. The government also failed to regulate the stock market, leading to the speculation and eventual crash of 1929. Overall, while government policies and regulations did have a significant impact on the American economy in the 1920s, the consequences of some policies were unintended and detrimental in the long run.


Anti-Trust Laws and Weaknesses Prior to the 1929 Crash In the early 20th century, the United States developed a robust legal framework of anti-trust laws to curb the power of big businesses and promote competition in the economy. The federal government passed several statutes, including the Sherman Antitrust Act of 1890, the Clayton Antitrust Act of 1914, and the Federal Trade Commission Act of 1914, to regulate corporate practices and safeguard the interests of consumers. However, despite these efforts, the US economy remained vulnerable to monopolies and economic concentration, leading to the stock market crash in 1929. One of the key weaknesses of anti-trust laws prior to the 1929 crash was inadequate enforcement. Although the Sherman Act prohibited monopolies and restraints of trade, the federal government struggled to prosecute violators effectively, partly because the law's language was vague and lacked clear enforcement guidelines. For example, several major corporations, such as Standard Oil and the American Tobacco Company, managed to evade prosecution by circumventing the law's provisions or by using legal tactics to drag out the legal process. In addition, the Clayton Act, which sought to strengthen anti-trust enforcement, faced significant political opposition and limited resources, which further hampered its effectiveness. As a result, anti-trust laws failed to prevent the growth of oligopolies and monopolies in critical sectors such as finance, transportation, and utilities. Another weakness of anti-trust laws was the lack of coordination between federal and state authorities. While federal agencies such as the Department of Justice and the Federal Trade Commission had the primary responsibility for enforcing anti-trust regulations, state governments also had their anti-monopoly laws. This complicated legal landscape led to confusion and inconsistencies in enforcement, as companies could exploit differences in state and federal regulations to engage in anti-competitive behaviour. Moreover, the federal government had limited capacity to monitor and regulate the increasingly complex and interconnected economy, which had global dimensions and required a coordinated response. In some cases, state-level authorities had stronger anti-trust laws than federal ones, leading to a regulatory patchwork that favoured certain companies over others. The third limitation of anti-trust laws was the narrow scope and focus of their provisions. Although anti-trust regulations aimed to prevent exclusive deals and unfair practices such as price fixing, they did not address broader socio-economic issues such as income inequality, worker exploitation, or environmental degradation. As a result, big businesses could still benefit from regulatory advantages, tax breaks, and other incentives, contributing to a growing wealth gap and political instability. In addition, anti-trust laws did not consider the impact of technological changes and innovation, which fuelled the rise of new sectors and new types of monopolies. For instance, in the 1920s, the emergence of radio broadcasting and the film industry produced new media conglomerates that wielded immense economic and cultural power yet faced little anti-trust scrutiny. In conclusion, anti-trust laws prior to the 1929 crash had several weaknesses that made the US economy vulnerable to monopolies and economic concentration. These included inadequate enforcement, lack of coordination between federal and state authorities, and narrow provisions. These shortcomings failed to prevent the stock market crash of 1929, which had far-reaching economic and social consequences and led to the introduction of new anti-trust measures in the following decades. The legacy of this period underscores the importance of effective anti-trust enforcement and regulation in promoting competition, innovation, and economic stability. It also highlights the need for a holistic approach that recognizes the broader social and environmental implications of corporate power.


October 29th, 1929

The stock market crash that occurred on October 29th, 1929, also known as "Black Tuesday," was a significant event that marked the beginning of the Great Depression in the United States. This event is widely recognized as one of the most severe financial crises in American history, causing widespread panic and leading to economic turmoil that lasted for years. The origins of the crash can be traced back to the "Roaring Twenties," a period of economic prosperity and cultural revolution that followed World War I. During this time, the stock market experienced rapid growth, with investors pouring large sums of money into the market on the promise of quick returns. The market had become overvalued, and stock prices had reached unsustainable levels by late 1929. On October 24th, 1929, also known as "Black Thursday," the market experienced a sudden drop in stock prices, leading to panic selling by investors. This was followed by a brief recovery, but the market continued to experience significant fluctuations over the next few days. On October 29th, 1929, the market experienced a severe crash, with stock prices plummeting and investors losing their life savings in a matter of hours. The causes of the crash were complex and multifaceted but can be attributed to several factors. One of the main reasons was the overvalued stock market, which had led to a speculative bubble. The market had become detached from underlying economic fundamentals and was driven solely by speculation and hype. Additionally, the Federal Reserve's monetary policy in the 1920s played a role in the crash. The Fed had kept interest rates low, making it easy for investors to borrow money to invest in the market. However, when the Fed raised interest rates in 1928, it had a significant impact on stock prices, leading to a decline in investor confidence. The crash had significant consequences on the American economy and the broader global economy. In the aftermath of the crash, millions of Americans lost their jobs and life savings, leading to widespread poverty and economic hardship. The crash had a ripple effect that spread throughout the world, leading to a global economic downturn that lasted for years. The Great Depression that followed the crash had a profound impact on American society, leading to significant changes in economic and social policies. The New Deal, a series of economic and social reforms implemented by President Franklin Roosevelt, aimed to address the root causes of the crisis, and rebuild the economy. The reforms included the creation of new government agencies, such as the Social Security Administration and the Federal Deposit Insurance Corporation, which aimed to protect citizens from economic instability. In conclusion, the October 29th stock market crash was a significant event that marked the beginning of the Great Depression. The crash was caused by a combination of factors, including an overvalued stock market, a speculative bubble, and the Federal Reserve's monetary policy. The consequences of the crash were severe, leading to widespread poverty and economic hardship. However, the New Deal reforms implemented in response to the crisis helped to rebuild the economy and reshape American society. The crash and its aftermath serve as a powerful reminder of the importance of responsible economic policies and the need to address systemic issues that can destabilize financial systems.


The Governments response

The stock market crash of 1929, known as the Black Tuesday, was a massive setback for the United States and the world economy. The collapse of the stock market led to a severe economic depression that lasted for more than a decade. The United States government responded to the stock market crash with several policy interventions to contain the negative consequences and stimulate economic growth. One of the primary ways the government responded to the crash was through the establishment of the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts aimed to restore trust in the financial system by requiring companies to provide investors with reliable and transparent information about their securities. In addition, the laws established the Securities and Exchange Commission (SEC) to regulate securities transactions, including brokerage firms and exchanges. The SEC also had the power to investigate and prosecute cases of insider trading and other securities fraud, which helped to prevent market manipulation. The government also intervened through monetary policy, specifically through the Federal Reserve's efforts to restore liquidity to banks. In response to the crisis, the Federal Reserve lowered interest rates and increased the money supply through open market operations. The central bank also established the Reconstruction Finance Corporation, which provided loans to banks, insurance companies, and other businesses to stimulate economic growth. Another significant policy response was the New Deal, which was a series of programs and policies implemented by President Franklin D. Roosevelt's administration to address the economic crisis. The New Deal included programs such as the Civilian Conservation Corps, which provided jobs for young men; the Works Progress Administration, which created jobs through public works projects; and the National Recovery Administration, which aimed to stabilize prices and promote fair competition through industry codes of conduct. Furthermore, the government established the Emergency Banking Act, which authorized the federal government to regulate and support banks during the crisis. The law allowed the government to close insolvent banks temporarily and provided funds to banks that were struggling to meet withdrawals. In conclusion, the government's response to the stock market crash of 1929 was comprehensive and far-reaching. The interventions aimed to restore confidence in the financial system, encourage economic growth, and prevent future market collapses. The policies that the government implemented, such as the establishment of the SEC, monetary policy, and the New Deal programs, helped to mitigate the negative consequences of the crash and shape the economic landscape for years to come.


Here are some of the measures that were taken by the US government after the stock market crash of 1929: 1. The government created the Securities and Exchange Commission (SEC) to regulate the stock market and prevent insider trading and other fraudulent activities. 2. The Federal Reserve increased the money supply to prevent banks from failing and to encourage lending. 3. The government established the Reconstruction Finance Corporation (RFC) to provide loans to struggling businesses, including banks and railroads. 4. The government raised tariffs on imported goods to protect American businesses. 5. The government established the National Recovery Administration (NRA) to encourage cooperation between businesses and labor unions and to set minimum prices and wages. 6. The government passed the Emergency Banking Act, which authorized the Treasury Department to inspect and close banks that were failing. 7. The government established the Agricultural Adjustment Administration (AAA) to provide farmers with subsidies to reduce crop surpluses and stabilize prices. 8. The government-sponsored public works programs, such as the Civilian Conservation Corps and the Works Progress Administration, to provide jobs and stimulate economic growth.


The 1929 stock market crash serves as a grim reminder of the dangers of speculation and the risks associated with unfettered market practices. The lessons learned from this event have been etched into the minds of economists, policymakers, and investors throughout the years. One of the key takeaways from the crash was the importance of regulating the financial market to prevent the reckless actions of investors and banks.


Today, the effects of the 1929 stock market crash can still be felt. Government regulations such as the Securities Exchange Act and the creation of the Federal Reserve System were implemented in response to the crash to avoid a recurrence of a similar incident. The crash also highlighted the importance of diversification in investment portfolios, which many individuals and organizations still practice to this day.


Moreover, the Great Depression, which followed the stock market crash, led to massive job losses, underemployment, and poverty that had long-term socioeconomic effects. It taught authorities to be more proactive in managing the economy and to adopt a more robust social safety net in times of crises. Additionally, the crash revealed that stock market values could be driven by irrational exuberance that could lead to the overpricing of securities. This insight has led to the development of various valuation models to help investors determine the intrinsic worth of assets.


Overall, the 1929 stock market crash demonstrated the importance of effective regulatory action and the need for a more cautious approach to investments. It still stands out today as a vivid example of how greed and speculation can lead to catastrophic outcomes.


Source:

· Adams, Walter, ed. The Structure of American Industry, 5th ed. New York: Macmillan Publishing Co., 1977.

· Aldcroft, Derek H. From Versailles to Wall Street, 1919-1929. Berkeley: The University of California Press, 1977.

· Allen, Frederick Lewis. Only Yesterday. New York: Harper and Sons, 1931.

· Alston, Lee J. “Farm Foreclosures in the United States During the Interwar Period.” The Journal of Economic History 43, no. 4 (1983): 885-904.

· Alston, Lee J., Wayne A. Grove, and David C. Wheelock. “Why Do Banks Fail? Evidence from the 1920s.” Explorations in Economic History 31 (1994): 409-431.

63 views0 comments

Comments


bottom of page