The Wall Street Crash of 1929 was one of the most impactful events in the financial history of the United States that also influenced the flow of the global banking operations. When the Wall Street stock market evidenced a sudden crash on October 24, 1929 (“Black Thursday”), the global economy could not withstand the pressure and was forced into the Great Depression, which also affected the United Kingdom and its London Stock Exchange’s crash (Ganeri 2009). The image below depicts a photo of the Brooklyn Daily Eagle headline on October 24th:
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Newspaper Headlines I
Causes of the Wall Street Crash
Before analysing the impact of the Crash on the global banking system (see table Bank Failures II), it is essential to mention key points that explain the causes of the event. Among the reasons for the Wall Street Crash were the collapse of prices on land, the supply of food and goods exceeding the demand, too much speculation in the stock market, as well as the fact that the United States lent substantiate amounts of financial resources to European countries.
According to Amadeo (2017b) from The Balance, several days before the Crash, The New York Times released information about the exit of foreign investors from the stock market, short-selling, and margin sellers, which had a significant impact on spreading the panic. It is also noteworthy to mention that the Crash followed an “asset bubble,” which meant that the prices of stocks, housing, gold, and other assets were over-inflated, leading to the increases in the stock market by 20% every year since 1922 (Amadeo 2017a, para. 1). Lastly, the irrational spending that took place during the Roaring Twenties weakened the financial sector and thus made the stock market more vulnerable to changes that the economy could withstand had there been enough resources to do so.
From the social perspective, the global society (predominantly American and European) felt the impact of the Great Depression immediately. People thought that the stock market crash was their fault, that they had spent too much previously and were paying for it (Hanakova 2015). The middle class that followed the principle of “personal gains” lost many jobs and had nothing to do during the Depression (Hanakova 2015, p. 45).
Moreover, the mental attitude of the middle class changed significantly, leading to the shame of asking for help, to which they were not used. As mentioned by Hanakova (2015), “the majority of people were hit and hit hard. They were mentally disturbed you’re bound to know, because they didn’t know when the end of all this was coming” (p. 46). Overall, the society was in shock from the sudden changes that the stock market had brought.
As the consequences of the Wall Street Crash took their effect both in America and Europe, the majority of savers who had their money stored in banks wanted their finances bank due to the increased demand for money (Mishkin & Serletis 2011). However, the banks could not afford to return all of their money to savers due to issues such as the unwise lending of funds to stockbrokers and businesses with the lack of financial security (Marsh 2010). Therefore, when people started calling in their debts, the majority of banks could not return the money. The table below shows how many American banks failed in the aftermath of the Crash (based on Olson’s estimations):
Bank Failures I
|around 650||around 1,300||around 2,300||over 4,000|
It is noteworthy that the stock market crash sent banks into a crisis because many of them that wanted to liquidate their assets discovered that prices on stocks had fallen significantly, leading to the erosion of assets (Olson 2001). Following such erosion, the government started scrutinising the credibility of banks and assessing their credit ratings. This led to the increase in the role of relative liquidity of highly rated bonds (Levich, Majnoni & Reinhart 2002). Changes in credit rating changes subsequently led to the fluctuations in bond prices (Levich, Majnoni & Reinhart 2002).
If to mention the global impact of the great depression, it is crucial to note that banks of European countries also felt the effect of the stock market crash. For instance, the Bank of England had previously borrowed large sums of money from France and the United States for resisting the impact of the possible financial crisis (Robbins 2007). When the money was borrowed, the rates were at high discounts; however, after the crash, the increased above 4.5%, which significantly undermined the ability of the country’s banking sector to withstand the pressure of the Great Depression.
However, if to look at the aftermath of the Wall Street Crash and its impact on the banking sector, there was no unified or national banking crisis; rather, banking difficulties were divided into regions. As revealed by the research conducted by Wicker (2000), the New York banking system was less concerned with the crisis and had fewer bank suspensions. Also, the collapse of the Bank of the United States and Caldwell and Company may seem as events brought on by the Great Depression; although both of them would have occurred regardless of the crisis. It is also important to mention that the agricultural drought that took place in the South of the U.S. in 1930 contributed to the weakening of banks and led to the increased incidence of bank failures in regions that heavily relied on the agricultural sector (Wicker 2000)
. Therefore, there were two perspectives that analysed the impact of the Wall Street Crash: one viewed it as a dramatic event that undermined the integrity of the global banking system while another regarded it as a region-specific occurrence that had a larger impact on some areas over others.
Banks were one of the most significant points when it comes to discussing the Wall Street Crash and the Great Depression that followed it. Overall, the industry witnessed a 52% decline in operations between 1924 and 1933 (Salisbury 2010). This suggests that the U.S. economy and subsequently economies of countries with which it traded went through a shock and had to complete a long path toward recovery.
Overall, the Wall Street Crash can be considered a fate-changing event in the global history of banking and finance that allowed governments to learn on their mistakes and shape such financial systems that could withstand the pressure (Luyendijk 2015). Although, the financial crisis of 2007-2008 showed that the banking system was not perfect and still required improvements to be made in order to become truly productive.
Amadeo, K 2017a, Asset bubble: causes, examples, and how to protect yourself. Web.
Amadeo, K 2017b, Stock Market Crash of 1929 facts, causes, and impact, Web.
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Brooklyn Daily Eagle n.d.,. Web.
Ganeri, A 2010, The top ten events that changed the world, Power Kids Press, New York.
Hanakova, B 2015, Social consequences of the Wall Street Crash on 1930’s America. Web.
Levich, R, Majnoni, G & Reinhart, C 2002, Ratings, rating agencies and the global financial system, Springer Science, New York.
Luyendijk, J 2015, How the banks ignored the lessons of the crash. Web.
Marsh, C 2010, Great Depression & the new deal: Brother, can you spare a dime? American Milestones, Peachtree City.
Mishkin, F & Serletis, A 2011, The economics of money, banking, and financial markets, Pearson Canada, Toronto.
Olson, J 2001, Historical dictionary of the Great Depression, 1929-1940, Greenwood Press, London.
Robbins, L 2007, The Great Depression, The Ludwig von Mises Institute, Auburn.
Salisbury, P 2010, The current economic crisis and the Great Depression, Xlibris, Bloomington.
Wicker, E 2000, The banking panics of the Great Depression, Cambridge University Press, New York.