Stock

Khaled Bitar

What were the causes of the 1929 stock market crash and the 1987 stock market crash? What are the differences between the causes?

In the 1920s stock was first issued by companies. Companies issued stock after they went public in order to make money. When traders buy stock, they were buying from the company and a stake in the company.

On October 24, 1929, (a.k.a. Black Thursday) the stock market fell 9% and five days later the market fell an unprecedented 17.3%. About 29 million shares of stock changed owners causing, at the time, the biggest stock market crash in the history of the United States.

In the decade before the crash, America was thriving and production was soaring. The GNP increased by 40% and average income grew 30% throughout the decade. There was an abnormally high level of investment and traders were overwhelmed with confidence.

When the stock market crashed on Black Thursday, traders were still confident because of President Hoover's declaration that a recovery was imminent.

Despite the general optimism, the market crashed again causing the great depression. The effects were devastating. Over the next three years, the unemployment rate rose to 13.6 million people and GNP decreased 45 million dollars.

There are many causes to the 1929 stock market crash including speculation, WWI, Foreign investment, and a scandal that could have played a minor role.

The 1929 stock market was a bull market fueled by speculation. Speculation inflated stock prices beyond what they were worth because of the large amount of traders. Speculation is when traders think that a stock has much more value and potential then it really does. Traders would buy a stock that they think is thriving and when they realize that the company is losing money, they sell causing the market to decrease. (i.e. people investing in ebay and then selling after seeing ebay's earnings.)

Many investors were not very experienced and they believed that whenever their stock went down, they felt selling was the best option which fueled the crash even further.

Because of the thriving market, many loaned money from banks and invested in the stock market. When it crashed, they could not pay back the loans and the banks lost money. The market misled the banks as they thought loaning traders money would be very lucrative.

The Federal Reserve was a cause of the 1929 stock market crash because it essentially owned the government and fueled the speculation. The Federal Reserve was a private organization made up of private bankers and investors. The Federal Reserve would loan the government money and then the government would have to pay them back with taxation of all citizens of the United States. This would control inflation because all the people would be taxed and they would not be as wealthy.

The Fed controlled the government because they chose how much money to coin and the government could not control the quantity of money being put into circulation. The Fed would coin more money based on how much they though people would earn; the extra money, obviously created the speculation because people were led to believe that the economy was thriving so they invested.

Another cause of the 1929 stock market crash was the liquidation of British investments in the Unites States market. Many British citizens sold because of anxiety after the Haftry scandal.

Charles Haftry was a business man in England that was found guilty of a plot that issued false securities to finance companies he owned. He would lead people to speculate that his companies were thriving; however, they were losing money.

When he was caught he was forced to pay the English banks more than 65 million dollars. Because he was unable to pay, British banks took the heat of the disaster prompting the government to make new laws. The British in the US market sold their stock because of their anxiety. The British caused the market to decrease and people were starting to sell after the british did.

This theory is not likely to be a significant cause; however, it did play a minor roll in the crash.

Some analysts believe that WWI was a cause of the crash because the gold standard lacked the ability to support the economy after World War I. People were in the market to recover from the war and they were using loans to buy the stock.

The speculation theory is the theory with the most evidence to support it. The total value of stocks was 27 billion dollars in '25 and it increased to 87 billion in the months leading up to the crash. The Dow increased by 218.7% from '22 to '29. The utility stocks were selling for three times more than they are worth because of the speculation.

Forty-seven years and 360 days removed from the 1929 stock market crash, the market crashed again. It fell 23%; almost twice as much as the crash in 1929. This crash was unforeseeable and it only lasted one day.

Program trading has been cited as the major cause of the 1987 stock market crash. Program trading is a very effective way to make small profits without the risk of losing a large sum of money.

Traders program a computer to sell stock if it goes below a certain price. The computer does not take into account P/E ratios, analysts' opinions, or tendencies in the market. It also buys in another closely related stock at a set price.

For program trading to succeed the computer has to sell the stock and buy other stock within a second; the computer can make up to 60 transactions a minute.

Another popular type of program trading is buying futures. Traders would buy the value of a certain industry (such as pork) and sell it at a date later. Whenever it appeared that the market was headed downward, the computer was programmed to sell the future and buy another future. This way no one would lose more they are comfortable losing.

There is a spread called a premium between the futures market of the S&P 500 futures market and the S&P 500 stock market. When the premium reaches a certain level, the computer buys in the future market and the stock market; whichever was higher. The computer is programmed to buy the higher end of the spread and sell the lower end of the spread.

On Black Monday, the market fell below a certain price and all of the computers started to trade. There was an abundance of computer training, so all of the computers crashed and could not trade. On other computers, they would trade stock that they were not supposed to and there were billions of transaction per computer.

When the future market was dissipating, the computer would buy stocks, and traders would jump around from