An Asset Bubble In The 1920's

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First and foremost, it is important to have a glimpse of the events and history that eventually lead to the crash. Ultimately, the stock market crash was the result of an asset bubble in the 1920's (2). An asset bubble is when the prices of a resource or commodity become over inflated (2).

During the 1920's, the United States stock market underwent a rapid expansion, reaching its peak in August of 1929 (1). Between the years of 1922 to 1929, the stock market had gone up nearly twenty percent per year (2). Eventually, many Americans were investing in the stock market thanks to the financial invention of "buying on margin" (2). Buying on margin allowed people without the funds to borrow money from a stock broker or banker to buy stocks only …show more content…
Investors became convinced that stocks were a sure thing and borrowed heavily to invest more money into the market (3). Many investors even mortgaged their homes and foolishly invested their life savings into hot stocks (4). Though, few people studied the finances and underlying business of companies whom they invested (4).

Most investors never even thought a crash was possible as in their minds the market always went up (4). During the 1920's, investors aggressively purchased shares (4). They were comforted by the fact that stocks were considered extremely safe by most economists due to the powerful economic boom (4).

Banks also played a big role in the creation of this asset bubble. In the 1920's, there were no regulations on the amount of minimum capital required to start a bank and no rules regarding the number of reserves allowed to be lent out (5). As a result, there were a huge number of banks popping up in America everyday (5). Many of these banks themselves would invest depositors' money into the stock market …show more content…
This was an attempt to limit securities speculation and cool the overheated economy and stock market (4). However, rates on broker loans were unnaturally increased making it more difficult on investors (5). When borrowers were unable to pay loans, brokers would sell their stocks which wiped out savings and caused panics (6). These higher interest rates eventually caused economic activity to slow down in the U.S. (6).

Later in the 1920's, the stock market could not stay stabilized when such a huge amount of money was invested in and borrowed from it through margin buying (5). In addition to this, production in the U.S. had declined and unemployment had risen (1). Also, wages were lowering, there was a proliferation of debt, a struggling agricultural sector, and an excess of bank loans that could not be liquidated (1). All these factors left stocks in larger excess of their actual values (1). By October 1929, a powerful bear market had commenced
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