In 1929 an investor called Will Payne stated that it was so easy to make money on the Wall Street Stock Exchange that it was no longer a gamble. A gamble is when someone loses and someone gains, here everybody was winning. In an article titled Everybody Ought to be Rich, John Jaskob the author proposed a get rich scheme by saying that if $15 per month is invested in stocks then this money can be converted to $80,000 over a period of 20 years. In 1928 President Coolidge said, "No Congress of the US ever assembled on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment......and the highest record of years of prosperity.” Just before the 1929 stock market collapse a journalist asked a speculator about the profitability of investing in the stock market. The speculator replied, "One investor buys General Motors at $100"(he meant a GM share) "sells to another at $150, who sells it to a third at $200. Everyone makes money". From 1925 to 1929, the ‘Boom Period’ every share in the stock market seemed to be going up and industrial sector shares more than trebled in price. Stocks of RCA (Radio Corporation of America) were traded at $2 in 1921 and $500 in 1929. This was the magic of the bubble, a bull market in which Keynes ‘Animal Spirits’ took over entrepreneurs and speculators. People were buying because everybody was buying shares as a result all and sundry wanted to take part in stock investing. During the 1920s Americans believed in the ‘new paradigm’ an era of capitalist upswing and President Calvin Coolidge believed that the prosperity will go on forever. In reality it was the herd instinct of the investors which created panics and rushes in the market. In September 1929 the New York Times recognized the universal fact that what goes up must come down by commenting, “It is a well-known characteristic of boom times that the idea of their old unpleasant way is rarely recognized as such.” (Wall Street Crash) (Brooks, Mick. 1929. Can it happen again? Brooks, Mick. 1929. Can it happen again?)

The new economic era of boom began after the end of World War I. During that timeEurope was struggling to get on its feet and the United States was prospering as a major creditor of the Allied nations. The mass production system was applied to the manufacture of cars and other industrial as well as commercial products. Electricity became available for manufacturing and industrial purposes. Together with numerous inventions and innovations, the advent of electricity and mass production changed the economic outlook of America forever. Wireless technology was introduced to the masses and numerous radio manufacturers and radio stations began operations, General Motors and Ford manufactured cars for the middle class, an aviation industry under Boeing was established; in general, existing companies began to expand and many new companies entered the market. As a result wages began to go up and consumer spending on luxury and comfort goods increased. Americans experienced an unprecedented rise in their standard of living.

From 1920 to 1923 President Warren G. Harding who was a laissez Faire capitalist and Republican advocated and pursued economic policies which were aimed at the reduction of taxes and regulations and allowed unrestricted monopolies to form. As a result of his policies inequality of wealth and income reached record levels. When Calvin Coolidge assumed office in 1923 he allowed the Harding policies of minimal government intervention to continue. Coolidge used to say, ‘The business of America is business.” During the Coolidge presidency the stock market began its spectacular growth. The top level of tax rates was lowered to just 25% and the Supreme Court made a ruling which further relaxed intervention and control of monopolies by the government. By 1928 inequality of wealth reached such a level that half of the American population was living below the poverty line. When President Hoover came in to office, during the seven months up to the crash of 1929 consumption was down, there was an inventory backlog three times the figure for the preceding year; the construction industry had been experiencing a slump since 1926, inflation was increasing and automobile sales were down by a third. A recession began in August before the crash in October. (Tanner, Neal. Overview: The Great Depression)

Just as the bubble was created by an extremely bullish market the crash and collapse of the market was caused by the reversal of the bubble, a panic selling bearish market. In order to understand how the crash happened and what caused it we have to indulge in some basic economics. The capitalist system of the economy, especially a laissez faire one with minimal governmental intervention depends on the recycling and reinvestment of the surplus value or the profit obtained from the working class population employed in the production process. This surplus value is the property of the owner of the business or production process who owns the business in the form of shares. An ordinary and preference share is entitled to a dividend which is a portion of the surplus value or profit not reinvested in the business. The Stock Exchange allows shares of companies to be floated on the open market; therefore shares are transferred from one person to another. This operation is very similar to the exchange of second hand possessions; the original manufacturer does not gain anything from second hand transfers. Just the same way listed companies do not profit from transfer and sale of shares from one person to another on the stock market. However, if a companies shares are selling at a very high price on the stock exchange then that company can raise more finance by issuing new shares at a premium. This is a fundamental source of finance for companies. (Brooks, Mick. 1929. Can it happen again? Brooks, Mick. 1929. Can it happen again?)

Investors in the stock exchange assess the value of shares on their profitability or price earning ratio, declared dividends and the demand for shares. Speculation involves an estimate of the future profitability of shares. Hence, not only does the stock exchange react to current news regarding companies and their profitability it also reacts on the perceived or estimated future profits of a share. When profits are expected to rise, investors become bullish and start buying shares. When major investors move in the market towards a bullish direction many people follow their lead in what is called a ‘herd mentality’. The bubble which was created by serious investors who had speculated future profitability starts expanding and blowing itself up. Investors gain in terms of dividends as well as capital profit from sale of shares. In the bubble situation share prices are increasing because people are buying shares and people are buying shares because share prices are increasing.

Almost a century ago Worlds Work advised: Individual stocks—if carefully selected—can. . . play a role in a well-diversified investment program. . . . And it’s important to understand that buying any individual stock should involve extensive homework. The World’s Work is not opposed to industrial companies, nor to investment in industrial companies of established reputation by even the very small investor of limited knowledge, nor to such investment in new companies by businessmen. But it is unalterably opposed to the investment of savings by inexperienced people in new, untried, poorly backed, or wildly financed enterprises of a commercial nature. The Bullish market of 1925 to 1929 forgot this important advice. (Statman, Meir. A Century of Investors)

On Friday, September 6, 1929 the New York Times displayed the headline, BABSON PREDICTS 'CRASH' IN STOCKS, Says Wise Investors Will Pay Up Loans And Avoid Marging [sic] Trading. Another headline read FISHER VIEW IS OPPOSITE, Declares No Big Recession In Market Is Due, Because Inventions Are Adding To Health. On Thursday, October 24, 1929, the headlines were PRICES OF STOCKS CRASH IN HEAVY LIQUIDATION, TOTAL DROP OF BILLIONS and PAPER LOSS $4,000,000,000, 2,600,000 Shares Sold In The Final Hour In Record Decline. On Tuesday, October 29, 1929 the headlines were screaming STOCK PRICES SLUMP $14,000,000,000 IN NATION-WIDE STAMPEDE TO UNLOAD; BANKERS TO SUPPORT MARKET TODAY. Panic had set in and everyone was rushing to sell share and mitigate losses. Immediately after the market opened on the Black Thursday prices began to slump so fast that all the profit and gain made in the previous year was wiped out. During the period October 24 to November 13 US $30 billion was lost permanently by the US economy. The Federal Reserve reacted by lowering the interest rate from 6 to 4 % and increasing the money supply. Critics say that these measures were insufficient and eventually the collapses of the Wall Street Stock Exchange lead to the Great Depression. (Headlines of 1929 Stock Market Crash)

In 1890 The Chicago Tribune had pointed out "In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some greater fool could be depended on to take the property off their hands and leave them with a profit.” The crash of 1929 took everyone by even when they knew that they were treading on thin ice and that the bubble could at any moment. There have been many theories relating to the exact cause of the crash. Some analysts have declared that Massachusetts Department of Public Utilities was responsible for the crash others have cited other companies and incidents responsible for the crash. In his book the great crash on 1929 Galbraith notes "What first stirred these doubts we do not know, but neither is it very important that we know.” It was the panic that set in which really caused the 1929 crash, Galbraith writes, "That day 12,894,650 shares changed hands, many of them at prices which shattered the dreams and the hopes of those who had owned them....The panic did not last all day. It was a phenomenon of the morning hours....the uncertainty led more and more people to try to sell. Others, no longer able to respond to margin calls, were sold out. By eleven-thirty the market had surrendered to blind, relentless fear. This indeed was panic.”
People blamed the overpricing of stocks for the 1929 crash. However, analysts suggest that if P/E and P/D ratios are considered then the prices do not seem to be too high. Massive fraud and illegal activity has been suggested as a possible cause but analyst again believe that there was little illegal and insider trading. Margin buying could be a potential reason for the collapse since drags wider layers of people in to the collapse. In margin buying investors bought stock with bank loans by putting a face down value on the stock only. They figured that when they made the capital profit on the stocks they would be able to pay back the remaining figure on the stock. But this strategy solely depended on winning again and again. When stock prices started to go down, investors did not have enough money to pay back their loans and the banks who themselves had invested in stocks were not able to give loans or satisfy deposits.

After the 1929 crash new regulations were imposed by the government to protect investors from fraud, hype and shoddy stocks. The Securities and Exchange Commission (SEC) was established to monitor companies, issues laws and regulations and to punish violators. Changes to US GAAP was made to allow more transparency in financial statements so that financial statements and annual report were user friendly and displayed a true and fair view. In 1933 the government passed Glass-Steagall Act which prohibited any connection between commercial banking and investment banking. Nearly 4000 banks went bankrupt in the 1929 crash because everyone wanted to extract their deposits and the banks themselves had lost their investments in the stock market during the crash. (The Cause of 1929 Stock Market Crash)

The 1929 Wall Street Crash is now area of economic study, a land mark in history when people forgot that what goes up must come down. Due to this event in US history, Americans realized the fallacy of laissez faire capitalism and the business of America was indeed business but to ensure that business continues.