The Wall Street crash of 1929 leading to the Great Depression

October 25 1929 is remembered as the BLACK FRIDAY when suddenly a major sell off in the New York Stock Exchange, also known as the GREAT CRASH, led to world biggest financial crises and to the Great Depression.

The story is pretty known so rather than going into the details of the facts let's focus on the elements that could have alerted about the upcoming problems.

The 20s were fabulous years: people wanted to forget the war and the pandemic and simply have fun. Americans started learning how to play in the stock exchange and everybody was getting rich buying and selling stocks that were always growing in price.

Excess leverage is the first important element here: people could borrow dollars (basically against any guarantee) to to buy stocks. Average Joe could easily borrow from his broker up to 2/3 of what he was investing as a standard procedure. Easy credit and excess leverage are KEY ELEMENTS in creating a bubble.

When the stock exchange crashed they got plenty of margin calls and if they were not able to provide fresh new cash the broker was closing their position to recover the borrowed money. This type of forced selling heavily accelerated and deepen the crash. The stock exchange lost 23% in two days reaching a total loss of 89,2% in the next few years.

What was the pin that made the bubble burst: the price of the stocks were so high that they did not respect anymore the value of the their companies. a decrease in price of commodities (especially wheat) and a decline in the industrial production created a confidence crises that led people to start selling their stock.

IMPORTANT ELEMENTS: Excess leverage, easy credit, loss of confidence.