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In October 1929, the panic selling of shares on the Wall Street stock market led to a financial crisis. US banks ran out of money and businesses went bankrupt. As a result, millions of American workers lost their jobs. This period became known as the Great Depression.

Reasons for the Wall Street Crash

American businesses had boomed in the early part of the 1920s as consumer demand was rising for a wide range of goods. However, half of the population of the USA was too poor to afford these goods. This meant that US businesses were producing more than they could sell and so prices and wages began to fall.

People had begun to buy more and more shares in US businesses, as they believed that these shares would become more valuable as more and more products were being made to sell. Banks had also loaned out large sums of money, which people had used to buy shares. Everyone thought that they would end up being able to sell their shares for more than they had paid for them.

By the end of September 1929, people started to realise that the price of shares had become too high compared to the value of companies.

Black Thursday

The main American stock exchange, where shares were bought and sold, was on Wall Street in New York. The value of the shares sold on Wall Street had increased by around 120 per cent between 1925 and 1929. Once share prices started to fall in September 1929, increasing numbers of people tried to sell their shares before they became worth less than they had paid for them.

By the middle of October, people were selling their shares in a panic. Thursday 24 October 1929 became known as Black Thursday as 13 million shares were sold in one day. This was more than on any other day in 1929. Share prices fell so quickly that their value crashed to almost nothing.

Banks bought millions of shares to try to increase their value. However, many more millions of shares continued to be sold every day until the middle of November. The panic selling of shares that led to the sudden fall in share prices is now referred to as the Wall Street Crash.

Impact on banking

The immediate impact on banks was that many of them went bankrupt as they had run out of money. One of the worst bankruptcies was the New York City Bank, which closed in December 1930. As a result, 400,000 customers lost their savings.

Banks ran out of money because they had:

• lent money to people to buy shares that were now worthless
• bought shares to make a profit and spent all of their customers’ money
• bought shares to keep the prices up during the crash even though prices kept falling

Banks that still had cash in them found that customers rushed to withdraw their money in cash before the bank collapsed. As a result, some banks went bankrupt that might otherwise have survived.

Impact on unemployment

Before the crash there had been around 1.6 million unemployed people. However, by 1932 this figure had grown to around 12 million people - roughly a quarter of all people of working age in the US population.

The reason why so many people were unemployed is that hundreds of thousands of businesses shut down as a result of the crash. Some had borrowed money to keep going before the crash and could not afford to pay back their loans. Others had been hit by falling demand for goods as people had started to spend less and less, especially on goods they did not consider to be essential.

Most of the people who lost their jobs worked in the older industries, such as coal mining, textiles and steel production. However, by 1929 other industries, such as banking, domestic services and teaching, were also affected. Unemployment was particularly bad for unskilled workers, women and African Americans, who were more likely to lose their jobs first because of discrimination.

A vicious cycle had begun:

• fewer goods were sold
• businesses shut down
• unemployed workers had no money to spend

This cycle was part of the economic depression. Because it affected millions of people, it became known as the Great Depression.