key term - Stock market crash

Definition

A stock market crash is a sudden and significant decline in the value of stocks on a stock exchange, often triggered by panic selling and economic instability. The most notable crash occurred in October 1929, leading to the Great Depression, highlighting the fragile state of economies during the interwar period and the interconnectedness of global financial systems.

5 Must Know Facts For Your Next Test

1. The stock market crash of 1929 is considered one of the most significant financial disasters in history, wiping out millions of investors and destabilizing economies worldwide.
2. Prior to the crash, there was a period of rampant speculation in the stock market, with many people investing heavily without understanding the underlying economic conditions.
3. The aftermath of the crash led to a widespread loss of confidence in financial institutions and sparked bank failures across the United States and Europe.
4. The stock market crash exacerbated existing economic issues from World War I reparations and inflation, contributing to global economic instability during the interwar years.
5. Governments around the world responded to the crash with varying degrees of intervention, leading to significant changes in economic policy and regulation.

Review Questions

• How did the stock market crash contribute to the onset of the Great Depression?
  • The stock market crash served as a catalyst for the Great Depression by drastically reducing consumer and investor confidence. As stock values plummeted, individuals lost their life savings, leading to reduced spending and investment. This decline in economic activity resulted in massive layoffs and increased unemployment rates, which further deepened the economic crisis. The interconnectedness of global markets meant that the effects were felt not just in the United States but also in countries around the world.
• What were some factors that led to the stock market crash of 1929?
  • Several factors contributed to the stock market crash of 1929, including rampant economic speculation, where investors bought stocks at inflated prices without considering underlying values. Additionally, there was a lack of regulatory oversight in financial markets, which allowed for reckless trading practices. Furthermore, economic indicators like overproduction in various industries and an unsustainable credit boom created an unstable environment that ultimately led to panic selling when stocks began to fall.
• Evaluate the long-term effects of the stock market crash on global economies during the interwar period.
  • The long-term effects of the stock market crash were profound, leading to a rethinking of economic policies and practices around the world. Countries implemented stricter regulations on financial markets to prevent such speculation and instability from occurring again. Additionally, many governments adopted Keynesian economic principles, advocating for increased government spending to stimulate demand during economic downturns. The crash also facilitated social and political changes as people sought alternative economic solutions, influencing movements toward socialism and other ideologies as they looked for ways to cope with persistent unemployment and poverty.

Related terms

Great Depression:

A severe worldwide economic downturn that began after the stock market crash in 1929 and lasted through the late 1930s, characterized by high unemployment, declining output, and widespread poverty.

Black Tuesday:

The day on October 29, 1929, when stock prices collapsed dramatically, marking the beginning of the Great Depression.

Economic speculation: The practice of buying stocks with the hope that their prices will rise quickly, which contributed to inflated stock prices leading up to the crash.