Module 3: The Stock Market Crash

Essential Questions

Why are some people rich and other people poor?

Is the economy fair?

What role should a government play in its citizens' economic welfare? 

The Stock Market Crash

The 1920s stock market was characterized by rampant speculation and a largely unregulated environment that contributed to widespread corruption. As the economy boomed following World War I, many Americans were drawn into the stock market, lured by the promise of quick profits and easy wealth. The lack of oversight allowed unscrupulous practices to thrive, including stock manipulation and insider trading. Shareholders, often inexperienced investors, were left vulnerable as they relied on optimistic projections and misleading information, unaware of the precarious nature of the market.

The practice of buying on the margin became a common strategy during this period, allowing investors to purchase stocks with borrowed money. This speculative approach amplified potential gains, but it also significantly increased risks. When the market began to show signs of instability, many investors were unable to cover their debts, leading to a rapid sell-off. The situation reached a breaking point on Black Tuesday, October 29, 1929, when the stock market crashed, resulting in a loss of billions of dollars in market value. The aftermath of the crash saw a cascade of bank failures, as financial institutions that had invested heavily in the stock market were unable to recover from their losses.

The unregulated nature of the stock market not only precipitated the financial collapse but also highlighted the need for reform. As investors lost their savings and countless businesses failed, public trust in the financial system eroded. The ensuing economic crisis prompted calls for greater regulation to protect shareholders and stabilize the market. In response, the government eventually implemented measures such as the Securities Act of 1933 and the establishment of the Securities and Exchange Commission (SEC) in 1934, marking a significant shift toward greater oversight and accountability in the financial industry. The lessons learned from the corruption and volatility of the 1920s stock market laid the groundwork for future reforms aimed at preventing such a catastrophic collapse from occurring again.