The 1920's were a time of unbelievable prosperity. The stock market was going through the roof and the United States seemed to have the formula for limitless prosperity. However, the same formula that generated all of that profit would also be the cause of Black Tuesday. For five years prior to 1929, the stock market had been characterized by rising prices; there was an enormous "bull market."
One of the causes for the stock market rising was the rising stock dividend. New investors entering the market, who viewed it as an easy way to get rich quick, propped up the stock market. However, a relatively small number of Americans had investments in the market at any one time. Rather, the constant influx of new investors coming in and old investors moving out ensured that new money was always floating around.
The stock market also grew due to the increase in personal savings.
A solemn crowd gathers outside the Stock Exchange ...
Stock Market
stock marketHigher wages meant that even average Americans now had surplus money to put into savings or invest in the stock market. It was also a relatively easy loan policy from the banks. At this time, banks made money more readily available at lower interest rates to more and more people. Although it is debatable whether this had a direct affect on the stock market, it's conceivable that many people took out loans not only to buy cars, but also to buy stock.
An over-production meant profits were being invested in new production. Since 1925, industries have been over-producing. The profits were then invested back into the business, investing in factories, new machinery, and more workers, which led to even greater overproduction. The increase in production gave the Americans faith in the company and encouraged them to buy more stock.
At this time there were no effective...