Black Monday: Causes - Business in United States of America

Black Monday

Black Monday: Reforms

Shortly after Black Monday, President Ronald Reagan ordered a study to be conducted on what caused the crash. The resulting exhaustive study of U.S. stock exchanges, the Brady report, offered potential explanations for the disaster. However, the Brady report was not the only study written. Literally scores of individuals, think-tank groups, business agencies, and government agencies such as the Securities and Exchange Commission (SEC) analyzed the crash. Given the nature of the problem and the number of different studies, it is not surprising that no one single cause or report was accepted by all involved.

Among the more widely accepted explanations of Black Monday advanced by scholars are the following. Program or computer trading, allowing computers to be involved in trades once certain guidelines were met, may have exacerbated the crash by causing mass sell-offs more quickly than humans could react. The market may have been widely overvalued, meaning that stocks were valued much higher than their worth. Portfolios may have been underinsured or uninsured. There may have been insufficient coordination within the exchanges. 

New York Stock Exchange traders join in the panic selling on Black Monday. (AP/Wide World Photos)

Other widely accepted scholarly theories of causes contributing to the crash include illiquidity, or the problem of individuals and corporations being unable to convert their holdings to cash; failure of technology (too much stock activity occurred on Black Monday, and the technology controlling trading could not handle it all); investments in derivative securities (options and futures); U.S. trade and budget deficits; market psychology or overconfidence; and international disputes among the world’s industrialized countries over monetary policy. In many ways, what all these explanations boil down to is that the U.S. stock exchanges had serious internal problems that were not addressed until it was too late. The end result was almost a complete collapse of the market structure. Fortunately, the U.S. market rebounded fairly quickly and recovered. More important, studies of Black Monday led to significant reforms of the stock exchanges.

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