Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Stock Market Crash of 1929

What it is:

The stock market crash of 1929 is the most famous stock market crash of all time. On just one day (October 24, 1929), panicked sellers traded nearly 13 million shares on the New York Stock Exchange (more than three times the normal volume at the time), and investors suffered $5 billion in losses.

How it works (Example):

The years preceding the stock market crash of 1929 were filled with irrational exuberance. Stock prices had risen across the board, even for companies that posted little profit, and investors were very optimistic that the general upward trend of the market and the economy would continue for some time.

The Dow Jones Industrial Average nearly doubled, rising from 191 in early 1928 to 381 by September 3, 1929. Prices began falling slightly but steadily, however, as investors began to take profits. Many economists were not sure what to make of the slide, and Irving Fisher, a well-known economist at the time, dismissed it as nothing serious.

Then on October 10, 1929, the Dow Jones Industrial Average closed above 350 for the first time in 10 trading days. This respite sparked profit taking, and the Dow Jones Industrial Average began falling again amid the selling. The selling became intense on Monday, October 23, and the market fell 6.3%. By October 24, Black Thursday, the selling frenzy reached a critical mass and turned to flat-out panic. The trading volume got so high that it delayed the ticker tape by over an hour, which created confusion and anxiety. Some exchanges were so overwhelmed that they closed early. The Dow Jones Industrial Average closed at 299.27 that day. The Dow Jones Industrial Average closed at 230.07 that day.

The stock market crash of 1929 is often associated with stories of investors and traders jumping out of windows after losing everything. However, not all was lost: a rally that started when Richard Whitey, then head of the New York Stock Exchange, calmly began buying shares of U.S. Steel and other companies. His confidence encouraged others to begin buying. This did little more than temporarily stem the tide, however, because from Black Thursday to October 29, 1929 (Black Tuesday), stocks still lost more than $26 billion of value and more than 30 million shares traded. After this dismal week, prices continued to fall, wiping out an estimated $30 billion in stock values by mid-November 1929.

The days surrounding the stock market crash of 1929 were especially painful for investors who had borrowed money to purchase stocks that had become worthless or close to it. The situation influenced what became a major turning point for the American economy because many of these borrowers, who had leveraged themselves considerably in an effort to participate in the bull market, were ruined financially. They had to sell everything to pay back their debts, and many couldn't pay them back at all. Thousands of banks failed as a result; businesses closed, unable to get credit; and the nation's disposable income fell precipitously.

Why it Matters:

Historians often cite the stock market crash of 1929 as the beginning of the Great Depression because it marked not only the end of one of the nation's greatest bull markets but also the end of widespread optimism and confidence in the U.S. economy.

As with many market reversals, the causes are numerous, intertwined, and controversial. For example, many cite the September 1929 passage of the Smoot-Hawley Tariff Act, which placed high taxes on many imported items, as a major contributor to the market's instability. Others note the huge amount of leverage investors had used to buy stocks, and some cite the scandal-ridden recall of British funds invested in the United States and the September 26 spike in the Bank of England's discount rate. Regardless, investors no longer regarded high corporate profits and dividends, high wages, readily available bank debt, a booming auto industry and a relative lack of stock market regulation solely as signs of better days ahead. They began to see them as signs of market ready for reversal.

Besides the dramatic effect on investor psychology, the stock market crash of 1929 contributed to the creation of a variety of new laws, organizations and programs designed to improve the country's infrastructure, further social welfare and prevent corporate fraud and abuses. These included the establishment of the Federal Depository Insurance Corporation and the passage of the Securities Act of 1933, the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934 and the Public Utility Holding Act of 1935. The panic caused by information delays also spawned faster ticker systems that could handle heavy trading days.