What Was Black Tuesday?
Black Tuesday, also known as the Wall Street Crash of 1929, was the worst stock market crash in US history. Black Tuesday was an abrupt end to the rapid economic expansion of the roaring 20’s, and is widely considered to be one of the causes behind the beginning of The Great Depression.
What Caused Black Tuesday?
On October 29, 1929, over 16.4 million shares were traded on the New York Stock Exchange (NYSE). This was four times the average volume at that time. Investors lost a total of $14 billion ($212 billion in 2020 dollars), and the Dow Jones Industrial Average (DJIA) fell by 12% in a single day.
The events on this day were preceded by a long chain of contributing factors that began almost a decade before.
Agricultural Crisis of the 1920’s
During World War I, the massive demand for agriculture was supported by high prices and plenty of competition from small farmers across the country. Following the end of the war, technological advancements in the industrial sector caused agriculture production levels to increase rapidly. Without the war, however, demand fell to pre-war levels.
Eventually, farmers were forced to decrease their prices in order to sell product, causing the values of their property and crops to fall. This resulted in widespread bankruptcies, loan defaults, and financial strain for a significant number of American farmers.
Readily Available Credit
At the start of The Roaring 20’s, many Americans moved to cities to pursue jobs in the growing industrial sector. For the first time in US history, the 1920 US Census found that more than 50% of Americans were living in cities; more lived in urban areas than in rural areas.
Fueled by post-war optimism, more people took out an increasing number of mortgages. Department stores and automobile manufacturers began offering credit, causing consumer debt levels to skyrocket. Beyond homes, cars, and household goods, many people began investing in the stock market for the first time (partially due to the availability of broker-issued credit).
This resulted in a number of eager investors borrowing in order to purchase stocks on margin. By the summer of 1929, brokers had lent out $8.5 billion of stocks on margin, which was more than the total amount of currency in circulation in the US at the time.
Beyond agricultural and credit-related issues, there were a number of other factors that caused instability in the stock market leading up to Black Tuesday:
- The influx of new investors who were eager to participate
- The expectation that post-war “good times” were there to stay
- Declining confidence in the stability of the dollar
Overall, these factors contributed to the Dow Jones Industrial Average increasing by a factor of ten over the course of the 1920s. This was largely driven by speculation (as new investors did not have the resources to analyze or monitor investments), along with the desire to transfer their savings to a form of money that was more likely to hold its value. In other words, the market was propped up on a shaky foundation.
London Stock Exchange Crash of September 1929
The London Stock Exchange Crash of September 1929 was one the largest events attributed to the cause of Black Tuesday. Clarence Charles Hatry was a prominent English businessman and investor who also ran a stockbroking business. In 1929, he bought United Steel in an effort to consolidate the steel business, but struggled to secure funding.
In order to obtain collateral that would be used to raise money for the purchase, he issued fake securities in his existing companies. Eventually, the public discovered that he was over-extended and his remaining sources of funding called for their loans to be repaid. He confessed to his accountant on September 18th and was arrested for fraud two days later.
Following his arrest, all shares of the Hatry Group were suspended (worth about £24 million). Many of his investors lost a significant amount of money, causing them to pull investments out of the US market to recoup some of their losses. The collapse shattered investor confidence around the world and prompted a warning from UK chancellor Phillip Snowden that, “The Wall Street boom was nothing but a ‘speculative orgy.’"
What Was Black Thursday?
By early October, prices began to fall as investors sold off stocks when they realized that the market was artificially inflated. As the value of stocks fell, brokers issued margin calls in an effort to limit their losses, but this only caused the market to fall further. On October 10th, the DJIA closed above 350 for the first time in ten trading days, sparking profit taking that eventually led to mass selloffs.
On Black Thursday (October 24th, 1929) the market lost 11% of its value when it first opened, triggering an even larger increase in selloffs. A staggering 13 million shares were sold over the course of the day. In fact, stocks were being sold so quickly that the ticker tape could not keep up, preventing brokers and investors from knowing the prices they were being sold at. Aiming to stop the freefall, banks scrambled to buy up large amounts of stock and the market managed to close only 6 points down – but the worst was yet to come.
What Was Black Monday?
When the markets reopened on Monday, widespread panic selling and margin calls caused prices to drop once again. The market dropped another 13% as over 9 million shares exchanged hands, virtually wiping out the efforts made by bankers on Black Thursday.
What Happened on Black Tuesday?
Despite the devastating losses of the previous four days, Black Tuesday was far worse. As the market opened, panic selling continued as investors tried to exit their positions and recoup some of their losses. But many were too late: Some stocks were reported as having no buyers at any price. By the end of the day, 16.4 million shares were traded on the NYSE, the DJIA fell by another 12%, and investors had lost over $14 billion.
From Black Thursday to Black Tuesday, the stock market lost over $26 billion in value and over 30 million shares were traded. After this devastating week, prices continued in freefall, wiping out an estimated $30 billion in stock value by mid-November 1929.
The Lasting Effects of the 1929 Stock Market Crash
Before the crash, many people felt that the stock market was a reflection of the booming economy and invested their life savings in hopes that it would continue to go up. Many who had not invested were also affected since some bankers invested consumers’ money without their permission or knowledge, ultimately losing it entirely. Between the loss in value of their investments – and the repayment of loans and borrowed stocks – many people’s life savings were completely wiped out by the crash.
After losing confidence in the banks, many consumers chose to withdraw their savings all at once, causing a wave of bank runs across the country. Due to low reserve requirements, banks did not have enough available cash to meet consumer demand. They were forced to liquidate assets at below-market prices, leading to insolvency and bankruptcies. Roughly 650 banks failed in 1929, followed by an additional 1,300 in the next year.
Consumers weren’t the only ones affected by the crash: Many businesses, public utility companies, banks, and investment trusts had also invested. This led to a dramatic decline in production and money supply – along with mass layoffs – as businesses lacked the funds to pay their employees. Aiming to increase domestic spending and aid businesses, President Hoover introduced the Smoot-Hawley Tariff in 1930 which increased tariffs on imported goods. However, foreign countries responded by boycotting and placing tariffs on American products, directly harming American producers desperate for sales.
The effects of the crash were felt by the entire country for years. By 1932, stocks were only worth about 20% of their value in the summer of 1929. In fact, on July 8, 1932, the market hit a 20th-century low of 41.22 – 89% lower than its peak of 381.17 on Sept. 3, 1929. By 1933, almost 50% of American banks had failed and nearly 15 million people (30% of the workforce) were unemployed.
The Great Depression Ripple Effect
The Great Depression caused a ripple effect that was largely influenced by newly-elected President Franklin Roosevelt and the introduction of The New Deal. This was a set of programs, regulations, and initiatives that targeted the "three Rs": relief, recovery, and reform.
Relief: A New Way of Life
Aiming to provide relief to unemployed people and underdeveloped areas, millions of new jobs were created through the introduction of tens of thousands of public works projects. This led to the development of new bridges, airports, schools, and infrastructure, employing millions of people in construction, trades, and labor. Significant aid to the agricultural sector encouraged a return to farming, and the repeal of the Smoot-Hawley tariffs helped increase demand for American goods.
While these new projects provided some relief, the 1930s were a far cry from the boom of the 1920s. Frugality became the new normal as people reduced their incomes and made do with what they had. Cheaper cuts of meat, beans, soups, and homemade bread became staples, and some housewives fashioned clothes out of flour bags and feed sacks.
Recovery: Defeating Deflation
The economic instability and deflation that resulted from the stock market collapse pushed consumers to pull money out of banks and invest in other forms of currency. Investments in commodities, gold, and bonds became popular as consumers valued stability.
The mass conversions of dollars to gold eventually led to the suspension of the Gold Standard through the Gold Reserve Act of 1934. This move increased money supply, and effectively devalued the dollar in order to reduce deflation. This caused interest rates to fall and stimulated consumer and government investment in durable goods.
Reform: Financial Changes Born Out of Black Tuesday
In spite of the hardships caused by the event, a number of major regulatory changes for the financial industry were born out of Black Tuesday:
The Federal Deposit Insurance Corporation (FDIC) was created to insure consumer deposits in eligible financial institutions.
The Glass-Steagall Act was created to establish a separation between commercial banking, securities, and investment businesses.
The Securities and Exchange Commission (SEC) was created to regulate stocks, bonds, and other securities.