Summary

The Great Crash of 1929, also known as the Wall Street Crash of 1929 or simply the Great Crash, was a major crash of the US stock market that occurred in the autumn of 1929. It began in September and ended in late October, when stock prices on the New York Stock Exchange also collapsed.

It was the most devastating stock market crash in the history of the United States, considering the full extent and duration of its consequences. The Great Crash is primarily associated with October 24, 1929, called Black Thursday, the day of the largest stock sale in U.S. history, and October 29, 1929, called Black Tuesday, when investors traded some 16 million shares on the New York Stock Exchange in one day. The crash, which followed the London Stock Exchange crash in September, marked the beginning of the Great Depression.

The "Roaring Twenties", the decade after the First World War that led to the crash, was a time of wealth and excess. Building on postwar optimism, rural Americans migrated to the cities in huge numbers during the decade in hopes of finding a more prosperous life in America's ever-growing industrial sector.

Despite the inherent risk of speculation, there was a widespread belief that the stock market would continue to rise forever: on 25 March 1929, when the Federal Reserve issued a statement warning of widespread speculation, a 'mini' crash occurred as investors began selling stocks at a rapid pace, exposing the shaky foundations of the market. Two days later, banker Charles E. Mitchell announced that his company, National City Bank, would provide a $25 million credit line to halt the market's downward slide. Mitchell's move led to a temporary pause in the financial crisis and the interbank lending rate was reduced from 20 to 8 percent. However, the US economy was showing ominous signs: Steel production fell, the manufacturing sector was sluggish, auto sales were down, and consumers were accumulating large debts due to the existence of cheap credit.

Despite all the danger signals in the economy and the stock market trading suspensions in March and May 1929, stocks continued to rise in June and gains continued almost unabated until early September 1929 (the Dow Jones average gained more than 20% between June and September). The market was in the midst of a nine-year run in which the Dow Jones index increased tenfold, peaking at 381.17 on September 3, 1929. Shortly before the crash, economist Irving Fisher famously proclaimed "Stock prices have reached what looks like a permanently high level." The optimism and economic gains of the big bull market were shaken after a widely publicized prediction by financial expert Roger Babson in early September that "a crash is coming and it could be terrible." That's why the initial September drop was dubbed the "Babson Crack" by the press. This was the beginning of the Great Crash, but until the onset of its fierce phase in October, many investors viewed the September "Babson Crack" as a "healthy correction" and an opportunity for further stock buying.

On 20 September 1929, the London Stock Exchange collapsed when leading British investor Clarence Hatry and many of his associates were imprisoned for fraud and forgery. The London crash significantly weakened the optimism of American investment in foreign markets, and in the days leading up to the crash, the market was highly volatile. Periods of selling and high trading volumes were interspersed with short periods of price rises and recoveries.

Share sales intensified in mid-October. On 24 October, "Black Thursday", the market lost 11% of its value at the start of trading. The huge volume meant that the price recording on the teletype used by stockbrokers around the country at the time changed hours late, so investors had no idea of the gross price of the shares available for trading. Several top Wall Street bankers met to find a solution to the panic and chaos in the market. The meeting included Thomas W. Lamont, deputy head of Morgan Bank, Albert Wiggin, head of Chase National Bank , and Charles E. Mitchell, president of National City Bank of New York. They selected Richard Whitney, vice president of the New York Stock Exchange, to act on their behalf.

With the financial backing of bankers behind him, Whitney made an offer to buy 25,000 shares of US Steel at $205 per share, well above the current market. As traders watched, Whitney then made similar offers on shares of institutional listed companies whose prices determined market sentiment. The tactic was similar to the one that had ended the Panic of 1907 and succeeded in stopping the slide. The Dow Jones Industrial Average recovered, closing down only 6.38 points for the day.

On 28 October, "Black Monday", an increasing number of investors whose positions required further capital to be maintained decided to exit their positions by selling their shares; the fall continued with a loss of 38.33 points, or 12.82% of the Dow index, a record fall for the day.

On October 29, 1929, "Black Tuesday" hit Wall Street as investors sold about 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, bankrupting thousands of investors. The next day, the panic selling of stocks reached its peak with some stocks having no buyers at any price. The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 23% in two days.

On October 29, William C. Durant joined forces with members of the Rockefeller family and other financial giants in a concerted effort to buy a large number of stocks to show the public their confidence in the market, but their efforts failed to stop the great fall in prices. The sheer volume of shares sold that day caused the tylet to continue broadcasting until 7:45 in the evening.

After a one-day rebound on October 30, when the Dow recovered 28.40 points, or 12.34%, to close at 258.47, the market continued to fall, reaching an interim low on November 13, 1929, with the Dow closing at 198.60. The market then rebounded for several months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28 and reaching a secondary closing peak ( a rallying market rally) at 294.07 points on April 17, 1930. Then the Dow began another, much longer, steady slide from April 1930 to July 8, 1932, when it closed at 41.22, its lowest level of the 20th century, resulting in an 89.2% loss for the index in less than three years.

Beginning on March 15, 1933 and continuing through the rest of the 1930s, the Dow slowly began to regain the ground it had lost. The largest percentage increases in the Dow Jones occurred in the early and mid-1930s. In late 1937, there was a sharp drop in the stock market, but prices remained well above the 1932 lows. The Dow Jones did not return to the peak it closed at on September 3, 1929, until November 23, 1954.

In 1932, the Pecora Commission was established by the US Senate to study the causes of the crash. The following year, the US Congress passed the Glass-Steagall Act which imposed a separation between the commercial arm of banks, which takes deposits and makes loans, and the investment arm of banks, which underwrites, issues and distributes stocks, bonds and other securities.

Subsequently, stock markets around the world introduced measures to allow trading to be suspended in the event of a rapid decline, claiming that the measures would prevent such panic selling. However, the one-day Black Monday crash of October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, and the Black Monday crash of March 16, 2020 (-12.9%), were each worse in absolute terms than any trading day of the 1929 crash (although the combined 25% drop of October 28-29, 1929 was greater than that of October 19, 1987, and remains the worst two-day drop until October 9, 2021 ).

World War II

The American mobilization for World War II at the end of 1941 drove some ten million people out of the workforce. World War II had a dramatic effect on many parts of the economy and may have hastened the end of the Great Depression in the United States. Government investment accounted for only 5% of the annual U.S. investment in industrial capital in 1940. By 1943, the government accounted for 67% of U.S. capital investment.

The crash followed a speculative boom that had prevailed in the late 1920s. During the second half of the 1920s, steel production, building construction, retail sales, the number of registered cars , and even railroad receipts went from record to record. The total net profits of 536 manufacturing and trading companies showed an increase, in the first half of 1929, of 36.6% over 1928, a record six months. Iron and steel topped the list with double the profits. Such figures created a crescendo of stock market speculation that led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them borrowed money to buy more stocks. By August 1929, brokers were usually lending small investors more than two-thirds of the face value of the shares they were buying. Over $8.5 billion was loaned, an amount that exceeded the value of printed money in the United States at that time.

Rising share prices encouraged more people to invest, hoping that share prices would rise further. Speculation thus fuelled further increases and created an economic bubble. Because of the margin market, investors stood to lose large sums of money if the market fell - or even failed to move fast enough. The average price-to-earnings ratio of S&P Composite stocks was 32.6 in September 1929, well above historical norms. According to economist John Kenneth Galbraith, this euphoria also resulted in large numbers of people putting their savings and money into leveraged investment products such as the Blue Ridge trust and Goldman Sachs' Shenandoah trust. These too collapsed in 1929, resulting in losses to banks of $475 billion in 2010 dollars ( $563.72 billion in 2019 ).

The good harvests had created a surplus of 250 million bushels of wheat that would come on the market when it opened in 1929. By May there was also a winter wheat crop of 560 million bushels ready for harvest in the Mississippi Valley. This oversupply caused such a large drop in wheat prices that the net incomes of the farming population from wheat were threatened with extinction. Stock markets are always sensitive to the future condition of the commodity markets, and the Wall Street depression that Sir George Paish had predicted for May arrived just in time. In June 1929, the niche was saved by a severe drought in the Dakotas and the Canadian West, and by unfavorable seeding times in Argentina and eastern Australia. The oversupply now was desirable to fill the gaps in world wheat production in 1929. From 97 cents per bushel in May, the price of wheat rose to $1.49 in July. When it appeared that at that rate American farmers would receive more for their 1928 crop than for that of 1928, stocks rose again.

In August, the price of wheat fell as France and Italy boasted a wonderful harvest and the situation in Australia improved. This caused a shudder on Wall Street and share prices fell quickly, but the news of cheap shares brought a fresh rush from amateur speculators and investors. Congress passed a $100 million aid package for farmers, hoping to stabilize wheat prices. By October, however, the price had fallen to $1.31 per bushel.

Other reliable economic indicators were slowing or even falling by mid-1929, including auto sales, housing sales and steel production. The decline in commodities and industrial production quite possibly even shook American confidence, with the stock market recording a high on September 3 at 381.17 just after Labor Day, and then began to falter when Roger Babson issued his warning prediction of a "market collapse." By the end of September, the market had fallen 10% from its previous high (the "Babson Break"). Stock selling intensified in early and mid-October, with down days punctuated sporadically by a few up days. Massive panic selling began the week of October 21 and intensified during the period October 24 - October 28, peaking on October 29 ("Black Tuesday").

The president of Chase National Bank, Albert H. Wiggin, had then stated: "We are now faced with the impact of the orgy of speculation in which millions of investors engaged. It was inevitable, for the rapid increase in the number of investors implied a corresponding increase in the number of holders of shares for sale when the bull market came to an end and sell orders replaced buy orders."

United States

Together, the crash of 1929 and the Great Depression were the greatest economic crisis of the 20th century. The panic of October 1929 became a symbol of the economic contraction that gripped the world over the next decade. The falls in stock prices on 24 and 29 October 1929 had a momentary effect on all financial markets except Japan.

The Wall Street crash had a significant impact on the US and global economy and has been the subject of intense academic historical, economic and political debate from its end to the present day. Some people believed that abuses by utility holding companies contributed to the Wall Street crash of 1929 and the Great Depression that followed. Many people blamed the crash on commercial banks that were too eager to jeopardize stock market deposits.

In 1930, 1,352 banks had over $853 million in deposits; in 1931, a year later, 2,294 banks failed with nearly $1.7 billion in deposits. Many businesses failed (28,285 failed with a daily rate of 133 businesses a day in 1931).

The crash of 1929 stopped the frenetic 1920s. As economic historian Charles P. Kindleberger cautiously put it, in 1929 there was no institutional lender of last resort, whose timely and decisive intervention would have been key to reducing the period of business recession that usually follows financial crises. The crash caused far-reaching and long-lasting consequences for the United States. Historians are still examining whether the 1929 crash triggered the Great Depression or whether it simply coincided with the bursting of a moderately dangerous financial and economic bubble . Only 16% of American households had invested in the stock market within the United States in the period leading up to the Great Depression, suggesting that the crash had somewhat less weight in causing it.

However, the psychological impact of the crash reverberated throughout the country as businesses realised the difficulties in securing capital market investment for new projects and expansions. Business uncertainty naturally affected the job security of workers and as the American worker (the consumer) faced uncertainty about his or her income, naturally the propensity to consume decreased. The fall in stock prices caused bankruptcies and severe macroeconomic difficulties such as credit curtailment, business closures, worker layoffs, bank failures, a reduction in the money supply and other economic distress.

The subsequent increase in mass unemployment is seen as a result of the crash, although the crash is by no means the only event that contributed to the recession. The Wall Street crash is usually considered to have the greatest impact on the events that followed and is therefore widely considered to mark the downward economic slide that started the Great Depression. True or not, the consequences were dire for almost everyone. Most academic experts agree on one aspect of the crash: it wiped out billions of dollars of wealth in one day and that immediately reduced consumer spending.

The failure triggered a global flight from the securities that guaranteed the US gold reserves (i.e. the dollar) and forced the Federal Reserve to raise interest rates at a time when cheap credit was needed. Some 4,000 banks and other lenders eventually failed. Also, the uptick criterion, which allowed investors to position themselves negatively against a stock only when the last movement in its price was positive, was implemented after the 1929 market crash to prevent investors from lowering the price of a stock through a coordinated attack.

Europe

The stock market crash of October 1929 led directly to the Great Depression in Europe. When stocks plummeted on the New York Stock Exchange, people noticed immediately. Although economic leaders in the United Kingdom, as in the United States, vastly underestimated the extent of the crisis that followed, it soon became clear that the world's economies were more interconnected than ever before. The effects of the disruption to the global system of credit, trade and production and the subsequent collapse of the US economy were soon felt across Europe.

Especially in 1930 and 1931, the unemployed workers went on strike, demonstrated and generally took direct action to draw public attention to their suffering. In the United Kingdom, protests often centred on the so-called Living Wage assessment which the government had introduced in 1931 to limit the number of unemployment benefits paid to individuals and families. For members of the working class, the assessment was seen as an intrusive and insensitive way of dealing with the chronic and relentless deprivation caused by the economic crisis. Strikes were met with violence, with police breaking up demonstrations, arresting protesters and charging them with crimes related to breaches of public order.

There is an ongoing debate among economists and historians about the role that the crash played in subsequent economic, social and political events. The Economist magazine argued in a 1998 article that the recession did not begin with the stock market crash, nor was it clear at the time of the crash that a recession was beginning. They asked: "Can a very severe stock market crash cause a serious setback in industry when industrial production is mostly in a healthy and balanced state?" They argued that there must be some setback, but there was not yet sufficient evidence to show that it would last long or necessarily cause a general industrial downturn.

However, the Economist also warned that some bank failures were also to be expected and some banks may not have had reserves to finance commercial and industrial firms. It concluded that the position of banks was the primary factor, but what was about to happen could not have been predicted.

In Milton Friedman's A Monetary History of the United States, co-authored with Anna Schwartz, it is argued that what made the "great contraction" so severe was not the business slowdown, protectionism or the 1929 stock market crash alone, but the collapse of the banking system during three waves of panic from 1930 to 1933.

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