Stock market crash of 1929

Black Tuesday, October 29, 1929, saw one of the worst financial crises in U.S. history. Though there were several days of serious market declines, Black Tuesday has become infamous as being the worst single day in American brokerage history and is usually described as the start of the Great Depression.

Beginning in September of 1929 and lasting for about six weeks, various stock markets in New York and elsewhere experienced a series of corrections as the values of many stocks began to fall from their highs earlier in the decade. The most significant of these corrections came on the New York Stock Exchange and the Curb Exchange, which would later be renamed the American Stock Exchange, in October of 1929. These market adjustments were the result of many factors and occurred over a period of several days.

Causes

The activities of brokers and independent buyers and sellers of securities during the 1920s were almost totally unregulated by the U.S. government. Republican presidentsCalvin Coolidge and Herbert Hoover had both personal and ideological qualms about government involvement in the operations of a free economy.

This period of apparently widespread prosperity was further reinforced by stories of investors who made fortunes in the stock market. Improvements in communication and corporate efficiency made it easier for individuals from small towns across the country to invest their money in securities. This led to an atmosphere of rampant and unrestrained speculation as more people invested in stocks. Often, stock prices rose simply by virtue of their desirability and not necessarily on the basis of sustainable and stable economic indicators for the corporation. Leaders of future trends such as U.S. Steel and General Electric, despite their high prices, could not compare to the outsized valuations of popular stocks such as RCA.

Investors and brokers soon developed questionable payment strategies in order to afford stocks at prices of $300 to $400 per share at a time when the average American was earning only $1,425 annually. Many investors cooperated in investment pools in their hometowns. More troublesome, though, was the practice of margin buying. Margin buying was a system intended to allow any person to buy stock with only a percentage of the cost paid up front. In many ways, it was a version of the increasingly popular installment buying option offered by retailers. In margin buying, an investor could purchase a block of stocks sometimes for as little as a 10 percent down payment with the expectation that the steadily rising value of the stock would provide the necessary revenue to pay off the remaining balance of the stock’s initial purchase price. Throughout the 1920s, the almost unending upward trend of the markets seemed to make this practice feasible. Exacerbating this tendency was the fact that some investors got bank loans in order to pay the initial margin buy. The end result was that there was little actual money supporting the stocks’ values. As investors and brokers began to recognize the fragile nature of the markets, there began a series of corrections starting in September of 1929.

The Crashes

The markets reached their peak in 1928 and early 1929. Despite a series of adjustments during the summer and fall of 1929 and warnings from a handful of commentators, there was general optimism that the upward trend of prices would continue. Many public officials, including presidents Coolidge and Hoover, had repeatedly assured the public that the nation’s economic future was bright.

Thursday, October 24, 1929, however, was the worst day in the market’s history up to that point. Wednesday’s session had seen a late slump in stock prices, which carried over into what came to be known as Black Thursday. At times, so-called air pockets developed when the bid price was so far below the asking price that stocks could lose several dollars every few minutes. As tensions escalated toward panic, leaders of major banks and brokerages stepped onto the floor in an effort to restore confidence. The vice president of the New York Stock Exchange and a man with ties to the investment bankJ. P. Morgan & Co., Richard Whitney, acted as proxy for the pooled resources of the city’s financial leaders. Starting with U.S. Steel, Whitney began buying large blocks of securities at several dollars above the asking price. This helped to restore investors’ faith in the market.

The exchange operated with shortened hours over the next two business days; however, many investors began planning their escape from the volatile market. After the market’s close on Monday, October 28, many banks began issuing margin calls in an effort to recover their losses and limit their exposure to the plunging market. Since most investors had little or no money to pay off their margin debts, Tuesday, October 29, saw widespread sell-offs from the opening bell. By the end of Black Tuesday, the market had lost between 12 percent and 13 percent of its value with over sixteen million shares traded. The exchange’s ticker machines could not keep up with the volume of trading, even though new systems had been installed Monday morning to avoid a repeat of the previous week’s debacle. As a result, Western Union hired taxicabs to shuttle messages between the stock market and financial offices around the city. Crowds estimated at ten thousand or more gathered outside the exchanges on Wall Street, desperate to learn anything they could about the chaos inside. At the closing bell, the exchange’s ticker machines were more than two hours behind, causing investors to base their decisions on inaccurate information and leading the nation to be unaware of the full scale of the damage. Ironically, the group of investors and planners responsible for the construction of the Empire State Building, unaware of the crisis on Wall Street, had met that morning at the Plaza Hotel in Midtown to finalize plans for the spire, which would make the building the tallest structure in the world.

Despite Black Tuesday’s reputation as being the start of the Great Depression, the economy did not show marked signs of being in a depression until the spring of 1930. The market did not actually reach its bottom until July of 1932. In fact, on October 30, the New York Stock Exchange recovered 74 percent of its losses from the previous few days. After trading finished that Wednesday, the markets closed until Monday to allow brokers and banks to get their books in order. For the remainder of 1929, the exchanges limped along with neither substantial gains nor dramatic losses. Weak recoveries were met with additional slumps. Despite the huge crashes of October, however, most companies ended the 1920s in the black, which testifies to the strength of the bull market over the previous decade. Few businesses collapsed as a direct result of the market’s decline, and most observers assumed that the crashes would remove unproductive stocks or at the very least would revalue stocks more accurately. By the spring of 1930, other indicators began to demonstrate the depth of the economic problems the country faced. Swelling inventories, shrinking credit, and the resultant unemployment combined to plunge the nation into the Great Depression.

Impact

Although many factors actually led to the Great Depression in the United States and some economists doubt that the stock market crash of 1929 was indeed a major factor, the events of September and October of 1929 have become legendary as being the cause of the Great Depression. As such, it is often pointed to as a watershed moment in U.S. history, since the social, political, and economic changes sparked by the Great Depression ostensibly would not have happened were it not for the crash of 1929.

Bibliography

Galbraith, John Kenneth. The Great Crash, 1929. Boston, Mass.: Houghton Mifflin, 2009. Examines the actions of investors and the government inaction in the months prior to Black Tuesday.

Klein, Maury. Rainbow’s End: The Crash of 1929. New York: Oxford University Press, 2003. Investigates the multitude of economic, political, and social events that led to the crash of 1929.

McElvaine, Robert S. The Great Depression: America, 1929–1941. New York: Three Rivers Press, 2009. Provides insight into the attempts made by economists and politicians to revive the economy during the Great Depression. Relates personal stories of Americans who survived the crisis and includes descriptions of the popular culture of the time.

Parker, Selwyn. The Great Crash: How the Stock Market Crash of 1929 Plunged the World into Depression. London: Piatkus: 2008. A history of the stock market crash of 1929 and its ensuing worldwide effects.

Thomas, Gordon, and Max Morgan-Witts. The Day the Bubble Burst: A Social History of the Wall Street Crash of 1929. New York: Penguin Books, 1979. Recounts stories and experiences of average Americans, bankers, corporate officials, and Wall Street speculators from October of 1929 through the years that followed.