Wall Street Crash of 1929

Crowd gathering on Wall Street after the 1929 crash.

The Wall Street Crash of 1929 (October 1929), also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout.^[1] The crash began a 10-year economic slump that affected all the Western industrialized countries.^[2]

Timeline

Dow Jones Industrial, 1928-1930

The Roaring Twenties, the decade that led up to the Crash,^[4] was a time of wealth and excess. Despite caution of the dangers of speculation, many believed that the market could sustain high price levels. Shortly before the crash, economist Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau."^[5] However, the optimism and financial gains of the great bull market were shattered on "Black Tuesday", October 29, 1929, when share prices on the New York Stock Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued to fall at an unprecedented rate for a full month.^[6]

The October 1929 crash came during a period of declining real estate values in the United States (which peaked in 1925) near the beginning of a chain of events that led to the Great Depression, a period of economic decline in the industrialized nations.

In the days leading up to "Black Thursday" (called "Black Friday" in Europe due to the time difference) and "Black Tuesday" the following week, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. Economist and author Jude Wanniski later correlated these swings with the prospects for passage of the Smoot–Hawley Tariff Act, which was then being debated in Congress.^[7] After the crash, the Dow Jones Industrial Average (DJIA) partially recovered in November–December 1929 and early 1930, only to reverse and crash again, reaching a low point of the great bear market in 1932. On July 8, 1932, the Dow reached its lowest level of the 20th century and did not return to pre-1929 levels until November 1954.^[8][9]

After a six-year run when the world saw the Dow Jones Industrial Average increase in value fivefold, prices peaked at 381.17 on September 3, 1929.^[10] The market then fell sharply for a month, losing 17% of its value on the initial leg down.

Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterward. The decline then accelerated into the so-called "Black Thursday", October 24, 1929. A then-record number of 12.9 million shares were traded on that day.

At 1 p.m. on the same day (October 24), several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.^[11] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.

The trading floor of the New York Stock Exchange just after the crash of 1929

Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, the first "Black Monday",^[12] more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%. The next day, "Black Tuesday", October 29, 1929, about 16 million shares were traded.^[13][14][15] The volume on stocks traded on October 29, 1929 was "...a record that was not broken for nearly 40 years, in 1968".^[14] Author Richard M. Salsman wrote that "on October 29—amid rumors that U.S. President Herbert Hoover would not veto the pending Hawley-Smoot Tariff bill—stock prices crashed even further".^[3] William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market lost $14 billion in value that day, bringing the loss for the week to $30 billion.^[16]

An interim bottom occurred on November 13 with the Dow closing at 198.60 that day. The market recovered for several months from that point, with the Dow reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.^[18]

Economic fundamentals

The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan,^[19] more than the entire amount of currency circulating in the U.S. at the time.^[20] The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929,^[21] clearly above historical norms. Most economists view this event as the most dramatic in modern economic history. On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market finally turned down, and panic selling started.

Subsequent actions

In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of the crash. The U.S. Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.

After the experience of the 1929 crash, stock markets around the world instituted measures to temporarily suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. The one-day crash of Black Monday, October 19, 1987, however, was even more severe than the crash of 1929, when the Dow Jones Industrial Average fell a full 22.6%.^[12]

Effects and academic debate

Crowd at New York's American Union Bank during a bank run early in the Great Depression.

Together, the 1929 stock market crash and the Great Depression "...was the biggest financial crisis of the 20th century."^[22] "The panic of October 1929 has come to serve as a symbol of the economic contraction that gripped the world during the next decade."^[23] "The crash of 1929 caused 'fear mixed with a vertiginous disorientation', but 'shock was quickly cauterized with denial, both official and mass-delusional'."^[24] "The falls in share prices on October 24 and 29, 1929 ... were practically instantaneous in all financial markets, except Japan."^[25] The Wall Street Crash had a major impact on the U.S. and world economy, and it has been the source of intense academic debate—historical, economic and political—from its aftermath until the present day. "Some people believed that abuses by utility holding companies contributed to the Wall Street Crash of 1929 and the Depression that followed."^[26] "Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market."^[27]

"The 1929 crash brought the Roaring Twenties shuddering to a halt."^[28] As "tentatively expressed" by "economic historian Charles Kindleberger", in 1929 there was no "...lender of last resort effectively present", which, if it had existed and were "properly exercised", would have been "key in shortening the business slowdown[s] that normally follows financial crises."^[25] The crash marked the beginning of widespread and long-lasting consequences for the United States. The main question is: Did the "'29 Crash spark The Depression?",^[29] or did it merely coincide with the bursting of a credit-inspired economic bubble? Only 16% of American households were invested in the stock market within the United States during the period leading up to the depression, suggesting that the crash carried somewhat less of a weight in causing the depression.

Unemployed men march in Toronto, Ontario, Canada.

However, the psychological effects of the crash reverberated across the nation as business became aware of the difficulties in securing capital markets investments for new projects and expansions. Business uncertainty naturally affects job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, naturally the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economic depressing events. The resultant rise of mass unemployment is seen as a result of the crash, although the crash is by no means the sole event that contributed to the depression. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression.

True or not, the consequences were dire for almost everybody. "Most academic experts agree on one aspect of the crash: It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying."^[29] The failure set off a worldwide run on US gold deposits (i.e., the dollar), and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 banks and other lenders ultimately failed. Also, the uptick rule,^[30] which "...allowed short selling only when the last tick in a stock’s price was positive," "...was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run."^[31]

Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. The Economist argued in a 1998 article, "Briefly, the Depression did not start with the stockmarket crash."^[32] Nor was it clear at the time of the crash that a depression was starting. On November 23, 1929, The Economist asked: "Can a very serious Stock Exchange collapse produce a serious setback to industry when industrial production is for the most part in a healthy and balanced condition? ... Experts are agreed that there must be some setback, but there is not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression." But The Economist cautioned: "Some bank failures, no doubt, are also to be expected. In the circumstances will the banks have any margin left for financing commercial and industrial enterprises or will they not? The position of the banks is without doubt the key to the situation, and what this is going to be cannot be properly assessed until the dust has cleared away."^[33]

Many academics see the Wall Street Crash of 1929 as part of a historical process that was a part of the new theories of boom and bust. According to economists such as Joseph Schumpeter and Nikolai Kondratieff the crash was merely a historical event in the continuing process known as economic cycles. The impact of the crash was merely to increase the speed at which the cycle proceeded to its next level.

Milton Friedman's A Monetary History of the United States, co-written with Anna Schwartz, makes the argument that what made the "great contraction" so severe was not the downturn in the business cycle, trade protectionism, or the 1929 stock market crash. But instead what plunged the country into a deep depression, was the collapse of the banking system during three waves of panics over the 1930-33 period.^[34]

See also

• The Great Depression
• Bear raid
• List of largest daily changes in the Dow Jones Industrial Average

Notes

Further reading

• Bierman, Harold (March 26, 2008), Whaples, Robert, ed., "The 1929 Stock Market Crash", EH.Net Encyclopedia (Santa Clara, California: Economic History Association), http://eh.net/encyclopedia/article/Bierman.Crash, retrieved May 13, 2010 
• Brooks, John. (1969). Once in Golconda: A True Drama of Wall Street 1920-1938. New York: Harper & Row. ISBN 0-393-01375-8.
• Galbraith, John Kenneth. (1954). The Great Crash: 1929. Boston: Houghton Mifflin. ISBN 0-395-85999-9.
• Klein, Maury. (2001). Rainbow's End: The Crash of 1929. New York: Oxford University Press. ISBN 0-195-13516-4.
• Klingaman, William K. (1989). 1929: The Year of the Great Crash. New York: Harper & Row. ISBN 0-060-16081-0.
• Reed, Lawrence W. (1981 & 2008). Great Myths of the Great Depression. Midland, MI: Mackinac Center. [1]
• Rothbard, Murray N. (2000), America’s Great Depression (5th ed.), Auburn, Alabama: The Ludwig von Mises Institute, ISBN 978-0-945466-05-5, http://mises.org/rothbard/agd.pdf, retrieved May 13, 2010 
• Salsman, Richard M. “The Cause and Consequences of the Great Depression” in The Intellectual Activist, ISSN 0730-2355.

• “Part 1: What Made the Roaring ’20s Roar”, June 2004, pp. 16–24.
• “Part 2: Hoover’s Progressive Assault on Business”, July 2004, pp. 10–20.
• “Part 3: Roosevelt's Raw Deal”, August 2004, pp. 9–20.
• “Part 4: Freedom and Prosperity”, January 2005, pp. 14–23.

• Shachtman, Tom. (1979). The Day America Crashed. New York: G.P. Putnam. ISBN 0-399-11613-3.
• Thomas, Gordon & Morgan-Witts, Max. (1979). The Day the Bubble Burst: A Social History of the Wall Street Crash of 1929. Garden City, NY: Doubleday. ISBN 0-385-14370-2.