Wall Street Crash of 1929
Overview
 
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
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...

 in the history of the United States
History of the United States
The history of the United States traditionally starts with the Declaration of Independence in the year 1776, although its territory was inhabited by Native Americans since prehistoric times and then by European colonists who followed the voyages of Christopher Columbus starting in 1492. The...

, taking into consideration the full extent and duration of its fallout. The crash signaled the beginning of the 12-year Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 that affected all Western industrialized countries and that did not end in the United States until the onset of American mobilization for World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 at the end of 1941.

The Roaring Twenties
Roaring Twenties
The Roaring Twenties is a phrase used to describe the 1920s, principally in North America, but also in London, Berlin and Paris for a period of sustained economic prosperity. The phrase was meant to emphasize the period's social, artistic, and cultural dynamism...

, the decade that led up to the Crash, was a time of wealth and excess.
Encyclopedia
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
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...

 in the history of the United States
History of the United States
The history of the United States traditionally starts with the Declaration of Independence in the year 1776, although its territory was inhabited by Native Americans since prehistoric times and then by European colonists who followed the voyages of Christopher Columbus starting in 1492. The...

, taking into consideration the full extent and duration of its fallout. The crash signaled the beginning of the 12-year Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 that affected all Western industrialized countries and that did not end in the United States until the onset of American mobilization for World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 at the end of 1941.

Timeline

The Roaring Twenties
Roaring Twenties
The Roaring Twenties is a phrase used to describe the 1920s, principally in North America, but also in London, Berlin and Paris for a period of sustained economic prosperity. The phrase was meant to emphasize the period's social, artistic, and cultural dynamism...

, the decade that led up to the Crash, was a time of wealth and excess. Despite the dangers of speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

, many believed that the stock market would continue to rise indefinitely. The market had been on a six-year run that saw the Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...

 increase in value fivefold peaking at 381.17 on September 3, 1929. Shortly before the crash, economist Irving Fisher
Irving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...

 famously proclaimed, "Stock prices have reached what looks like a permanently high plateau." The optimism and financial gains of the great bull market were shaken on "Black Thursday", October 24, 1929, when share price
Share price
A share price is the price of a single share of a number of saleable stocks of a company. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.-Behavior of share prices:...

s on the New York Stock Exchange (NYSE) abruptly fell.

In the days leading up to the crash 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
Jude Wanniski
Jude Thaddeus Wanniski was an American journalist, conservative commentator, and political economist.- Early life and education :...

 later correlated these swings with the prospects for passage of the Smoot–Hawley Tariff Act, which was then being debated in Congress.

On October 24 ("Black Thursday"), the market lost 11% of its value at the opening bell on very heavy trading. Several leading Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...

 bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont
Thomas W. Lamont
Thomas William Lamont, Jr. was an American banker.- Biography :Lamont was born in Claverack, New York. He graduated from Phillips Exeter Academy in 1888 and earned his degree from Harvard University in 1892. He became a generous benefactor of the school once he had amassed a fortune, notably...

, acting head of Morgan Bank
J.P. Morgan & Co.
J.P. Morgan & Co. was a commercial and investment banking institution based in the United States founded by J. Pierpont Morgan and commonly known as the House of Morgan or simply Morgan. Today, J.P...

; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell
Charles E. Mitchell
Charles Edwin Mitchell was an American banker whose incautious securities policies facilitated the speculation which led to the Crash of 1929...

, president of the National City Bank of New York. They chose Richard Whitney
Richard Whitney (financier)
Richard Whitney was an American financier, president of the New York Stock Exchange from 1930 to 1935, and a convicted embezzler.-Biography:He was born on August 1, 1888 in Boston, Massachusetts to George Whitney, Sr....

, 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
U.S. Steel
The United States Steel Corporation , more commonly known as U.S. Steel, is an integrated steel producer with major production operations in the United States, Canada, and Central Europe. The company is the world's tenth largest steel producer ranked by sales...

 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 one that ended the Panic of 1907
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...

. It succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day; however, unlike 1907, the respite was only temporary.

Over the weekend, the events were covered by the newspapers across the United States. On October 28, "Black Monday", more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13%. The next day, "Black Tuesday", October 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points, or 12%. The volume on stocks traded on October 29, 1929 was a record that was not broken for nearly 40 years. Author Richard M. Salsman
Richard Salsman
Richard M. Salsman is an American economist and lecturer. His work incorporates Objectivist philosophy and supply-side economics. In particular, Salsman admires the ideas of economists such as Jean-Baptiste Say and Carl Menger, as opposed to more modern supply-siders such as Arthur Laffer...

 wrote that "on October 29—amid rumors that U.S. President Herbert Hoover
Herbert Hoover
Herbert Clark Hoover was the 31st President of the United States . Hoover was originally a professional mining engineer and author. As the United States Secretary of Commerce in the 1920s under Presidents Warren Harding and Calvin Coolidge, he promoted partnerships between government and business...

 would not veto the pending Hawley-Smoot Tariff bill—stock prices crashed even further". William C. Durant
William C. Durant
William Crapo "Billy" Durant was a leading pioneer of the United States automobile industry, the founder of General Motors and Chevrolet who created the system of multi-brand holding companies with different lines of cars....

 joined with members of the Rockefeller family
Rockefeller family
The Rockefeller family , the Cleveland family of John D. Rockefeller and his brother William Rockefeller , is an American industrial, banking, and political family of German origin that made one of the world's largest private fortunes in the oil business during the late 19th and early 20th...

 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 large decline in prices. The ticker
Ticker tape
Ticker tape was the earliest digital electronic communications medium, transmitting stock price information over telegraph lines, in use between around 1870 through 1970...

 did not stop running until about 7:45 that evening. The market had lost over $30 billion in the space of two days.


Dow Jones Industrial Average



DateChange% ChangeClose
October 28, 1929−38.33−12.82260.64
October 29, 1929−30.57−11.73230.07


The market continued to fall arriving at an interim bottom on November 13, 1929 with the Dow closing at 198.60. The market recovered for several months reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930 before embarking on another, much longer, slide from April 1931 to July 1932 when the Dow closed at 41.22—its lowest level of the 20th century. It would not return to the peak of September 1929 until November 1954.

Economic fundamentals

The crash followed a speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

 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
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by 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, more than the entire amount of currency circulating in the U.S. at the time. 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
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...

. Because of margin buying, investors stood to lose large sums of money if the market turned down—or even failed to advance quickly enough. The average P/E
P/E ratio
The P/E ratio of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share...

 (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929, clearly above historical norms. On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market finally turned down, and panic selling
Panic selling
Panic selling is a wide-scale selling of an investment, in order to get out of an investment . The main problem is that investors react simply out of emotion and fear, without evaluating the fundamentals. Almost all market crashes are caused by panic selling. Most major stock exchanges use trading...

 started.

Subsequent actions

In 1932, the Pecora Commission
Pecora Commission
The Pecora Investigation was an inquiry begun on March 4, 1932 by the United States Senate Committee on Banking and Currency to investigate the causes of the Wall Street Crash of 1929...

 was established by the U.S. Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...

 to study the causes of the crash. The following year, the U.S. Congress passed the Glass–Steagall Act mandating a separation between commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...

s, which take deposits and extend loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s, and investment banks, which underwrite
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...

, issue, and distribute stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

s, bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

s, and other securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

.

After the experience of the 1929 crash, stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. However, the one-day crash of Black Monday
Black Monday (1987)
In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...

, October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, was worse in percentage terms than any single day of the 1929 crash.

Effects and academic debate

Together, the 1929 stock market crash and the Great Depression formed "the biggest financial crisis of the 20th century". "The panic of October 1929 has come to serve as a symbol of the economic contraction that gripped the world during the next decade." "The crash of 1929 caused 'fear mixed with a vertiginous disorientation', but 'shock was quickly cauterized with denial, both official and mass-delusional'." "The falls in share prices on October 24 and 29, 1929 ... were practically instantaneous in all financial markets, except Japan." 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." "Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market."

"The 1929 crash brought the Roaring Twenties
Roaring Twenties
The Roaring Twenties is a phrase used to describe the 1920s, principally in North America, but also in London, Berlin and Paris for a period of sustained economic prosperity. The phrase was meant to emphasize the period's social, artistic, and cultural dynamism...

 shuddering to a halt." 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". 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?", 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.
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
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

 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." 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
Uptick rule
The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the...

, 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."

Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

argued in a 1998 article, "Briefly, the Depression did not start with the stockmarket crash." 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."

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
Boom and bust
A credit boom-bust cycle is an episode characterized by a sustained increase in several economics indicators followed by a sharp and rapid contraction. Commonly the boom is driven by a rapid expansion of credit to the private sector accompanied with rising prices of commodities and stock market index...

. According to economists such as Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...

 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
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

's A Monetary History of the United States, co-written with Anna Schwartz
Anna Schwartz
Anna Jacobson Schwartz is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman "one of the world's greatest monetary scholars"...

, 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.

See also

  • Bear raid
    Bear raid
    A bear raid is a type of stock market strategy, where a trader attempts to force down the price of a stock to cover a short position...

  • The Great Depression
    Great Depression
    The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

  • List of largest daily changes in the Dow Jones Industrial Average

Further reading

  • 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 0-19-513516-4.
  • Klingaman, William K. (1989). 1929: The Year of the Great Crash. New York: Harper & Row. ISBN 0-06-016081-0.
  • Reed, Lawrence W. (1981 & 2008). Great Myths of the Great Depression. Midland, MI: Mackinac Center.
  • Salsman, Richard M. "The Cause and Consequences of the Great Depression" in The Intellectual Activist, .
  • "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.
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