Wall Street Crash of 1929

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

The Wall Street Crash of 1929, also called the Great Crash or the Crash of '29, was the stock-market crash that occurred in late October, 1929. It started on October 24 ("Black Thursday") and continued through October 29, 1929 ("Black Tuesday"), when share prices on the New York Stock Exchange (NYSE) collapsed. However, the days leading up to the 29th had also seen enormous stock-market upheaval, with panic selling and vast levels of trading interspersed with brief periods of recovery.

Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even.
— — Richard M. Salsman ^[1]

The Dow Jones Industrial Average, recovered early in 1930 only to begin a steady decline by late 1930 and hit the bottom of the bear market in 1932. After 1930, the market did not come back to pre-1929 levels until 1955 [1].

Timeline

The Dow Jones Industrial Average reached a high of 381.17 on September 3, 1929. "In September, the tariff bill reached the Senate, the same month stock prices peaked. On October 21, an amendment to impose tariffs only on agricultural imports was defeated. Three days later the stock market suffered its first one-day crash." ^[1] A then-record of 13 million shares were traded again.

The market was crashing and the floor of the NYSE was in a state of panic. By noon on Black Thursday, there had been eleven suicides of fairly prominent investors. [2]

At 1:00pm, several leading Wall Street bankers met to find a solution. The group included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin head of the Chase National Bank; and Charles E. Mitchell, president of National City Bank. 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 amazed traders watched, Whitney then placed similar bids on other "blue-chip" stocks.

Although a similar such tactic had ended the Panic of 1907, this action halted the slide that day and returned stability to the market only temporarily.

Over the weekend, the events were dramatized by the newspapers across the U.S. On Monday, October 28, investors decided to get out of the market and the slide continued with a record 13% loss in the Dow for the day. "[On] October 29 — amid rumors that U.S. President Herbert Hoover would not veto the pending tariff bill — stock prices crashed even further." ^[1]

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 effort failed to stop the slide. The DJIA lost 12% with 16.4 million shares traded (a new record, surpassing the one set only the previous Thursday).

"As late as April 1942, U.S. stock prices were still 75% below their 1929 peak and would not revisit that level until November 1954 — almost a quarter of a century later." ^[1] The stock market took 25 years to recover its 1929 high value.

The resulting low of 41.22 on July 8th, 1932 was the lowest the stock market had been since the 1800s. [3]

What caused the huge crash?

Boom-bust theory

The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, even borrowing money to buy more stock. Banks lent heavily to fund this share-buying spree. ^{[citation needed]}

The rising share prices encouraged more people to invest, as they hoped the shares would rise further, thus fueling further rises, and creating an economic bubble. On October 24, 1929 (with the Dow just off its September 3rd peak from at 381.17), the "bubble" finally burst and panic selling set in. 12,894,650 shares were traded in the space of one day, as people desperately tried to dispose of their shares before they became worthless.

Over the following few days another thirty million shares changed hands and share prices collapsed, ruining many investors.

The banks which had lent heavily to fund share buying found themselves saddled with debt, which caused many banks to fail. ^{[citation needed]}

While millions of people lost their savings, businesses lost their credit lines and customers, and were forced to close, which caused massive unemployment.

The crash dramatically worsened an already fragile economic situation, and was a major contributing factor to the Great Depression. There is a good deal of controversy among economists and historians about the nature of that contribution, though. Some hold that political over-reactions to the crash, such as in the passage of the Smoot-Hawley Tariff Act through the U.S. Congress, caused more harm than the crash itself.

Explanation from supply-side economic theory

Many commentators view the Smoot-Hawley Tariff Act as a consequence of the Crash, since the act was not signed by President Hoover until June of 1930. However, supply-side economists (and others) argue that stock-market prices anticipate future profits. The Crash reflected investors’ rational expectations that tariffs would raise prices for U.S. consumers (both final consumers and manufacturers that used the imported products as inputs) and reduce firms’ future profits.

Supply-siders also blame two tariff laws for the earlier, sharp recession of 1920–1921.

However, the Crash of 1929 and the subsequent Great Depression were in part longer and deeper for three reasons: ^[2]

The Smoot-Hawley Tariff Act applied tariffs to more than 3,200 products (many more than the previous tariffs).
The tariff rates were very high — averaging 60%.
Other countries responded by enacting their own tariffs against U.S. goods in retaliation.

Official investigation of the Crash

In 1931, the Pecora Commission was established to study the causes of the crash. Based in part on the Commission's findings, the United States Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, whose activities involved the taking of deposits and making loans, and investment banks whose role was the underwriting, issuing, and distributing 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 they would prevent such panic sales. However, the crash of Monday, October 19, 1987 was even more severe than the Crash of 1929. On Black Monday of 1987, the Dow Jones Industrial Average fell 22.6%.

Footnotes

^ ^a ^b ^c ^d Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 1: What Made the Roaring '20s Roar" in The Intellectual Activist, ISSN 0730-2355, June, 2004, p. 16. Emphasis original.
^ Salsman, part 2, p. 15.

Article on the 1929 Crash from EH.NET's Encyclopedia
When filmmakers Ellen Hovde and Muffie Meyer produced in 1990, The Crash of 1929, they interviewed many people about the Wall Street disaster, including interviewing noted business historian, Robert Sobel.
About.com: Black Thursday - 1929
About.com: 1929 Stock Market Crash
NYSE Timeline for Black Thursday

[salsman-1] Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 1: What Made the Roaring '20s Roar" in The Intellectual Activist, ISSN 0730-2355, June, 2004, p. 16. Emphasis original.

[2] Salsman, part 2, p. 15.

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