Stock Market Crash of 1929

What Was the Stock Market Crash of 1929?

The stock market crash of 1929 began on October 24. While it is remembered for the panic selling in the principal week, the largest falls occurred in the following two years as the Great Depression emerged. In fact, the Dow Jones Industrial Average (DJIA) didn't bottom out until July 8, 1932, by which time it had fallen 89% from its September 1929 peak, making it the biggest bear market in Wall Street's history. The Dow Jones didn't return to its 1929 high until November 1954.

Understanding the Stock Market Crash of 1929

The stock market crash of 1929 followed a bull market that had seen the Dow Jones rise essentially in five years. However, with industrial companies trading at price-to-earnings ratios (P/E ratios) of over 15, valuations didn't appear unreasonable after a decade of record productivity growth in manufacturing; that is, until you take into account the public utility holding companies.

By 1929, a large number of electricity companies had been consolidated into holding companies that were themselves owned by other holding companies, which controlled around 66% of the American industry. Ten layers separated the top and bottom of some of these complex, highly leveraged pyramids. As the Federal Trade Commission (FTC) reported in 1928, the unfair practices these holding companies were involved in — like bilking subsidiaries through service contracts and fraudulent accounting including depreciation and inflated property values — were a "menace to the investor."

The Federal Reserve decided to rein in speculation because it was diverting resources from productive uses. The Fed raised the rediscount rate to 6% from 5% in August, a move that some experts say stalled economic growth and reduced stock market liquidity, making the markets more vulnerable to rapid price drops.

Other Factors Leading to the 1929 Stock Market Crash

Another factor experts cite as leading to the 1929 crash is the overproduction in numerous industries that caused an oversupply of steel, iron, and durable goods. When obviously demand was low and there were not enough buyers for their goods, manufacturers dumped their products at a loss and share prices began to plummet. Some experts additionally cite a continuous agricultural recession as another factor impacting the financial markets.

However, the straw that broke the camel's back was probably the news in October 1929 that the public utility holding companies would be regulated. The resulting sell-off cascaded through the system as investors who had [bought stocks on margin](/purchasing on-margin) became forced sellers.

The Aftermath of the 1929 Stock Market Crash

Instead of attempting to stabilize the financial system, the Fed, thinking the crash was necessary or even desirable, never really prevented the wave of bank failures that paralyzed the financial system — thus made the slump worse than it could have been. As Treasury Secretary Andrew Mellon told President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It'll purge the rottenness out of the system."

The crash was exacerbated by the collapse of a parallel boom in foreign bonds. Because the demand for American exports had been propped up by the huge aggregates lent to overseas borrowers, this vendor-financed demand for American goods disappeared overnight. Yet, the market didn't drop steadily. In early 1930, it rebounded briefly — in what might be a classic dead cat bounce — before collapsing once more.

Toward the end of the crash, the market lost $30 billion in value; approximately $487 billion in today's money.

The stock market crash led the way to the Great Depression, where 15 million Americans would lose their positions and half of the nation's banks failed at the lowest point in 1933. Production had fallen by half after the stock market crash, leading to soup kitchens, bread lines, and homelessness across the nation. Farmers were forced to let crops decay as they couldn't bear the cost of the harvests and numerous in the nation starved. Numerous farmers migrated to the cities searching for occupations as dry spells caused high breezes and dust in the south, known as the Dust Bowl.

The Great Depression ushered in an era of nonintervention, protectionism, and nationalism. The notorious Smoot-Hawley Tariff Act in 1930 started a spiral of beggar-thy-neighbor economic policies.

Special Considerations

The lack of government oversight was one of the major causes of the 1929 crash, because of laissez-faire economic theories. In response, Congress passed a variety of important federal regulations aimed at stabilizing the markets. These include the Glass Steagall Act of 1933, the Securities and Exchange Act of 1934, and the Public Utility Holding Companies Act of 1935.

Highlights

• The 1929 crash was preceded by a decade of record economic growth and speculation in a bull market that saw the DJIA skyrocket over five years.
• The stock market crash of 1929 began on Thursday, Oct. 24, 1929, when panicked investors sent the Dow Jones Industrial Average (DJIA) plunging 11% in heavy trading.
• Congress passed a variety of important federal regulations aimed at stabilizing the markets, for example, the Glass Steagall Act of 1933.
• The stock market crash paved the way for the Great Depression that would follow during the 1930s and last till World War II.
• Other factors leading up to the stock market crash include unscrupulous actions by public utility holding companies, overproduction of durable goods, and a continuous agricultural slump.

FAQ

Did the Stock Market Crash in 1929 Cause a Shift in Culture During the 1930s?

The stock market crash of 1929 devastatingly affected the culture of the 1930s. As investors, businesses, and homesteads lost money, they started to shutter and lay off workers. Banks closed too. The Great Depression began during the 1930s, leading to soup kitchens, bread lines, and homelessness across the nation. The culture during the 30s shifted decisively from that during the 20s. The 20s, known as the thundering 20s, saw a period of economic growth and consumerism after the war, while the 1930s witnessed poverty and economic decline.

On What Day Was the Great Wall Street Crash of 1929?

The great Wall Street crash of 1929 began on Oct. 24, 1929, known as Black Thursday, yet witnessed further crashes in the days to come, like on Oct. 29, 1929, known as Black Tuesday.

What Factors Led to the Stock Market Crash of 1929?

Historians contribute a variety of factors that led to the stock market crash of 1929, like tremendous speculation during the thundering twenties; a huge expansion of debt; a decline in production which led to a rise in unemployment, which led to a decline in spending; low wages; an agricultural sector in distress, and banks that had large loans that couldn't be liquidated.