Understanding the Wall Street Stock Market Crash of 1929

The stock market crash of 1929 was an unprecedented economic event in American history and marked the beginning of the Great Depression in the United States. Fueled by exuberant speculation in the stock market, Americans failed to recognize the warning signs and continued to engage in risky behavior.

The end of World War I ushered in a prosperous era in America, as manufacturing boomed and inventions such as the airplane and the radio made life more enjoyable. With optimism at its height, Americans started to invest their money in the stock market. As more people invested, stock prices began to rise. This was first noticeable around 1925. Between 1925 and 1927 stocks rose and fell moderately.

In 1927, the market surged ahead. By 1928, the stock market boom was officially underway. Every day Americans regarded the stock market as a way to get wealthy, encouraged by stories of friends and family that had made fortunes from investing. The excitement surrounding the purchase of stocks soared. Unfortunately, not everyone who wanted to invest in the stock market could afford to do so and to alleviate this problem, banks allowed investors to buy “on margin.”

Buying stocks on margin means that an investor is only required to put down a portion of the purchase price (in this case, 10% to 20%) while the broker covers the remaining amount. Although buying on margin made it possible for many people to invest, it was in essence very risky. If the price of a stock fell below the loan amount, an investor was likely to receive a “margin call” which meant he/she would have to come up with the cash to pay the loan back immediately.

Americans neglected to recognize the risk inherent in buying stocks on margin and continued to make purchases. By 1929 everyone was investing: individuals, companies and banks. On March 25, 1929, the stock market experienced a mini-crash. As prices began to drop, margin calls were made. Panic began to set in. To stop the market from declining further, Charles Mitchell, a prominent banker from National City Bank, stepped in to reassure market participants that his bank would continue to lend. This assuaged investors and the panic subsided.

By spring of 1929, certain key economic indicators showed signs of weakening and knowledgeable people were warning of a crash; however, no one listened. During the summer of 1929 the market gained momentum, reaching its peak on September 3, 1929. Two days later the market started dropping. Margin calls were issued. The ticker could not keep up. In the afternoon of that same day, a group of bankers pooled their money and invested in the market ending the precipitous drop. By the end of the day, 12.9 million shares had been sold.

A few weeks later on October 28, 1929 the market fell again. Following weekend newspapers speculated about an impending crash and investors realized they needed to get their money out before it was too late. Tuesday, October 29, 1929 would go down as the worst day in stock market history even though over 16.4 million shares of stock were sold. The following day, the stock market was closed and when it reopened, stocks continued to drop. This signified the beginning of the stock market crash. Over the next two years, the stock market plummeted reaching its low point on July 8, 1932 when the Dow Jones Industrial Average hit 41.22.

The Stock Market crash of 1929 sent ripples throughout the economy. Unable to pay off debts, many Americans were financially ruined. Demand for consumer goods dropped as people began to live in poverty. After the crash, credit also became worthless; no one could be trusted to repay their debts.

The economy, individuals and corporations suffered for several years after the crash. Recovery was due in part to President Roosevelt and his Hundred Day plan, during which time he proposed legislation designed to prop up the banking system, stabilize the economy and restore confidence in Americans.

Although no one is sure exactly what caused the crash, there were several indicators that might have suggested a crash was imminent. Prior to the crash, unemployment was on the rise and construction, steel and automobile production was declining. Most economists subscribe to the theory that the crash was a result of the so-called “Boom-Bust.” This theory explains the disaster by describing the stock market as a bubble – the demand for stocks went unchecked which caused an increase in stock prices, margin buying, and widespread speculation, all of which led to a bubble that eventually burst.

While the recent events of the US economy will not lead to anything close to the Great Depression, the continued issues of health insurance, unemployment and now a massive BP oil spill will certainly have a negative impact on our economy.  Hopefully the turnaround will be much faster than 11 years.

Published or Updated: February 16, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. ctreit says:

    How do you think the “continued issues of health insurance” will affect the economy? Why do you think unemployment will affect the economy and why do you think it does not work the other way around? Where can I read more about the economic “Boom-Bust” theory?

  2. Jerry says:

    You’re absolutely right that the insurance plan, the oil spill, the wars we’re engaged in are definitely having an effect on our economy. And, I hope it doesn’t lead to a 20 + year recovery like the Great Depression. We shall see, I suppose.

  3. jacke says:

    What was missing in today’s economic bust is the willingness of bankers to step up and lend, to evaluate existing loans and continue with those viable projects they had agreed to fund. The absolute failure of the TARP bailout to preserve lending and jobs can be laid directly at the feet of Treasury Secretary Geithner, when he stated that TARP money was not to be used to fund existing loans, only new ones.
    Throughout the nation, high quality projects that were not distressed, lines of credit that were in no way in difficulty, and other business loans were called simply for the banks’ own reasons. Valuable properties were foreclosed and then resold to “buddies” of bank insiders at pennies on the dollar, while smaller banks, businesses, and hundreds if not thousands of workers were put out of work. Today, there is still no indication that the lending policies are improving for real work that creates private jobs. Until that happens, there will be very little recovery, and the longer it takes, the more depressed the economy will be.

  4. Retired Syd says:

    What a great recap of the history surrounding the great depression. Will you write another one with the history of how we got out of that rut to recover? Perhaps there are some important lessons there. Was it a case of the government stepping in to be the buyer (or borrower) of last resort to fund WWII (and therefore creating all those war-related jobs?) What else contributed to the expansion we enjoyed after we turned this around?

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