Black Tuesday occurred on October 29, 1929. Within hours, the stock market lost all the gains of the entire year. The Dow Jones Industrial Average gapped down from the previous day's close of 260.64, opening at 252.6. It fell to 212.33, closing a bit up at 230.7, an 11% loss. A terrifying 16.4 million shares were traded, beating the record of 12.9 million shares traded on Black Thursday. That was worth $14 billion, or $185 billion in 2011 dollars.
As bad as they were, these losses weren't what made Black Tuesday so devastating. (By today's standards, even $185 billion in losses wasn't a lot of money. For example, the stock market crash of 2008 resulted in trillions, not billions, in losses.)
However, the crash on Black Tuesday was set the direction of the stock market, and then the economy, for the next decade. In just four days, the stock market dropped 25%. It lost $30 billion, or 40%, in market value. This was ten times more than the 1929 Federal budget, and more than the U.S. had spent in World War I. By November 13, the day when stock prices hit their lowest point in 1929, over $100 billion had disappeared from the American economy. In today's terms, that was worth $1.3 trillion.
Black Tuesday's record losses occurred despite attempts by the prominent bankers to stop the crash. The prominent bankers of the day -- Morgan Bank, Chase National Bank, and National City Bank of New York -- intervened, The banks bought shares of stocks in an attempt to restore confidence in the stock market. However, the banks' intervention signaled other investors to continue to sell, creating continued panic. Black Tuesday is widely regarded as the start of the Great Depression, because it signaled a complete loss in confidence in the U.S. financial system.
What Caused Black Tuesday?Part of the panic that caused Black Tuesday resulted from how investors played the stock market back in the 1920s. They didn't have as much access to information as they do today. Stock prices weren't on the computer, they were shown via a tickertape machine. This machine printed stock prices on a strip of paper. As stock prices dropped on Black Tuesday, panic ensued because no one knew how bad it was.The tickertapes literally could not keep up with the pace of falling stock prices. It was pandemonium on the floor of the stock exchange. Buyers roared and screamed, as often fell to the floor when they got bad news about a stock price. Crowds formed outside of the New York Stock Exchange, and policeman were called to keep order.
The other reason for the panic was a new way that stocks were bought. Many investors had placed huge stock orders using money they borrowed from their brokers, called buying on margin. When stock prices fell, the brokers called in the loans. Many people found their entire life savings wiped out to pay off the loan. Some of them realized what fools they had been. In despair, they jumped out of windows. The Roaring 20s was over. New York hotel clerks would cynically ask their incoming guests, "You want a room for sleeping...or for jumping?"
Did Black Tuesday Cause the Great Depression?Black Tuesday's losses alone were not enough to cause the Great Depression. However, psychologically, it destroyed confidence in the economy. That's because, in those days, people believed the stock market was the economy. What was good for Wall Street was thought to be good for Main Street. That loss of confidence created a run on the banks. People withdrew all their savings. The banks didn't have enough cash on hand, and were forced to close. When they reopened, they only gave savers ten cents for every dollar. There was no Federal Deposit Insurance Corporation to insure people's savings.
Investors abandoned the stock market and started putting their money in commodities. Gold prices soared. At that time, the U.S. was on the gold standard, and promised to honor each dollar with its value in gold. As people began turning in dollars for gold, the U.S. government began to worry it would run out of gold.
The Federal Reserve thought it would come to the rescue by increasing the value of the dollar. How did it do this? By raising interest rates, which reduced liquidity to businesses. Without funds to grow, businesses started laying off employees, leading to a vicious downward economic spiral that became the Great Depression.