Definition: The stock market crash of 1929 was the most significant crash in U.S. history. Although the crash itself only lasted four days, it led to a catastrophic sell-off. The Dow Jones Industrial Average lost 90% of its value between its record high close of 381.2 on September 3, 1929, and its subsequent bottom of 41.22 on July 8, 1932. That was the worst bear market in terms of percentage loss in modern U.S. history. It took 25 years for the Dow to regain its September 3 high.
The crash began on Black Thursday, October 24, 1929. The stock market opened at 305.85, falling 11% during the day, barely a stock market correction. It regained, to close just 2% down for the day. Nevertheless, Wall Street bankers were worried because trading was triple the normal volume.
The next day was Black Tuesday, when the market fell another 11%, as panicked investors stampeded out of the stock market. Over 16 million shares were sold that day.
Over the four days of the stock market crash, the Dow dropped 25%, losing $30 billion in market value. (That's worth $396 billion today.) Although we are used to trillion-dollar losses today, back then the public was terrified. This was more than the total cost of World War I! The confidence that's essential for a healthy economy was lost.
What made Black Thursday such a bad day in the history of the New York Stock Exchange was the loss of people's faith in the Wall Street. Since 1922, the stock market had gone up, not down -- nearly 20% a year. Everyone invested. A financial innovation, called buying "on margin," allowed those who didn't have the cash to buy the stock outright to invest. They only had to put 10-20% down, and borrow the rest from their stockbrokers. When the stock market crashed, brokers called in loans. Many people were wiped out, selling businesses and losing their life savings. The irrational exuberance of the Roaring 20s was over. (Source: Dow figures taken from Yahoo Finance DJIA Historical Prices.)
Effects of the Crash
The crash led to the Great Depression. During the Depression, unemployment rose to 25%, wages fell 42%, economic growth fell 50%, and world trade plummeted 65%. That's partly because prices fell 10% a year, thanks to deflation.
What Caused the Crash?
Even before the crash began on Black Thursday, the market was jittery. The Dow had already fallen 20% from its September 3 high. Markets were spooked by the Hatry Case in late September, which caused the British stock market to drop. Investors in Clarence Hatry's company lost billions when it was discovered he used fraudulent collateral to buy United Steel. A few days later, England's Chancellor of the Exchequer,Philip Snowden, described America's stock market as "a perfect orgy of speculation." The next day, U.S. newspapers agreed, and quoted Secretary of the Treasury Mellon who said that investors "acted as if the price of securities would infinitely advance."In response, the Dow dropped significantly on both of those days, and again on October 16. By the 19th and 20th, Washington Post headlines proclaimed the drop in ultra-safe utility stocks.
The week of the stock market crash began with another down day. On Tuesday, The New York Times headlines fanned the panic with articles about margin sellers, short-selling and the exit of foreign investors. The day before Black Thursday, The Washington Post headlines blared "Huge Selling Wave Creates Near-Panic as Stocks Collapse," while The Times screamed "Prices of Stocks Crash in Heavy Liquidation." By Black Thursday, panic had set in for the worst stock market crash in history. (Source: Harold Bierman, Jr, The 1929 Stock Market Crash)
Stock Market Crash of 1929 Facts
- March 1929 -- The Dow dropped, but bankers reassured investors.
- August 8 -- The Federal Reserve Bank of New York raised the discount rate to 6%
- September 26 -- The Bank of England also raised its rate to protect the gold standard.
- September 29, 1929 -- The Hatry Case plunged British markets into panic.
- October 3 -- Phillip Snowden said the U.S. stock market was a "speculative orgy."
- October 4 -- The Wall Street Journal and the New York Times agreed.
- October 24 -- Black Thursday.
- October 28 -- Black Monday.
- October 29 -- Black Tuesday.
- 1933 -- The Federal Deposit Insurance Corporation was created to insure bank deposits. After the crash, banks only had enough to honor ten cents for every dollar. That's because they had used their depositors' savings, without their knowledge, to buy stocks.
- November 23, 1954 -- The day when the Dow finally regained its September 3 high.