The U.S. stock market crash of 1929 was the beginning of the longest and deepest decline in stocks in history. It precipitated the failure of about half of the banks in the U.S. and was one of the principal causes of the Great Depression, which lasted about 10 years and engulfed most of the world.
The market crash was preceded by a long period of economic prosperity in the U.S. following the end of World War I. During the "Roaring 20s," as the period became known, millions of Americans were able to buy automobiles, telephones, radios and other new innovations. This prosperity fueled speculation in stocks in the companies that made these products as investors big and small rushed to get into the market. The resulting speculation was enabled by banks, which were willing to lend money to investors to buy stocks with only 10% down, with the stock serving as collateral for the loans; the banks themselves invested depositors' money in stocks.
Beginning Of The Crash
The beginning of the 1929 crash is generally considered to be 24 October 1929, now known as Black Thursday. However, stocks had already fallen by 20% after hitting their September peak as many people grew concerned that the market had risen too far, too fast. At the same time, the U.S. Federal Reserve in August tightened credit by raising the discount rate to 6% from 5%, which caused banks to limit lending.
After falling 4.6% the previous day, on Black Thursday stocks went into freefall, with the Dow falling 11% during intra-day trading on very heavy trading. However, in a bid to calm the panic and prop up stock prices, the three leading banks at that time—Morgan, Chase National, and National City Bank—bought stocks. This seemed to work, at least temporarily, as the market closed with a relatively modest 2% loss.
The following day, stocks actually staged a modest rebound, ending the day slightly higher. However, that proved to be only the beginning of the onslaught. Far worse was yet to come the following week.
Black Monday And Tuesday
On Black Monday, 28 October, the Dow plunged nearly 13%, still the second-biggest one-day percentage drop in history. It was eclipsed only by the 22.6% drop on 19 October 1987, which is also referred to as Black Monday. That was followed by an 11.7% drop the following day—known as Black Tuesday—the-third biggest one-day percentage loss. A week later, on 6 November 1929, the Dow declined another 10%, the fourth-biggest one-day loss in percentage terms.
Among individual stocks, General Electric fell to 210 from 396 in less than two months. DuPont plunged to 80 from 217, United States Steel to 166 from 261, and RCA to 26 from 505.
The market eventually bottomed out on 8 July 1932, with the Dow closing at 41.22. After reaching its then-record high on 3 September 1929, the Dow lost almost 90% of its value over that time. It would take another 22 years—23 November 1954—until the Dow got back to its previous peak.
By way of comparison, the stock market drop of 2008 prior to the Great Recession was relatively mild. From a peak of 1526 in the summer of 2007 to a bottom of 798 in March 2009, the S&P 500 dropped nearly 48%. It eventually recouped all of that loss by the beginning of 2013, or about four years. Since then, the index had risen by more than 300% by late 2019.
The Great Depression
The massive decline in stock prices in 1929 was a principal cause of the long worldwide economic calamity that followed. Many investors lost their life savings in the rout. When the bottom of the stock market fell out, the collateral behind the loans used to buy stocks was often worthless. This left banks with billions of dollars of bad loans in addition to their own stock market losses. In the days before government bank insurance, that created a panic among depositors who rushed to their banks to get their money, many unsuccessfully. By 1933, nearly half of U.S. banks had failed.
With money so tight, businesses cut back on production and laid off workers. Eventually, nearly 15 million Americans, or 30% of the workforce, lost their jobs. That loss of income worsened the downward business spiral, as people didn't have the money to buy things.
The U.S. government enacted several measures in response. In 1933, shortly after taking office, President Franklin Roosevelt signed into law the Glass-Steagall Act, also known as the Banking Act of 1933. This prohibited commercial banks from engaging in investment banking activities. It also created the Federal Deposit Insurance Corp. to insure bank deposits.
The U.S. stock market crash of 1929 was the beginning of the longest and deepest decline in stocks in history and was a major cause of the Great Depression that followed, lasting about 10 years. After climbing more than six-fold during a period of prosperity and rampant speculation that became known as the Roaring 20s, the Dow Jones Industrial Average would plummet nearly 90% over the next three years, not returning to its peak again until 1954.
The crash led to the failure of about half of American banks and massive unemployment. The crash resulted in the passage of the Glass-Steagall Act that separated commercial banks from investment banks and the creation of the Federal Deposit Insurance Corp. to insure bank deposits.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…