Stock Market Crash 1929

The roar of the 1920s ended in an even louder crash. After a decade of optimism came a decade of depression. What went wrong? How did so much wealth evaporate that it took 25 years for the stock market to return to its previous high?

Fig. 1 - A black and white photograph of a crowd outside the New York Stock Exchange

Stock Market Crash 1929: A Definition of the Stock Market

Stock is partial ownership of a company's profits and assets sold in shares. Each share represents a certain percentage of the company, and its value is supposed to be based on what those assets are worth. When a company makes more profit, the value of its shares increases. If a corporation is profitable, it may give the money to its shareholders, called a dividend, or reinvest it back into the growing the business. Corporations sell shares to raise funds for operating their business.

Stock Exchanges

Stocks are sold in marketplaces called stock exchanges. The exchanges are not stores that sell the stock but are places where buyers and sellers can connect. Selling takes the form of an auction, with sellers giving the stock to whoever will pay the most for it. Sometimes, strong demand from many people wanting to buy a stock can push the price up to more than the stock is worth.

Fig. 2 - Stock certificate

The Stock Market Crash 1929's Significance and Preamble

Throughout the 1920s, average Americans became more involved in the stock market. Stocks surged under speculation. Many believed that the American economy was going to move forever upward. For a time, that seemed to be the case.

A Strong Economy

The economy of the 1920s had been robust. Not only was unemployment low, but the automobile industry created jobs that paid well. The automobile and other improvements also made production more efficient, which helped companies' profits.

More Americans Enter the Stock Market

Working-class Americans were not very interested in the stock market before the 1920s. When they saw the massive amounts of money being made, they decided to get in on the action. Stockbrokers made purchasing stock very easy by selling the stock "on margin" to investors: buyers were only paying a small percentage of the stock's price, and the rest was a loan from the broker. When the market crashed, this meant that people didn't just lose their savings. They lost money they didn't even have, while brokerage firms were left holding loans they couldn't collect on.

Stock Market Crash 1929: Causes

By the end of the 1920s, the instruments that had brought about the strong economy worked to bring its demise. The economy had started to overheat to a point where it was no longer sustainable. Speculators were throwing money at stocks in the hope of getting rich. Corporations were producing goods so efficiently that they ran out of customers. Oversupply and ballooning stock prices combined to bring the impending crash.

Oversupply

With so many people buying stocks and pumping up the value, companies had a huge stream of investment. Many companies decided to invest this money into increasing production. With production already much more efficient, this additional investment led to a tremendous output of goods produced. Although many people had more money due to the strong economy, there still were not enough customers to purchase all the goods. When stock remained unsold, many companies had to clear their items at a loss and lay off workers.

Speculation

As stocks seemed to be on an endless climb in the 1920s, many felt investing was easy. Stocks started to feel like a guaranteed way to make money. Investors began buying stocks assuming they had to go up, not based on how a business was performing.

Fig. 3 - A color graph depicting the Dow Jones Economic Downturn in 1929

Stock Market Crash 1929: Explained

Early in October of 1929, stock prices finally began lowering based on the companies' actual economic condition. By the end of the month, the bubble eventually burst. The 1929 Stock Market Crash occurred over several days. Monday, October 28, 1929, became known as Black Monday, and Tuesday, October 29, 1929, became Black Tuesday. These two saw the implosion of a decade worth of American economic prosperity.

Black Thursday

Although not as well remembered as Black Monday or Tuesday, the crash started on Thursday, October 24, 1929, also known as Black Thursday. The market had begun to slide in September, but on Thursday morning, the market opened 11% lower than it closed on Wednesday. Before that morning, the market was already down 20% since September. Some large banks put together the money to buy up stocks and restore confidence in the market. Their plan worked, but only long enough the bring prices back up by the end of the day and hold them through Friday.

Black Monday and Tuesday

Throughout the day on Monday, the situation grew increasingly worse. The stock market fell almost 13%. Black Tuesday was when panic set in for most small investors. The market lost another 12% during frenzied sell-offs of 16 million shares. The problem with the economy had now spun out of control.

Debt Spiral

Much of the stock in the market had been purchased on margin. When stocks sank to lower in value than the money owed still owed to the brokers, they sent letters to the borrowers to deposit more money on their loans. Those borrowers hadn't had the money to buy the stock in the first place. Many loans had been made on too lenient terms as the brokers believed the market would perpetually go up. These investors' stocks were then sold at a loss, further driving down the market

Stock Market Crash 1929: Effects

The financial system suffered for years afterward. Besides the over two decades it took the market to recover, the entire banking system was significantly weakened. By the mid-1930s, President Franklin Delano Roosevelt was dealing with a massive banking crisis. The economy was now in the Great Depression, and the roar of the 1920s had grown silent.