The 1929 Stock Market Crash: Causes, Events, and Aftermath
The Market’s Rise (1928-1929)
The Dow Jones Industrial Average experienced remarkable growth in 1928-1929, climbing from a low of 191 to 300 by December 1928, before ultimately peaking at 381 in September 1929. During this period, investors maintained high expectations that corporate earnings and dividends would continue their upward trajectory.
This optimism pushed price-to-earnings ratios from their traditional range of 10-12 to 20 or higher for popular stocks. Market observers were divided about these valuations—some believed stock prices in early 1929 were excessively high, while others considered them still undervalued despite the dramatic increases.
The Crash Unfolds
The market’s collapse began on October 3, 1929, when the Dow Jones Average started to decline, continuing downward throughout the week of October 14. The situation deteriorated rapidly during the night of Monday, October 21, when margin calls intensified and sell orders poured in from Dutch and German investors for the Tuesday morning opening.
The following morning brought even more pressure as out-of-town banks and corporations recalled $150 million in call loans. Wall Street was already in panic before the New York Stock Exchange even opened its doors. By Thursday, October 24—a day that would become known as “Black Thursday”—investors were frantically selling stocks.
The New York Stock Exchange saw unprecedented activity:
- 1,100 members appeared on the trading floor (compared to the normal 750-800)
- All exchange employees were directed to work on the floor
- Extra telephone staff was arranged to handle the flood of margin calls and sell orders
Despite this chaos, the Dow Jones Average closed at 299 that day. However, the true crash came on Tuesday, October 29, 1929. Within the first few hours of trading, prices fell so dramatically that all gains from the previous year were completely wiped out. The Dow closed at 230.
The Immediate Impact
The financial devastation was immense and rapid:
- Between October 29 and November 13, over $30 billion disappeared from the American economy
- By mid-November, New York Stock Exchange listings had lost over 40% of their value—a staggering $26 billion
- At the height of the panic, the ticker tape fell 68 minutes behind actual trading
- An estimated $50 million in market value was being erased every minute
- Some ruined investors tragically jumped to their deaths from office buildings
- Others gathered in the streets outside the Exchange to learn the extent of their losses
The long-term impact was equally severe—it took nearly 25 years for many stocks to recover their pre-crash values.
Why Did the Crash Happen?
Five major theories explain what caused the crash:
- Overvaluation theory: Some argued the crash simply brought inflated share prices back to normal levels. However, studies using standard measures like P/E ratios suggest stocks weren’t necessarily overpriced.
- Fraud and illegal activity: While initially suspected, evidence has shown there was likely very little insider trading or manipulation involved.
- Excessive margin buying: While margin purchases (buying stocks with borrowed money) contributed to the problem, the overall amount of margin outstanding was relatively small compared to the market’s total value.
- Federal Reserve policy changes: The new Federal Reserve Board President, Adolph Miller, tightened monetary policy specifically to lower stock prices, believing speculation was damaging the economy. Interest rates on broker loans rose significantly in early 1929, reducing bank-originated broker loans and decreasing market liquidity.
- Public official statements: High-profile figures like President Herbert Hoover publicly declared stocks were overvalued. Paradoxically, such statements may have encouraged investors to believe the government would take measures to sustain the market’s strength.
Why People Invested in the Stock Market
Americans poured money into stocks during the late 1920s for five primary reasons:
- Get-rich-quick mentality: The market was widely perceived as an easy path to wealth, though only about 4 million Americans (a small percentage of the population) were invested at any one time.
- Rising wages: Higher incomes meant more Americans had surplus money to save or invest.
- Easy credit: Banks offered money at lower interest rates to more people, likely encouraging some to take loans specifically to purchase stocks.
- Industrial overproduction: Companies were producing more than consumers could buy, then reinvesting profits into expanded facilities, new machinery, and additional workers. This created an illusion of financial soundness that encouraged further stock purchases.
- Lack of regulations: Without clear guidelines or laws governing the market, investors began buying stocks “on margin”—essentially purchasing on credit with minimal down payments. This practice meant much of the money supposedly invested in the market didn’t actually exist.
Government Response and Regulations
The crash prompted significant criticism of Federal Reserve policies. The Fed’s initial response between October 1929 and February 1930 included lowering interest rates from 6% to 4% and increasing the money supply. Commercial banks in New York provided loans to security brokers and dealers to maintain market liquidity.
However, monetary policy became inconsistent between February 1930 and 1932:
- Government security purchases declined until 1932, reducing liquidity by lowering non-borrowed reserves
- While interest rates were reduced between March 1930 and September 1931, they were then raised twice in late 1931, making loans more expensive and deterring borrowing
The crash revealed how inadequately investors had been protected from fraud and questionable stocks. Before 1929, there was virtually no oversight ensuring that companies were reporting their financial health accurately. The Securities and Exchange Commission (SEC) was subsequently established to regulate the market and punish violators.
Another crucial reform came in response to the banking crisis—4,000 banks failed during this period simply because they ran out of money. Four years after the crash, Congress passed the Glass-Steagall Act, which separated commercial banking from investment banking to prevent similar failures in the future.
The Crash and the Great Depression
While the market crash is often blamed for causing the Great Depression, historians and economists note that the relationship is more complex. From the business cycle peak in August 1929 to March 1933, production fell nearly 50%, and the overall price level dropped by about one-third.
Many people at the time blamed President Hoover, brokers, bankers, and businessmen for the economic collapse. However, experts now recognize that the Depression cannot be attributed to any individual or single group. The crash alone was likely not substantial enough to drive the economy into depression or sustain the prolonged downward spiral in business activity that followed.
The 1929 crash and subsequent reforms fundamentally transformed the American financial system, establishing regulatory frameworks that continue to influence markets today, even as some provisions, like parts of Glass-Steagall, have been modified or softened over time.