The Stock Market Crash of 1929 was a major American stock market crash in October 1929 that precipitated the beginning of the Great Depression. Various causes stood behind the financial collapse of 1929, some of which attributed to speculation, government mismanagement, and oversupply.
Understanding the Stock Market Crash of 1929
Before the Stock Market Crash of 1929, the United States had enjoyed a period of economic and social growth in a period known as the “Roaring Twenties”.
Stock prices soared during this time as the United States underwent rapid expansion. When President Herbert Hoover was inaugurated in January 1929, millions of American citizens poured their liquid assets into securities.
Many invested their life savings, while others sold bonds and mortgaged their homes to invest billions in the stock market.
The Dow Jones Industrial Average (DJIA) reached a peak of 381 in September 1929, with prices starting to decline in early October.
Speculation continued, however, with investors ignoring warnings about an imminent collapse by borrowing more money to invest in shares.
After recently witnessing massive losses on the British stock market, Chancellor of the Exchequer Philip Snowden described America’s predicament as “a perfect orgy of speculation.”
The crash began on October 24, 1929, when the market opened 11% lower than it had closed the previous day.
Losses were initially modest as institutions stepped in with bids above the market to quell investor panic and protect their wealthy clientele.
As a result, most stocks had bounced back by the end of the day with the DJIA closing only 6.8 points down.
On the following Monday, October 28, many investors exited the market after facing margin calls.
The Dow suffered a record loss of 38.33 points, or 12.82%.
The next day, some 16 million shares were traded on the New York Stock Exchange as investors suffered losses in the billions of dollars.
The Dow lost another 12% and closed at 198, representing a drop of 183 points in less than two months.
Companies including General Electric, American Telephone and Telegraph, DuPont, and United States Steel also suffered heavy losses. Most smaller organizations were forced to declare bankruptcy.
The DJIA continued to slide until the summer of 1932 when it closed at a record low of 41.22. The index would not recapture its pre-crash value until November 1954.
What caused the Stock Market Crash of 1929?
As with most disasters, there was no single cause of the 1929 crash.
Nevertheless, here are a few of the major contributing factors:
During the 1920s, American companies exported goods to Europe which was still rebuilding after the First World War.
Unemployment was also low and the rise of the automobile was creating new jobs where there were none previously.
Investors became complacent by assuming the new status quo would last forever.
Stock speculating became a national pastime with many new investors entering the market with little understanding of how it worked.
Many of these new investors were buying stocks on margin.
In this scenario, the buyer of the asset pays a percentage of the asset’s value and borrows the rest from a bank or broker.
This arrangement meant investors were extremely vulnerable to share price decreases, losing money on their original investment and owing money to the entities who had granted them loans.
The United States Federal Reserve is tasked with the role of creating a safe and stable financial system.
When the country was experiencing rapid growth, they kept interest rates low and only raised them when the crash hit.
Today, these actions are considered to be the opposite of good economic management.
While there was a period of growth in the 1920s, many companies were selling their goods at a loss because of oversupply.
Unfortunately, the share price of such companies did not accurately reflect their financials or indeed broader market conditions.
U.S. Congress eventually passed the United States Tariff Act of 1930 to increase domestic demand for goods by increasing import tariffs.
However, this move backfired as other countries retaliated by imposing import tariffs on U.S. products.
- The Stock Market Crash of 1929 was a major American stock market crash in October 1929 that precipitated the beginning of the Great Depression.
- Black Friday, Black Monday, and Black Tuesday are terms used to describe the calamitous fall of the Dow Jones Industrial Average over three days. The index would slide further in the following years and would not recapture its pre-crash value until November 1954.
- The Stock Market Crash of 1929 was caused by complacency during the economic prosperity of the 1920s with many new investors buying stocks on margin. Government mismanagement and company share prices that did not reflect their true value were also contributing factors.
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