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.
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.”
Black Thursday
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.
Black Monday
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%.
Black Tuesday
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:
Complacency
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.
Margin calls
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.
Government mismanagement
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.
Oversupply
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.
Key takeaways:
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.
Tulip mania was a period during the 17th century where contract prices for tulip bulbs reached extremely high levels before crashing in 1637.
The causes of tulip mania have perhaps been distorted over the centuries, with many assuming it was one of the first examples of a market bubble bursting. However, the proliferation of once rare tulip bulbs probably lead to them becoming less desirable.
Tulip mania remains a popular term to describe markets where high prices are associated with low value or low utility items, including baseball cards, Beanie Babies, and NFTs.
The South Sea Bubble describes the financial collapse of the South Sea Company in 1720, which was formed to supply slaves to Spanish America and reduce Britain’s national debt.
Investors saw the potential for the South Sea Company to collect interest on the loan in addition to collecting profits from its gold, silver, and slave interests. Positive sentiment was also driven by the actions of the government.
Lucrative trade profits never materialized, which caused the share price to become dangerously overvalued. Instead, the South Sea Company operated more like a bank and less like a shipping business. Capital invested from waves of new investors was redistributed to older investors in an early Ponzi scheme. The share price crashed in December 1720, with many South Sea Company directors impeached or imprisoned.
The Mississippi bubble occurred when a fraudulent fiat banking system was unleashed in a French economy on the verge of bankruptcy.
Scottish banker John Law proposed that the French transition from gold and silver-based currency to paper currency. Law theorized that he could sell shares in the Mississippi Company to pay off French national debt. When the company secured total control of European trade and tax collection, investor speculation increased to unsustainable levels.
The company share price reached its peak in January 1720 as more and more speculative investors entered the fray. Law continued to issue banknotes to fund share purchases, which inevitably caused hyperinflation. Less than twelve months later, shares in the Mississippi Company declined by 1900% and Law had to flee France in disgrace.
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.
The Japanese asset pricebubble resulted in greatly inflated real estate and stock market prices between 1986 and 1991. During the late 1980s, the Japanese economy was booming as a result of exuberance in equity markets and skyrocketing real estate prices.
The Nikkei stock market index reached a peak of 38,916 on December 29, 1989. The bubble burst soon after as the Bank of Japan raised bank lending rates to try to keep inflation and speculation in check. The economy lost over $2 trillion in value over the next twelve months.
The Japanese asset pricebubble was primarily caused by bank deregulation and expansionary monetary policy. Japanese banks who had lost their corporate clients instead lent to riskier small and medium enterprises. The 1985 Plaza Accord trade agreement also caused a sharp appreciation in the yen, which caused massive speculation that the Bank of Japan was happy to ride for years.
The dot-com bubble describes a rapid rise in technology stock equity valuations during the bull market of the late 1990s. The stock market bubble was caused by rampant speculation of internet-related companies.
At the height of the dot-com bubble, instances of private investors quitting their day jobs to trade on the financial market were common. Thousands of companies held profitable IPOs despite earning no profit or even revenue in some cases.
The dot-com bubble began to burst after interest rates were raised five times between 1999 and 2000. Wall Street analysts, perhaps seeing the writing on the wall, advised investors to lower their exposure to dot-com stocks. The NASDAQ peaked in March 2000 and had lost 80% of its value by October 2002.
The global financial crisis (GFC) refers to a period of extreme stress in global financial markets and banking systems between 2007 and 2009.
The global financial crisis was precipitated by changes to legislation in the 1970s. The changes created the subprime mortgage industry and forced banks to loosen their lending criteria for lower-income borrowers.
When the subprime market collapsed in 2008, one-fifth of homes in the United States had been purchased with subprime loans. Bear Stearns and Lehman Brothers collapsed because of their excessive exposure to toxic debt, while consumers were left with mortgages far exceeding the value of their homes. In the aftermath of the GFC, interest rates were reduced to near zero and there was sweeping financial reform.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
