The Wall Street crash of 1929, also known as the Great Crash, was a major stock market crash in the United States which began in October1929 with a sharp decline in prices on the New York Stock Exchange (NYSE). It triggered a rapid erosion of confidence in the U.S. banking system and marked what would later cascade into the worldwide Great Depression that lasted until the United States entered into World War II on December 8, 1941, making it the most devastating crash in the country's history. It is most associated with October 24, 1929, known as "Black Thursday", when a record 12.9million shares were traded on the exchange,• "Worst Stock Crash Stemmed by Banks; 12,894,650 Share Day Swaps Market", The New York Times, Friday, October 25, 1929. Retrieved November 27, 2020. • Shachtman, Tom. (1979). The Day America Crashed: A Narrative Account of the Great Stock Market Crash of October 24, 1929. Description. New York: G.P. Putnam. Retrieved November 27, 2020 and October 29, 1929, or "Black Tuesday", when some 16.4million shares were traded.
The "Roaring Twenties" of the previous decade had been a time of industrial expansion in the U.S., and much of the profit had been invested in speculation, including in stocks. Many members of the public, disappointed by the low interest rates offered on their bank deposits, committed their relatively small sums to stockbrokers. By the year 1929, the U.S. economy was showing signs of trouble; the agricultural sector was depressed due to overproduction and falling prices, forcing many farmers into debt, and consumer goods manufacturers also had unsellable output due to low wages and thus low purchasing power. Factory owners cut production and fired staff, reducing demand even further. Despite these trends, investors continued buying shares in parts of the economy where output was falling and unemployment was rising, pushing stock prices far above their underlying value.
By September 1929, more experienced shareholders realized that prices could not continue to rise and began to get rid of their holdings, which caused share values to stall and then fall, encouraging more to sell. As investors panicked, the selling became frenzied. After Black Thursday, leading bankers joined forces to purchase stock at prices above market value, a strategy used during the Panic of 1907. This encouraged a brief recovery before Black Tuesday. Further action failed to halt the fall, which continued until July 8, 1932; by then, the stock market had lost some 90% of its pre-crash value.
Congress responded to the events by passing the Banking Act of 1933 (Glass–Steagall Act), which separated commercial and investment banking, and the Securities Act of 1933 and Securities Exchange Act of 1934, which created the U.S. Securities and Exchange Commission, authorized the creation of its disclosure regulations, and prohibited the market manipulation, insider trading, and speculative investing practices that precipitated the crash. Stock exchanges introduced a practice of suspending trading when prices fell rapidly to limit panic selling. Scholars disagree about the crash’s role in the Great Depression. Some argue that the price swings were not, by themselves, severe enough to trigger a major collapse of the financial system. Others contend that the crash, combined with other economic problems in the U.S. in the 1920s, should be understood as one stage of a broader business cycle affecting capitalist economies.
Background
The "Roaring Twenties", the decade following World War I and the Recession of 1920–1921, has been scholarly and biographically regarded as an era defined by wealth, luxury and excess. Building on post-war optimism, rural Americans migrated to the cities in vast numbers throughout the decade, hoping to find a more prosperous life amid the ever-growing expansion of America's industrial sector, pursuing means of conspicuous consumption.
Declines in the money supply caused by Federal Reserve decisions were beginning to have a severely contractionary effect on output. Despite the inherent risk of speculation, it was widely believed that the stock market would continue to rise. On March 25, 1929, after the Federal Reserve warned of excessive speculation, a small crash occurred as investors began selling stocks rapidly, exposing the market's shaky foundation. Two days later, banker Charles E. Mitchell announced that his company, the National City Bank, would provide $25 million in credit to stop the market's slide. Mitchell's move brought a temporary halt to the financial crisis, and call money declined from 20 to 8 percent. However, the American economy showed ominous signs of trouble. Steel production declined, construction was sluggish, automobile sales went down, and consumers were building up large debts because of easy credit.
Despite these problems and the market breaks in March and May 1929, stocks resumed their advance in June, and the gains continued almost unabated until early September 1929 (the Dow Jones average gained more than 20% between June and September). The market had been on a nine-year run that saw the Dow Jones Industrial Average increase in value tenfold, peaking at 381.17 on September 3, 1929. Shortly before the crash, economist Irving Fisher famously proclaimed "Stock prices have reached what looks like a permanently high plateau". The optimism and the financial gains of the great bull market have been regarded as having been shaken after a well-publicized September 5 prediction from financial expert Roger Babson, declaring that "a crash is coming, and it may be terrific"."Babson Predicts Crash in Stocks Sooner or Later". The Owensboro Messenger (Owensboro, Kentucky). September 8, 1929. p. 2. "I repeat what I said at this time last year, and the year before, that sooner or later a crash is coming which will take the leading stocks and cause a decline of from sixty to eighty points in the Dow-Jones Barometer. Fair weather cannot always continue. The economic cycle is in progress today, as it was in the past. The Federal Reserve System has put the banks in a strong position, but it has not changed human nature. More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails. This does not mean selling all you have but it does mean paying up your loans and avoiding margin speculation." The initial September decline was thus called the "Babson Break" in the press. That was the start of the Great Crash, but until the severe phase of the crash in October, many investors regarded the September "Babson Break" as a "healthy correction" and buying opportunity.
On September 20, 1929, top British investor Clarence Hatry and many of his associates were jailed for fraud and forgery, leading to the suspension of his companies. This may have weakened the confidence of Americans in their own companies, although it had minimal impact on the London Stock Exchange. In the days leading up to the crash, the market was severely unstable. Periods of selling and high volumes were interspersed with brief periods of rising prices and recovery.
Conservative economists Jude Wanniski and Alan Reynolds have argued that the immediate cause of the crash was investor fears about the Smoot–Hawley Tariff Act, which was being negotiated in the U.S. Senate at the time. On October 23, 1929, while voting on an amendment to the bill, 16 senators who had been considered members of an anti-tariff coalition unexpectedly changed their votes and supported an increase in the tariff on calcium carbide imports from Canada. The crash began that afternoon and grew worse the following morning.Reynolds, Alan. "Fifty Years Later: What Do We Know About The Great Crash?", National Review, November 9, 1979, via the Cato Institute. In response, libertarian economist Scott Sumner has pointed out that this vote did not significantly change the anti-tariff coalition, which Sumner says was growing stronger during the days following October 23 while the crash was occurring. Instead, Sumner argues that the ongoing conflict between pro-tariff and anti-tariff Republicans led investors to worry that the party could not govern effectively on economic issues.Sumner, Scott B. The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Independent Institute, 2015, pp. 54-55. In particular, he cites the controversy over the appointment of Otto H. Kahn, a Wall Street banker who supported the tariff bill, as treasurer of the Republican Senatorial Campaign Committee. Kahn's appointment was announced on the evening of October 24,Associated Press. "Republican Solons Must Help Hoover", via the Iola Register, October 26, 1929, front page. and fierce opposition from Progressive Republicans who opposed the bill forced him to publicly turn down the offer on October 29.Associated Press. "Kahn Declines To Occupy G.O.P. Post", via the Cincinnati Enquirer, October 30, 1929, front page.
Harold Bierman, Jr., argues that the decline in stock prices began on October 3, 1929, in response to a widely publicized comment from British Chancellor of the Exchequer Philip Snowden, who described American markets as a "speculative orgy". In this unsettled market, Bierman says, the sudden crash a few weeks later was triggered by federal and state efforts to regulate public utilities, which had become a common vehicle for investment trusts. In particular, he argues that the creation of the Committee on Public Service Securities in the state of New York by Governor Franklin D. Roosevelt on October 8, and similar investigatory action in Massachusetts the following week, were possible "straws that broke the camel's back", sparking fears that those public utilities were overvalued by speculators.
Stock crash
Selling intensified in late-October. A sharp, unexpected decline in stock prices began on the afternoon of October 23, about an hour before trading ended for the day, leading to a 4.6% drop in total market value.Bierman, Harold, Jr. "The 1929 Stock Market Crash", Economic History Association. That night, many investors panicked and resolved to sell their shares as soon as possible.Suddath, Claire. "The Crash of 1929", Time, October 29, 2008. On October 24, "Black Thursday", the market lost 11% of its value at the opening bell. In the first three minutes alone, nearly three million shares of stock, accounting for $2 billion of wealth, changed hands. The huge volume meant that the report of prices on the ticker tape in brokerage offices around the nation was hours late, and so investors had no idea what most stocks were trading for."Rally Follows Record Crash; Ticker 2 Hrs. Late". Times Union (Brooklyn, New York). October 24, 1929. p. 11. Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.Robert Goldston, The Great Depression, pp. 39–40 The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York."Lamont Says Banks See No Cause For Alarm As Stock Crash Is Only Technical Break". Times Union (Brooklyn, New York). October 24, 1929. p. 1. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.
With the bankers' financial resources behind him, Whitney placed a bid to purchase 25,000 shares of U.S. Steel at $205 per share, a price well above the current market."Brief Review Transactions On Exchange". Associated Press. The Ithaca Journal (Ithaca, New York). October 25, 1929. p. 14. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907 and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing down only 6.38 points (2.09%) for the day.