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The 1929 Stock Market Crash
In early 1928 the Dow Jones Average went from
a low of 191 early in the year, to a high of 300 in December of 1928 and peaked
at 381 in September of 1929. (1929…) It was anticipated that the increases in
earnings and dividends would continue. (1929…) The price to earnings ratings
rose from 10 to 12 to 20 and higher for the market’s favorite stocks. (1929…)
Observers believed that stock market prices in the first 6 months of 1929 were
high, while others saw them to be cheap. (1929…) On October 3rd, the Dow Jones
Average began to drop, declining through the week of October 14th. (1929…)
On the night of Monday, October 21st, 1929, margin calls were heavy and
Dutch and German calls came in from overseas to sell overnight for the Tuesday
morning opening. (1929…) On Tuesday morning, out-of-town banks and corporations
sent in $150 million of call loans, and Wall Street was in a panic before the
New York Stock Exchange opened. (1929…)
On Thursday, October 24th, 1929,
people began to sell their stocks as fast as they could. Sell orders flooded the
market exchanges. (1929…) This day became known as Black Thursday. (Black
Thursday…) On a normal day, only 750-800 members of the New York Stock Exchange
started the exchange. (1929…) There were 1100 members on the floor for the
morning opening. (1929…) Furthermore, the exchange directed all employees to be
on the floor since there were numerous margin calls and sell orders placed
overnight. Extra telephone staff was also arranged at the member’s boxes around
the floor. (1929…) The Dow Jones Average closed at 299 that day. (1929…)
On
Tuesday, October 29th, 1929, the crash began. (1929…) Within the first few
hours, the price fell so far as to wipe out all gains that had been made the
entire previous year. (1929…) This day the Dow Jones Average would close at 230.
(1929…) Between October 29th, and November 13 over 30 billion dollars
disappeared from the American economy. (1929…) It took nearly 25 years for many
of the stocks to recover. (1929…)
By mid November, the value of the New York
Stock Exchange listings had dropped over 40%, a loss of $26 billion. (1929-1931)
At one point in the crash tickers were 68 minutes behind. (1929-1931) An average
of about $50,000,000 a minute was wiped out on the exchange. (1929-1931) A few
investors that lost all of their money jumped to their deaths from office
buildings. Others gathered in the streets outside the Stock Exchange to learn
how much they had lost. (Black Thursday…)
The Cause
There are five
proposed reasons as to why the stock market crashed. One of the reasons was that
stocks were overpriced and the crash brought the share prices back to a normal
level. However, some studies using standard measures of stock value, such as
Price to Earning ratios and Price to Dividend ratios, argue that the share
prices were not too high. Another reason is that there were massive frauds and
illegal activity in the 1920’s stock market. However, evidence revealed that
there was probably very little actual insider trading or illegal manipulation.
(1929…)
Margin buying is another reason why people believed that the crash
happened. Though it is not the main reason, there was very little margin
relative to the value of the market. The new President of the Federal Reserve
Board, Adolph Miller, tightened the monetary policy and set out to lower the
stock prices since he perceived that speculation led stocks to be overpriced,
causing damage to the economy. Also, in the beginning of 1929, the interest rate
charged on broker loans rose tremendously. This policy reduced the amount of
broker loans that originated from banks and lowered the liquidity of
non-financial and other corporations that financed brokers and dealers. Lastly,
many public officials commented that the stock price was too high. Herbert
Hoover publicly stated that stocks were overvalued and that speculation hurt the
economy. Hoover’s statement suggested to the public the lengths he was willing
to go to control the stock market. These kinds of statements encouraged
investors to believe that the market would continue to be strong, which could be
one of the causes of the crash. (1929…)
The Crash and The Depression
After the crash, production fell nearly 50% from the business cycle peak in
August 1929 to March 1933. Meanwhile, the overall price level of stocks dropped
by about 1/3. Many people blamed the crash for the economic collapse. Some
people held responsible, fairly or not, were President Hoover, brokers, bankers,
and businesspersons. The cause of the depression cannot be linked to one
individual or even a group of people. It is also unlikely that the crash of the
market would have been large enough to lead the US economy into the depression
by itself and to sustain the downward spiral in business activity. (1929…)
Why People Invested in the Stock Market
During 1929, people invested in
the stock market for five major reasons. The first was that the market was
considered an easy way to get rich quick. Although about four million Americans,
a small amount, invested in the stock market at one time, the constant influx of
new investors coming in and old investors moving out ensured that new money was
always flowing around. (1929…)
Another reason was the higher wages of the
ordinary workers. This meant that everyone in America had extra money to put
into savings or invest in the market. The third reason was that at this time,
money was made more readily available from banks, at a lower interest rate, to
more people. Some economist debated that this influenced the stock market, and
it is conceivable that people took loans to buy more stock. (1929…)
The
fourth reason is that industry was over-producing products, in anticipation of
selling the surplus. Profits were put right back into the industry, by investing
in factories, new machinery, and more people. This led to even more surplus. An
aura of financial soundness was created by this, and Americans were encouraged
to buy more stock. (1929…)
Lastly, there were no guidelines or laws
concerning the market. Investors began buying on ‘margin’ or buying stock on
credit. Investors had high expectations that they would receive large returns in
a few months, so they could pay the balance and have money left over in return.
In reality, most of the money that was being invested in the market was not
actually being put into the market. (1929…)
Government Reaction
After
the crash there was criticism of the Federal Reserve policy. Between October
1929 and February 1930 the interest rate was lowered from 6% to 4%, and the
money supply increased immediately after the crash. Commercial banks in New York
made loans to security brokers and dealers, which in turn provided liquidity to
the non-financial and other corporations that financed brokers and dealers prior
to the crash. (1929…)
Monetary policy became ambiguous between February 1930
and 1932. Government security purchases in the open market continued to decline
until 1932. This reduced liquidity by lowering non-borrowed reserves. Although
the interest rate was reduced between March 1930 and September 1931, it was
raised twice in late 1931. This made loans more expensive and deterred people
and corporations from borrowing. (1929…)
Government Regulations After
the Crash
Before the crash, investors were not protected at all from fraud,
hype and shoddy stocks. Investors did not know if a company actually doing as
well as it was said to be doing and if the financial reports were reliable.
After the crash, the Securities and Exchange Commission (SEC) was established to
lay down the law and to punish those who violated the law. (1929…)
Also
during the crash 4,000 banks failed, for the simple reason that the banks ran
out of money. Four years later, Congress passed the Glass-Steagall Act, which
essentially banned any connection between commercial banks and investment
banking, to ensure that this would never happen again. The Federal Reserve and
other banking regulators have softened some of the Act’s separation of
securities and banking functions by letting banks sell certain securities
through affiliated companies. (1929…)
1. Black Thursday: The 1929 Stock
Market Crash. www.letsfindout.com.
2. 1929 Stock Market Crash.
www.arts.unimelb.edu.
3. 1929-1931. Annals of America. Encyclopaedia
Britannica Inc. Volume 15: 32-39
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