The 1929 Stock Market Crash

The 1929 crash of the stock market was one of the most pivotal moments in American and global financial history that jumpstarted the Great Depression and caused over a decade of economic stagnation. Tax revenue and personal income both fell dramatically, crippling consumers, businesses, and governments alike. Severe price deflation devastated agriculture, and unemployment skyrocketed.

The reasons behind the Stock Market Crash of 1929 have served as a stark reminder to the rest of us about the potential for catastrophic events involving the global financial system – especially after the 2008 financial crisis that reminded the world of what happened over 80 years ago.

Here, I’ll cover the history of the crash and explain what happened, why it happened, and what effects it had.

Leading Up to the Crash

There aren’t very many people alive who still remember the 1920’s, also known as the Roaring Twenties because of how well the economy was doing following the destruction of World War I. Economies were rebounding, especially in America, which was largely untouched by the war. Part of that rebound was a renewed interest in the stock market.

Back then, people thought that the stock market was the path to wealth and would continue to grow indefinitely year after year. (This may sound very familiar to anyone who remembers the market before the dot-com bubble popped in 2001 and the sky-high performance of the Dow Jones right before 2008). People shoveled virtually every dollar they could get their hands on into the market, often trading on margin – or by leveraging themselves by borrowing large amounts of money from banks and brokers to buy even more shares.

A bubble was forming, and everyone wanted a piece of it. A massive amount of the country’s wealth was tied into the stock market. This wealth was used for anything from funding new construction to running companies to paying bills, buying groceries, and traveling throughout the country. And as the market continued to climb higher and higher, the majority of people thought this wealth would continue to grow, enabling them to buy more and do more with their money.

Of course, that wasn’t the case.

The Crash: The Black Week

All of that speculation and optimism was on shaky grounds. On October 24, 1929 – what is now known as “Black Thursday”, the New York Stock Exchange fell by 11%. We’re still not exactly sure why, but the market was pretty unstable leading up to Black Thursday, partially because of legislation pending in Congress that would’ve impacted foreign trade.

Wall Street tried to rally, but people were scared – and as a result, Black Monday hit on October 28th. That day, the market fell another 13%. Then came Black Tuesday – a day that saw another 12% collapse and the highest volume of shares traded to that point (a record that wouldn’t be broken until 1968).

Investors, business owners, politicians, and consumers all panicked. They continued to pull out of the market, trying to cut their losses, but the damage had already been done. By the time the dust cleared that week, 40% of the value of the market was gone. By 1933, the market was down to only 20% of its peak 1929 value, and the Great Depression was in full swing.

The Great Depression

The Great Depression didn’t start immediately after the Crash, but that is where it began – and in the months and years following the Crash, it began to pick up steam until the world found itself mired in a deep and dark place.

Businesses closed left and right. Banks failed, taking with them the hard-earned savings of millions. Prices for crops and other products fell dramatically because demand went away – mainly because people didn’t have enough money to buy anything close to what they bought before. Unemployment skyrocketed; at its peak, it’s estimated that unemployment was close to 25%, or one out of every four American workers. In some places, it was even higher; in Canada, for example, the unemployment rate peaked at 30% in 1933.

The United States, United Kingdom, and much of the industrialized world did not emerge out of the Great Depression until World War II – which would ultimately leave most of these countries worse off than they were before due to the terrible destruction they experienced during the war.

Looking Back at the Crash

We know now that speculation, overvalued prices, and trading heavily on margin and limited resources all helped to make the Crash as bad as it was. Bubbles – rapid rises in prices and value without any real economic foundation or reason why – caused by financial overextension happened then and have happened since. The dot-com bubble saw thousands of internet companies go public, inflate their shares, and then disappear when the market turn a turn for the worst in 2001. The housing bubble that grew from 2000 to 2006 popped in 2007 and helped cause the near-collapse of the global financial system in 2008.

The same root causes – speculation, a desire for quick profits, and ignoring responsible investing – continue to occur, just like they did during October many years ago.

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