The Roaring Twenties, the decade that led up to the Crash, was a time of wealth and excess. Despite caution of the dangers of speculation, many believed that the market could sustain high price levels. Shortly before the crash, economist Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau." However, the optimism and financial gains of the great bull market were shattered on "Black Tuesday", October 29, 1929, when share prices on the New York Stock Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued to fall at an unprecedented rate for a full month.
The October 1929 crash came during a period of declining real estate values in the United States (which peaked in 1925) near the beginning of a chain of events that led to the Great Depression, a period of economic decline in the industrialized nations.
In the days leading up to "Black Thursday" (called "Black Friday" in Europe due to the time difference) and "Black Tuesday" the following week, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. Economist and author Jude Wanniski later correlated these swings with the prospects for passage of the Smoot–Hawley Tariff Act, which was then being debated in Congress. After the crash, the Dow Jones Industrial Average (DJIA) partially recovered in November–December 1929 and early 1930, only to reverse and crash again, reaching a low point of the great bear market in 1932. On July 8, 1932, the Dow reached its lowest level of the 20th century and did not return to pre-1929 levels until November 1954.
After a six-year run when the world saw the Dow Jones Industrial Average increase in value fivefold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down.
Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterward. The decline then accelerated into the so-called "Black Thursday", October 24, 1929. A then-record number of 12.9 million shares were traded on that day.
At 1 p.m. on the same day (October 24), several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. 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. 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 a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. The Dow Jones Industrial Average recovered with a slight increase, closing with it down only 6.38 points for that day. In this case, however, the respite was only temporary.
Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, the first "Black Monday", more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13%. The next day, "Black Tuesday", October 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points. The volume on stocks traded on October 29, 1929 was "...a record that was not broken for nearly 40 years, in 1968". Author Richard M. Salsman wrote that "on October 29—amid rumors that U.S. President Herbert Hoover would not veto the pending Hawley-Smoot Tariff bill—stock prices crashed even further". William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market lost over $14 billion in value that day, bringing the loss for the week to $30 billion.
|October 28, 1929||−38.33||−12.82||260.64|
|October 29, 1929||−30.57||−11.73||230.07|
An interim bottom occurred on November 13 with the Dow closing at 198.60 that day. The market recovered for several months from that point, with the Dow reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at an all-time low of 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.
The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S. at the time. The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. Because of margin buying, investors stood to lose large sums of money if the market turned down—or even failed to advance quickly enough. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929, clearly above historical norms. Most economists view this event as the most dramatic in modern economic history. On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market finally turned down, and panic selling started.
In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of the crash. The U.S. Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.
After the experience of the 1929 crash, stock markets around the world instituted measures to suspend temporarily trading in the event of rapid declines, claiming that the measures would prevent such panic sales. Even more severe than the crash of 1929, however, was the one-day crash of Black Monday, October 19, 1987, when the Dow Jones Industrial Average fell 22.6%.