Also known as the Great Crash, the Wall Street Crash of 1929 is widely regarded as the worst economic crisis that ever happened in the US. In September that year, stock prices started drifting lower, but the climax was on the Black Tuesday of October 29th, 1929, when over 16 million shares were traded, and prices literally collapsed on the New York Stock Exchange.
This crash signalled the start of the Great Depression of the 1930s, the longest and most severe period of economic depression in the 20th century. So devastating was the crisis that it took over two decades for stock prices to reclaim pre-depression highs.
The Background
In the aftermath of the First World War, the United States experienced a period of economic expansion that came to be known as the ‘Roaring Twenties’. The 1920s were characterised by post-war optimism, and many Americans moved from rural areas to towns and cities in search of better life opportunities. The hope and optimism reflected in the stock market and the markets grew by about 20% each year between 1922 and 1929.
The stock market was on a long-term bull run, and speculation reached its peak in 1929. By March that year, the Federal Reserve had raised concerns about heightened speculation. Despite this, after a brief reaction to the news, the market resumed its uptrend after a capital injection was made by a major national bank.
There were, however, some concerns about the underlying American economy that speculators ignored. Consumer debt had built up due to easy credit, and there was a general slowdown in steel production, construction activity, and automobile sales.
Between June and September, the market grew by over 20%; and on September 3rd, 1929, the Dow (DJIA) printed an all-time high of just above 381. Stock prices started drifting lower as questions were raised about real fundamentals in the market. But what seemed like a healthy and long overdue correction quickly evolved into one of the worst stock market crashes in history.
The Crash
By late September, volatility accelerated in the market after a stock market crash was witnessed in the London Stock Exchange. The market then started selling off in mid-October, and panic crept in. On October 24th, a record 12.9 million shares exchanged hands in a day that would be christened ‘Black Thursday’. The market lost over 11% of its value on that day alone. The panic would resume on ‘Black Monday’ (October 28th), with the market shedding off over 12% of its value. On ‘Black Tuesday’ (October 29th), panic reached its peak with over 16 million shares traded on the NYSE and the market tanking over 12% again. Prominent politicians and business leaders tried to issue reassuring statements to no avail, and the Dow continued its slide to below 200.
There was a minor correction of the bearish rally that saw the Dow make a temporary peak just below 300 in mid-April 1930. The market would then embark on a long-term tumble that pushed the Dow to lows of circa 41 by July 1932. That was the lowest ever level the Dow printed in the 20th century. It would take almost two decades for the Dow to reclaim the 200 level, and it was not until November 1954 that the index breached the pre-crash peak.
The Aftermath
The Wall Street Crash of 1929 paved the way for the Great Depression, the worst economic crisis in US history. Both events delivered devastating effects to the American economy. By 1933, several banks failed with billions of customer deposits, and businesses had to embrace uncertainty as the new norm. Unemployment rose to over 25%, and wages shrank by over 42%. The US economy decreased by over 54%, and there was a general contraction of credit and liquidity that further compounded the troubles of both businesses and consumers.
When the stock market crash of 1929 hit the NYSE, panic spilt over to Europe. Initially considered a knee-jerk reaction, Europe then plunged into its own form of the Great Depression, highlighting how interconnected global economies were even at the time.
During and after the Great Depression, there were important legislative developments that took place. President Roosevelt took office in 1933, and his ‘New Deal’ attempted to bring optimism and confidence to the economy. The deal ended ‘Prohibition’ in the hope that alcohol legalisation would help restore the economy and create employment.
The deal also implemented a plan to pay farmers so they could leave their fields fallow in order to help curb over surplus of agricultural products and stabilise prices. There were numerous other legislative items that appealed to diverse groups of the American people. But despite being proactive and introducing a ‘Second New Deal’ that primarily focused on labour, the economy only started recovering after 1939 as the onset of the Second World War reinvigorated American industry.
What Caused the Wall Street Crash of 1929?
The crash was caused by a multitude of factors. To start with, the ‘Roaring Twenties’ was a period of easy credit and great optimism. It was easy for people to acquire loans, and the market bull run provided extra motivation. Leverage buying was also a popular concept that allowed people to buy stocks by only putting 10% down. This overconfidence was also witnessed in manufacturing and agricultural industries, where goods were overproduced and the supply glut depressed prices. Over time, this made the stock prices of the underlying companies tumble as well.
A monetary policy decision in August 1929 also helped limit confidence during the bull run. The Federal Reserve bank of New York raised interest rates from 5% to 6%, and the overconfidence in the market turned into cautious optimism.
But it was excessive panic that ultimately accelerated the crash. The panic was amplified by the financial press that covered the crash extensively and highlighted the negative fundamentals that were not improving. Depositors tried to make runs on banks, but it would be discovered that bank officials had used the reserves to buy stocks.
Furthermore, rampant speculators who had bought stocks on margin lost their entire investments, and much worse, they still had debt obligations to their respective brokers that they could not service. This added to the panic, and the selloff in the New York Stock Exchange was overextended.
Nonetheless, the generous consensus is that a recession was looming after a multi-year bull run. But a multitude of factors, combined with overall overconfidence in the markets, degenerated a correction into a full-blown crisis.
Lessons Learnt
The crash of 1929 and the subsequent Great Depression provide numerous lessons for modern-age finance. While recessions and crashes are, unfortunately, bound to happen from time to time, it is very difficult to determine how long they will last. From the 1929 September peak to the trough on ‘Black Tuesday’, the market had tanked 40%, and it was widely believed that the correction was complete. But a brief upward correction paved the way for the bearish price action to continue until July 1932, when the market completed an 89% drop from the pre-depression peak.
The 1929 crash also highlighted the importance of keeping banks and other financial institutions under tight regulatory supervision. The lack of regulatory control in the period before the crash led to solutions, such as uncontrolled leverage and easy credit, that were innovative but inherently risky.
In the aftermath of the crash, the Glass-Steagall Act was passed to help reform a financial system that could not withstand a contraction and allowed over 4000 banks to collapse. The Act helped restore confidence in the financial system by allowing banks to only invest in low-risk investments. The Act also introduced an insurance mechanism that would protect depositors from vulnerable or failing banks. The Act would later be repealed in 1999, but there are always discussions on its reinstatement.
While quantitative easing has become a powerful and popular monetary policy tool in recent years, the idea of pumping money to maintain demand during periods of crises was not implemented during the 1929 crisis. This can be a possible reason why the crash and the subsequent Great Depression took so long to be managed and overcome.
The 1929 crash also highlighted the important role that politics plays in the economy. President Roosevelt took power during the Great Depression, and his ‘New Deal’ provided an economic recovery plan that helped restore confidence in the financial system again. The ability to take proactive political action is still important to this day, and it can help avert or correct crisis situations.
Final Word
The Wall Street Crash of 1929 is one of the most notable stock market crashes in history. It welcomed the Great Depression, a worldwide economic downturn, that to this date illustrates how far and deep a crisis can go. The crash affected nearly every rung in society and changed how an entire generation relates to the financial markets.