Wall street crash of 1929

The 29th of October 1929, often referred to as “Black Tuesday”, was the day of the Great Crash of the New York Stock Exchange (NYSE). It was one of the most serious stock market crashes in the history of the USA and is seen by many experts as the beginning of a severe world-wide economic depression which came to be known as the “Great Depression” that affected all Western industrialized countries.

1. The Western World Before the Crash

The Great Crash of 1929 marked the end of the so-called carefree „Roaring Twenties“, a time of relative prosperity and economic well-being. The atrocities of World War I were a thing of the past and the future seemed promising. The production of luxury goods reached a new peak as more and more people started buying “must-have” items such as refrigerators, radios and cars not by cash but on credit. It was due to a change in the cultural mind-set that the traditional value of canniness gave way to this new and “easy way to buy”. Banks on the other hand encouraged this trend and were now keen to lend money to all kinds of people, whether it be a man of business or a mere blue-collar worker. By 1929, around 15 percent of all purchases were bought on credit. Furthermore, borrowed money was progressively used to buy stocks, all of which had increased in value throughout the 1920s. As such they were seen as a sure way to earn money the easy way: buy stocks on the stock market when the prices are low and sell them to others when the prices have gone up. Consequently, using borrowed money to buy stocks – also known as buying on margin – became a wide-spread practice for many common Americans. But in the end it were the Banks themselves which invested substantial amounts of money in the stock market, e.g. in companies such as General Motors, DuPont and RCA (Radio Corporation of America).

2. Prelude

When the “Roaring Twenties” drew to a close signs of an economic crisis became evident: a decline in the textile, coal and farming industries as well as in business in general had already set in. Moreover, unemployment had grown throughout 1928 and construction of new homes – a warning sign for many experts – declined in 1927 and along with it the need for new consumer goods. New production methods and more effective machinery further exacerbated this situation since fewer factory workers were needed to produce the same amount of products: a vicious circle. But the worst problem for the stock market by far was over-speculation, i.e. when speculators keep on borrowing money and buying stocks, thereby driving stock prices higher and higher. As a result, prices for many stocks were soon well above what companies were actually worth: the paper value did not match the true value of the company a share represented. Brenda Lange has highlighted the ensuing problem accurately:

      Unless that true value “catches up” with the stock price, the price will begin to fall. When a share of stock loses value, some people sell their shares, afraid they   
      will lose everything if they do not get rid of the devalued stock. If too many sell too quickly, panic can set in, with investors believing they won't get back at 
      least what they paid for the share. This is what happened in October 1929.

The recession was in full swing by mid-October. On 24th of October (“Black Thursday”) the industrial average dropped to previous June's level with many stocks losing the value they had acquired during the last four months. Therefore, many investors started to panic. As a consequence, 12,894,650 shares were traded by brokers on Black Thursday, thereby establishing a new record which by far exceeded the previous one (12th March 1928: 3,875,910 shares traded). Due to international trade relations the Canadian, London and other markets were affected by this first selling wave as well with prices falling as never before.

3. „Black Tuesday“

The selling frenzy which began on Black Thursday continued and reached a new height on the 29th of October – Black Tuesday. It was the day of the big stockholders and investment trusts selling as much as possible, whereas the small investors had already lost everything the week before. Another record was established: 16,410,030 shares were traded on this day with a total loss in value of approximately 14 billion dollars (the 1929 budget of the U.S. Federal government was around $3 billion); a very drastic change indeed with far-reaching consequences even for the London Stock exchange which dissolved into pandemonium after the second wave of violent selling. Few contemporaries realized the seriousness of the crash. Those who did noted its uniqueness: “Panics of the past were brought about by something fundamentally wrong with finance or business, crop failures, earthquakes, strained international relations, prohibitive rates for money, inflated inventories and the like. The recent break was due to the position of the market itself” (qtd. in Klein, 219). Since banks did take a big part in investing money in stocks, their customers began to empty their bank accounts as soon as they had heard about the falling prices and the subsequent selling frenzy at the NYSE. Most were afraid that there would not be any cash for them left if they wanted to withdraw their money. The effect was devastating: many banks went out of business altogether.

4. Repercussions

Notwithstanding the seriousness of the crisis, the Times published an article saying: “the longer result of it [i.e. crash] will be restoration of the community's mental health and vision” (qtd. in Klein, 231). However, the Wall Street Crash of 1929 was a heavy blow the U.S. credit system that had played an active part in supporting the country's economic development. Along with further economic decline came rising unemployment rates (up to 25%) and the cutting of wages (up to 50%). Since so many ordinary families had spent all their savings and all their borrowed money on stock speculation, they had no means of paying rent or feeding themselves once unemployment struck. Especially the middle class was affected. Homelessness and disillusionment were the consequence. In contrast to the Times, some economists like Alexander Noyes immediately recognized the danger of the crash saying: "A Stock Exchange panic foreshadows business depression, unemployment and hard times” (qtd. in Klein, 234). As time went by and the Great Depression began to take shape, Noyes' notion prevailed.

Sources:

Klein, Maury. Rainbow's End. The Crash of 1929. Oxford: Oxford University Press, 2001.

Lange, Branda. The Stock Market Crash of 1929. The End of Prosperity. New York: Chelsea House Publishing, 2007.