Wall Street Crash of 1929

The Wall Street Crash of 1929, also called the Great Crash or the Crash of '29, is the stock-market crash that occurred in late October, 1929. It started on October 24 ("Black Thursday") and continued through October 29, 1929 ("Black Tuesday"), when share prices on the New York Stock Exchange (NYSE) collapsed. However, the days leading up to the 29th had also seen enormous stock-market upheaval, with panic selling and vast levels of trading interspersed with brief periods of recovery.

"Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even."—Richard H. Salsman ^[1]

Timeline of the Crash

Spring and Summer of 1929

Herbert Hoover becoming president in March 1929 was a very significant event. He was a good friend and neighbor of Adolph Miller, an outspoken member of the Federal Reserve Board, who described 1929 as "this period of optimism gone wild and cupidity gone drunk," and Miller reinforced Hoover's fears. Hoover was an aggressive foe of speculation. For example, he wrote, "I sent individually for the editors and publishers of major newspapers and magazine and requested them systematically to warn the country against speculation and the unduly high price of stocks." Hoover then pressured Secretary of the Treasury Andrew Mellon and Governor of the Federal Reserve Board Roy Young "to strangle the speculative movement." In his memoirs (1952) he titled his Chapter 2 "We Attempt to Stop the Orgy of Speculation" reflecting Snowden's influence ( see October 3 events below ).

In late March 1929, just after the inauguration of Herbert Hoover, the Federal Reserve Board was meeting every day behind closed doors. There was no doubt heavy discussion about the market and the national economy. However, the May issue of the National City Bank of New York Newsletter indicated the earnings statements for the first quarter of surveyed firms showed a 31% increase compared to the first quarter of 1928. The August issue showed that for 650 firms the increase for the first six months of 1929 compared to 1928 was 24.4%. In the first nine months of 1929, 1,436 firms announced increased dividends. In 1928, the number was only 955 and in 1927, it was 755.

In September 1929 dividend increased were announced by 193 firms compared with 135 the year before. Although it can be argued that the stock market was not overvalued, there is evidence that many feared that it was overvalued—including the Federal Reserve Board and the United States Senate. By 1929, there were many who felt the market price of equity securities had increased too much, and this feeling was reinforced daily by the media and statements by influential government officials.

September

In September 1929 dividend increased were announced by 193 firms compared with 135 the year before. The financial news from corporations was very positive in September and October 1929. The Dow Jones Industrial Average ("the DJIA" or "the Dow") reached a high of 381.17 on September 3, 1929. However, in September 1929, the market value of one segment of the market, the public utility sector, should have beeen based on existing fundamentals, and fundamentals seem to have changed considerably in October 1929.

October

Thursday, October 3

Business activity news in October was generally good and there were very few hints of a coming depression. Although the start of the stock market crash is conventionally identified with Black Thursday, October 24, there were price declines on October 3, 4, and 16. The economic news after the price drops of October 3 and October 4 had been mixed. But the deluge of bad news regarding public utility regulation seems to have truly upset the market. In view of public utilities’ stock upcoming crash, it is reasonable to conclude that the October 16 break was related to the news from Massachusetts and New York public utilities. Among the sensational and mostly negative “frantic stock selling news” news in, both, New York times and Washington Post , there appeared the statement by Philip Snowden, England's Chancellor of the Exchequer that described America's stock market as speculative orgy.

Black Thursday: Thursday, October 24

"On October 21, an amendment to impose tariffs only on agricultural imports was defeated. ….Three days later the stock market suffered its first one-day crash..." ^[2]. On that day, forever called “Black Thursday,” 12,894,650 shares changed hands on the New York Stock Exchange; a record. To put this number in perspective, let us go back to March 12, 1928 when there was at that time a record set for trading activity. On that day, a total of 3,875,910 shares were traded.

The market was crashing and the floor of the NYSE was in a state of panic. By noon on Black Thursday, there had been eleven suicides of fairly prominent investors.

At 1:00pm, several leading Wall Street bankers met to find a solution. The group included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin head of the Chase National Bank; and Charles E. Mitchell, president of National City Bank. 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 amazed traders watched, Whitney then placed similar bids on other "blue-chip" stocks.

Although a similar such tactic had ended the Panic of 1907, this action halted the slide that day and returned stability to the market only temporarily.

Monday, October 28

Over the weekend, the events were dramatized by the newspapers across the U.S. The Sunday, October 27 edition of the Times had a two-column article "Bay State Utilities Face Investigation." It implied that regulation in Massachusetts was going to be less friendly towards utilities. Stocks again went down on Monday, October 28. There were 9,212,800 shares traded (3,000,000 in the final hour). On Monday, October 28, 1929 the volume was huge-over 9,250,000 shares traded with a record 13% loss in the Dow for the day. But unlike Thursday, there was no dramatic recovery; it was the prelude to Black Tuesday, the most infamous day in Wall Street history.

Black Tuesday: Tuesday, October 29

The Times on Tuesday, October 29 again carried an article on the New York public utility investigating committee being critical of the rate making process . This time, the panic of selling made sure, once and for all, that there was to be no quick fix, that the recovery would be slow and painful. There was not the nearly the recovery of gains seen on Thursday. The market had crashed.

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 effort failed to stop the slide.

The DJIA lost 12% with 16.4 million shares traded (a new record, surpassing the one set only the previous Thursday).

"As late as April 1942, US stock prices were still 75% below their 1929 peak and would not revisit that level until November 1954—almost a quarter of a century later." ^[3]

The stock market took 25 years to recover its 1929 high value.

What caused the huge crash?

Boom-bust theory

Keynesian, Monetarist, and Austrian economists agree that the Crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market. The rising share prices encouraged more people to invest, as they hoped the shares would rise further, thus fueling further rises, and creating an economic bubble. On October 24, 1929, the "bubble" finally burst and panic selling set in.

The crash dramatically worsened an already fragile economic situation, and was a major contributing factor to the Great Depression. There is a good deal of controversy among economists and historians about the nature of that contribution, though. Some hold that political over-reactions to the crash, such as in the passage of the Smoot-Hawley Tariff Act through the US Congress, caused more harm than the crash itself.

Explanation from supply-side economic theory

Many commentators view the Smoot-Hawley Tariff Act as a consequence of the Crash, since the act was not signed by President Hoover until June of 1930. However, supply-side economists (and others) argue that stock-market prices anticipate future profits. The Crash reflected investors’ rational expectations that tariffs would raise prices for U.S. consumers (both final consumers and manufacturers that used the imported products as inputs) and reduce firms’ future profits.

Supply-siders also blame two tariff laws for the earlier, sharp recession of 1920-21.

The Crash of 1929 and the subsequent Great Depression were in part longer and deeper for three reasons: ^[4]

1. The Smoot-Hawley Tariff Act applied tariffs to more than 3,200 products (many more than the previous tariffs).
2. The tariff rates were very high — averaging 60%.
3. Other countries responded by enacting their own tariffs against U.S. goods in retaliation.

Behavioralists’ explanation

Consider the following facts : (1) There is a delicate balance between optimism and pessimism regarding the stock market. Statements and actions by government officials can affect the sensitivity of stock prices to events. Call a market overpriced often enough, and investors may begin to believe it. (2) Even a market that is not excessively high can collapse. Both market psychology and the underlying economics are relevant. (3) A segment of the market can experience bad news and a price decline that infects the broader market. In 1929, it seems to have been public utilities. In 2000, for example, high technology firms were candidates.

Thus, it is entirely possible the statement by Snowden, Chancellor of the Exchequer, indicating the presence of a speculative orgy in America, is likely to have triggered the October 3 break. Public utility stocks had been driven up by an explosion of investment trust formation and investing. The trusts, to a large extent, bought stock on margin with funds loaned not by banks but by "others." These funds were very sensitive to any market weakness. Public utility regulation was being reviewed by the Federal Trade Commission, New York City, New York State, and Massachusetts, and these reviews were watched by the other regulatory commissions and by investors. The sell-off of utility stocks from October 16 to October 23 weakened prices and created "margin selling" and withdrawal of capital by the nervous "other" money. When several governmental bodies indicated that public utilities in the future were not going to be able to justify their market prices, the decreases in utility stock prices resulted in margin positions being further weakened resulting in general selling. At some stage, the selling panic started and the crash resulted.

Lessons learnt vis-à-vis the global markets and economies

• All stock market crashes are unforeseen for most people, especially economists. This is the first lesson of history. "In a few months I expect to see the stock market much higher than today." Those words were pronounced by Irving Fisher, America's distinguished and famous economist, Professor of Economics at Yale University, 14 days before Wall Street crashed on Black Tuesday, October 29, 1929. ( Note : Irving Fisher lost $140 million (in today's dollars) in the stock market crash, according to his biographer son, Irving Norton Fisher, and John Maynard Keynes, the most famous British economist, lost 156.1 million (in today's pounds) in the crash, according to biographer Professor Skidelski.( see ref. “Collapse of the Wall Street” ))

• In 1931, the Pecora Commission was established to study the causes of the crash. Based in part on the Commission's findings, the United States Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, whose activities involved the taking of deposits and making loans, and investment banks whose role was the underwriting, issuing, and distributing stocks, bonds, and other securities. The overhauled system also remedied earlier financial fragility by restricting private ownership of bullion, and creating deposit insurance and lenders of last resort.

• After the experience of the 1929 crash, where there was a true panic, and many rich people became poor people in one single day, stock markets around the world - as most stock markets are synchronized with Wall Street - instituted measures to temporarily suspend trading in the event of rapid declines, to prevent such panic sales.

• A big problem not mentioned so far in all this was communication. Even at telegraphic speed, the volume was having an effect on time. Issues were behind as much as one hour to an hour and a half on the tape. Phones were just busy signals on hooks. It was causing crowds to gather outside of the NYSE trying to get in the communication. Police had to be called to control the strangest of riot masses; the investors of business. Panic prevailed. This is another issue that in today’s era of general public ( inclusive of all professional and “lay” investors ) being virtually on-line should minimize, if not completely annihilate, the chance of panic that might ( just like in September 1929 ) bring down the global markets.

Footnotes

• Bierman, Harold, Jr. The Great Myths of 1929 and the Lessons to be Learned. Westport, CT: Greenwood Press, 1991.
• Bierman, Harold, Jr. The Causes of the 1929 Stock Market Crash. Westport, CT, Greenwood Press, 1998.
• Bierman, Harold, Jr. "The Reasons Stock Crashed in 1929." Journal of Investing (1999): 11-18.
• Bierman, Harold, Jr. "Bad Market Days," World Economics (2001) 177-191.
• “The Collapse of the Wall Street,” Friedberg Mercantile Group, Toronto, Canada , March 16, 1997
• Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 1: What Made the Roaring '20s Roar" in The Intellectual Activist, ISSN 0730-2355, June, 2004, p. 16.
• Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 2: Hoover's Progressive Assault on Business" in The Intellectual Activist, ISSN 0730-2355, July, 2004, p. 15.

Further reading

• John Kenneth Galbraith (1954), The Great Crash, 1929.
• Jude Wanniski (1978), The Way the World Works.

External links

• When filmmakers Ellen Hovde and Muffie Meyer produced in 1990, The Crash of 1929, they interviewed many people about the Wall Street disaster, including interviewing noted business historian, Robert Sobel.
• About.com: Black Thursday - 1929
• About.com: 1929 Stock Market Crash
• NYSE Timeline for Black Thursday

Credits

New World Encyclopedia writers and editors rewrote and completed the Wikipedia article in accordance with New World Encyclopedia standards. This article abides by terms of the Creative Commons CC-by-sa 3.0 License (CC-by-sa), which may be used and disseminated with proper attribution. Credit is due under the terms of this license that can reference both the New World Encyclopedia contributors and the selfless volunteer contributors of the Wikimedia Foundation. To cite this article click here for a list of acceptable citing formats.The history of earlier contributions by wikipedians is accessible to researchers here:

• Wall_Street_Crash_of_1929  ^history

The history of this article since it was imported to New World Encyclopedia:

• History of "Wall Street Crash of 1929"

Note: Some restrictions may apply to use of individual images which are separately licensed.