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Posted on 19 March 2011 | 10,189 views

What Caused the 1929 Stock Market Crash

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 Thursday”, October 24, 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.

A great number of investors were purchasing stock on the margin, meaning they put 10% of the investment and borrow the remaining 90%. For example, if $10 worth of stock was purchased, the investor put in $1, while the stock broker put in the other $9. It was a good deal as long as stocks were gaining value. However, if the stock lost value, the stock broker would issue a margin call requiring the investor to pay back the loan. In the example above, not only did the investor lose the $1 he invested, the investor also had to pay back the $9 borrowed.

All was well for most of the 1920s. People believed that stock values would never stop rising. But, in 1929, some of the larger investors realized the stock prices were artificially high as a result of the mass investments from speculative investors. So, those “savvy” investors started trading their stocks and consequently, stock prices began to fall. Then, brokers issued margin calls leading to further stock market drops. The situation peaked on Black Tuesday when the stock market completely crashed.

The euphoria had stock brokers making $4,000 per year at investment firms such as Goldman Sachs (whose stock closed at $35.125, down $24.875 on October 29, 1929) when the average wages during the 1920’s was $468 per year.

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. It was estimated that 15,000 miles of ticker tape was consumed on that fateful day of October 29, 1929.

When the stock market crashed in 1929, it didn’t happen on a single day. Instead, the stock market continued to plummet over the course of a few days setting in motion one of the most devastating periods in the history of the United States.

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 the level of summer 1929 until November 1954.

The most significant events started on Black Thursday, October 24, 1929. On that day, nearly 13 million shares of stock were traded. It was a record number of stock trades for the U.S. and marked the end of an upward trend on stock prices. On Black Thursday, the stock prices dropped so quickly, the stock ticker could not keep up. As the day progressed, the stock ticker lagged behind, failing to show the most up to date stock prices.

Even after Black Tuesday, stock prices continued to fall until November 23, 1929 when there was a brief period of stabilization. Though it seemed like the worst had been seen, there was more decline to come. After that, the stock market continued to decline until it reached its lowest point on July 8, 1932.

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