What was the 'Stock Market Crash Of 1929'

The Stock Market Crash of 1929 began on October 24. While it is remembered for the panic selling in the first week, the largest falls occurred in the following two years. The Dow Jones Industrial Average did not bottom out until July 8, 1932, by which time it had fallen 89% from its September 1929 peak, making it the biggest bear market in Wall Street’s history. The Dow Jones did not return to its 1929 high until November 1954.

BREAKING DOWN 'Stock Market Crash Of 1929'

The stock market crash of 1929 followed a bull market which had seen the Dow Jones rise 400% in five years. But with industrial companies trading at price-earnings ratios of 15, valuations did not appear unreasonable after a decade of record productivity growth in manufacturing – that is until you take into account the public utility holding companies.

By 1929, thousands of electricity companies had been consolidated into holding companies which were themselves owned by other holding companies, which controlled about two-thirds of American industry. Ten layers separated the top and bottom of some of these complex highly leveraged pyramids. As the Federal Trade Commission reported in 1928, the unfair practices these holding companies were involved in — like bilking subsidiaries through service contracts and fraudulent accounting involving depreciation and inflated property values — were a “menace to the investor."

The Federal Reserve's decision to reign in speculation, because it was diverting resources from productive uses, and raised the rediscount rate to 6% from 5% in August, was an accident waiting to happen. However, the straw that broke the camel’s back was probably the news, in October 1929, that the public utility holding companies would be regulated. The resulting sell-off cascaded through the system, as investors who had bought stocks on margin became forced sellers.

Instead of trying to stabilize the financial system, the Fed, thinking the crash was necessary or even desirable, did nothing to prevent the wave of bank failures that paralyzed the financial system – and so made the slump worse than it might have been. As Treasury Secretary Andrew Mellon told President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It’ll purge the rottenness out of the system."

The crash was exacerbated by the collapse of a parallel boom in foreign bonds. Because the demand for American exports had been propped up by the huge sums lent to overseas borrowers, this vendor-financed demand for American goods disappeared overnight.

But the market did not drop steadily. In early 1930, it rebounded briefly by about 50% — in what would be a classic dead cat bounce – before collapsing again. In the end, a quarter of America’s working population would lose their jobs, as the Great Depression ushered in an era of isolationism, protectionism and nationalism. The infamous Smoot-Hawley Tariff Act in 1930 started a spiral of beggar-thy-neighbor economic policies.

Because the lack of government oversight was one of the major causes of the 1929 crash – thanks to laissez faire economic theories – Congress would pass important Federal regulations, including the Glass Steagall Act of 1933, the Securities and Exchange Act of 1934 and the Public Utility Holding Companies Act of 1935.

RELATED TERMS
  1. Black Monday

    Black Monday, October 19, 1987, was a day when the Dow Jones ...
  2. Flash Crash

    A flash crash is an event in electronic markets wherein the withdrawal ...
  3. Smoot-Hawley Tariff Act

    The Smoot-Hawley Tariff Act, known formally as the United States ...
  4. Black Thursday

    Black Thursday is the name for Thursday, Oct. 24, 1929, when ...
  5. Dow Jones 65 Composite Average

    The Dow Jones 65 Composite Average is an index comprised of 65 ...
  6. Market Disruption

    A market disruption is a circumstance wherein the regular functions ...
Related Articles
  1. Trading

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  2. Financial Advisor

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  3. Insights

    How the 2008 Crisis Changed How We Save and Invest

    A new survey reveals how today's consumers feel about the crash and Great Recession of 2008.
  4. Investing

    The Market Is Crashing. Please Explain What All of These Words Mean

    What does it meant that the Dow fell 1600 points? What is the Dow? Is it the stock market? You know what, start over. What's a stock?
  5. Personal Finance

    The Safest Way To Travel In 2015

    Many have wondered if it is actually safe to fly or if they'd be better off taking an alternative form of transportation. Here’s a look at the statistics.
  6. Investing

    Investing Strategies for Market Crashes

    These five options provide varying levels of liquidity for managing a potential market crash. Hard assets can provide security through tangible value.
RELATED FAQS
  1. What caused the Stock Market Crash of 1929 that led to the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn fueled the Great Depression, sparking a nearly 90% loss ... Read Answer >>
  2. What caused Black Monday: The stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
  3. How do investors lose money when the stock market crashes?

    Find out how investors can lose money due to stock market crashes. Learn how fluctuating share prices affect overall wealth. Read Answer >>
  4. When did the Dow Jones Industrial Average (DJIA) begin?

    Discover how the Dow Jones Industrial Average, first published in 1896, was created as a way to inform investors of the overall ... Read Answer >>
Trading Center