Stock Market Crash of 1929: Definition, Causes, Effects

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 as the Great Depression emerged. In fact, the Dow Jones Industrial Average (DJIA) 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.

Key Takeaways

  • The stock market crash of 1929 began on Thursday, Oct. 24, 1929, when panicked investors sent the Dow Jones Industrial Average (DJIA) plunging 11% in heavy trading.
  • The 1929 crash was preceded by a decade of record economic growth and speculation in a bull market that saw the DJIA skyrocket over five years.
  • Other factors leading up to the stock market crash include unscrupulous actions by public utility holding companies, overproduction of durable goods, and an ongoing agricultural slump.
  • The stock market crash paved the way for the Great Depression that would follow in the 1930s and last till World War II.
  • Congress passed an array of important federal regulations aimed at stabilizing the markets, such as the Glass Steagall Act of 1933.

Understanding the Stock Market Crash of 1929

The stock market crash of 1929 followed a bull market that had seen the Dow Jones rise significantly in five years. But with industrial companies trading at price-to-earnings ratios (P/E ratios) of over 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 that were themselves owned by other holding companies, which controlled about two-thirds of the American industry. Ten layers separated the top and bottom of some of these complex, highly leveraged pyramids. As the Federal Trade Commission (FTC) 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 decided to rein in speculation because it was diverting resources from productive uses. The Fed raised the rediscount rate to 6% from 5% in August, a move that some experts say stalled economic growth and reduced stock market liquidity, making the markets more vulnerable to rapid price drops.

Other Factors Leading to the 1929 Stock Market Crash

Another factor experts cite as leading to the 1929 crash is the overproduction in many industries that caused an oversupply of steel, iron, and durable goods. When it became clear that demand was low and there were not enough buyers for their goods, manufacturers dumped their products at a loss and share prices began to plummet. Some experts also cite an ongoing agricultural recession as another factor impacting the financial markets.

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.

The Aftermath of the 1929 Stock Market Crash

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—in what would be a classic dead cat bounce—before collapsing again.

At the end of the crash, the market lost $30 billion in value; approximately $487 billion in today's money.

The stock market crash led the way to the Great Depression, where 15 million Americans would lose their jobs and half of the country's banks failed at the lowest point in 1933. Production had fallen by half after the stock market crash, leading to soup kitchens, bread lines, and homelessness across the nation. Farmers were forced to let crops rot as they couldn't afford the harvests and many in the nation starved. Many farmers migrated to the cities looking for jobs as droughts caused high winds and dust in the south, known as the Dust Bowl.

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.

Special Considerations

The lack of government oversight was one of the major causes of the 1929 crash, thanks to laissez-faire economic theories. In response, Congress passed an array of important federal regulations aimed at stabilizing the markets. These include the Glass Steagall Act of 1933, the Securities and Exchange Act of 1934, and the Public Utility Holding Companies Act of 1935.

On What Day Was the Great Wall Street Crash of 1929?

The great Wall Street crash of 1929 began on Oct. 24, 1929, known as Black Thursday, but witnessed further crashes in the days to come, such as on Oct. 29, 1929, known as Black Tuesday.

Did the Stock Market Crash in 1929 Cause a Shift in Culture During the 1930s?

The stock market crash of 1929 had a devastating effect on the culture of the 1930s. As investors, businesses, and farms lost money, they started to shutter and lay off workers. Banks closed as well. The Great Depression began in the 1930s, leading to soup kitchens, bread lines, and homelessness across the nation. The culture in the 30s shifted dramatically from that in the 20s. The 20s, known as the roaring 20s, saw a period of economic growth and consumerism after the war, while the 1930s witnessed poverty and economic decline.

What Factors Led to the Stock Market Crash of 1929?

Historians contribute a variety of factors that led to the stock market crash of 1929, such as tremendous speculation during the roaring twenties; a significant expansion of debt; a decline in production which led to a rise in unemployment, which led to a decline in spending; low wages; an agricultural sector in distress, and banks that had large loans that could not be liquidated.

Article Sources
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