Stock Market Crash 1929 - Key Facts

The stock market crash of 1929 is a story of unbridled speculation, greed, and hubris and a prime example of the danger of unchecked capitalism. It’s an event that rocked America and the world almost in an instant. But what exactly happened on that fateful four-day period that began on October 24, 1929?

What is the 1929 stock market crash

On October 24, 1929—a day now known as Black Thursday—the New York stock market began a crazed four-day descent that would kick off the greatest global economic crisis in modern history, rivaled only by the crash of 2008. The Dow Jones Industrial Average dropped by 25% and $30 billion in market value, which would roughly be about $396 billion in today’s currency. Americans’ confidence in Wall Street was shaken; investors pulled out stopped investing, and the Great Depression began.

Key facts about the great crash of 1929

• Before October 24, 1929, the U.S. economy was enjoying an almost decade-long period of economic growth, leading to high levels of optimism and confidence in the markets.

• On October 23, 1929, the market closed with the Dow Jones at a significantly lower value than it had been just an hour ago. This left investors and traders concerned and confused.

• On October 24, 1929, Black Thursday, stock prices immediately fell 11% upon markets opening. Traders were able to stabilize prices with excessive buying by the time markets closed. By the end of the trading day nearly 13 million shares had changed hands.

• On October 28, known as Black Monday, stocks fell by 13%.

• Finally, on October 29—Black Tuesday, the market dropped another 12% while a record number of trades were executed within the trading day. Three million shares were traded in the first thirty minutes of the day alone.

• As traders and investors began to panic, investors called their traders and caused phone lines to jam. The number of Western Union telegrams being sent tripled. Communication lines broke down and rumors started to spread, with investors unsure about how much they were actually losing because they couldn’t get the information in real time. The panic contributed to the frenzied selling, driving prices down even further.

• The trading day ended with the Dow Jones falling by 12%. A total of $30 billion had been lost by the market within the span of a few days.

How did the stock market crash in 1929

The 20s were a near-decade of economic prosperity in the U.S. World War I was over and the economy had grown by 42%, with American industries flourishing and producing nearly half of the global output of mass-made consumer goods, things like radios and refrigerators. The automobile industry was taking off, and big industry titans like steel and oil companies were creating a new generation of American royalty.

Given the generally optimistic mood around financial prosperity and security, investing in stocks became a quite popular activity that wasn’t just reserved for the rich or those working in the financial sector. Newspapers would often publish stories of average school teachers, janitors, and taxi drivers striking gold with a “winner”—a stock that ended up soaring in price.

Picking stocks became a fun way to gamble. In order to participate in the seemingly risk-free market, people would often buy stocks on credit, which was readily available. This is a process known as margin buying, and borrowers could often buy stocks with just 10-20% of their own money. Even large banks were doing it with their own funds, taken from customers’ deposits.

On October 16, 1929, Yale economist Irving Fisher wrote in the New York Times that “stock prices have reached what looks like a permanently high plateau.” As you can see in the chart below, there was a 10-year period of near-constant growth in the Dow Jones Industrial Average. It seemed like the good times were never going to end.

Image: Valuewalk

While overconfidence and speculative trading definitely contributed to the crash, there were a couple of other factors that also primed the environment for a complete financial meltdown. The fact that so much investing was happening on credit, which meant that banks themselves would end up cash-strapped once brokers simply bulk-sold stocks in a panic to make up for loans, wiping out savings and cash reserves.

But overconfidence was not just a problem in the markets. By 1929, a sense of economic prosperity had led industrial companies and agricultural businesses to step up their production. However, that didn’t mean that demand was meeting this sped-up production schedule. A surplus of iron, steel, and crops meant that industrial and agricultural sectors were struggling to maintain profits, which reflected itself in slowly sliding stock prices even before October.

The Federal Reserve raised interest rates in August 1929, which put a damper on the seemingly unstoppable growth of the market.

But ultimately, what happened in 1929 was a classic case of a speculative bubble popping, and the ensuing panic causing a dip in the market to become a full-on free fall. By 1929, many stocks were significantly over-valued because of the speculative nature with which many investors approached investing. As prices began to drop, investors panicked and tried to leave the market as quickly as possible by selling what they could.

A sort of mass hysteria ensued, which reached critical mass when investors started selling all at once, plummeting demand and causing stock market prices to fall even further, which then lead to panic selling. It was a vicious feedback loop where dropping prices caused mass sales, which further dropped prices, until all that was left were massive losses. This was further exacerbated by sensationalist headlines from newspapers which declared things like “Crushing Blow Dealt to Stock Market” (The Washington Post) or “Year’s Worst Break Hits Stock Market” (The New York Times). The environment was ripe for panic, and as prices started to dip and investors started to sell, a sort of domino effect took over, until everything came crashing down.

Could a crash like 1929 happen again?

We’ve seen stock market crashes happen since 1929, and we’ll probably be seeing some more, of varying scales, in our lifetimes. Yet, historically, investing will increase your chances at better returns than squirreling away your money under your mattress will, and the truth is that markets have a way of stabilizing themselves if you’re patient enough.

Take the S&P 500, an index of the 500 largest US companies. In the crash of 2008 the index dipped by 38.49%. Ouch. The following year, it bounced back and was up 23.45%. The year after it returned +12.78%. Since its inception, the S&P 500 has returned 9.5% on average. In order to get that return, you would have had to take the good years with the bad ones. That’s not to say the trend will continue though nor that all markets are guaranteed to bounce back. With investing there are no guarantees.

The crash of 1929 was exacerbated by fear and panic, two very human emotions. If you don’t buy into the frenzy, you’ll likely weather market downturns to come. One of the best, if perhaps counterintuitive, pieces of advice for surviving a market crash is to simply… do nothing. Panic-selling is just about the worst thing you could do in a situation like that, so sitting tight and not trying to get ahead of the market are your best bets. And if you’re investing for the long-term, then you don’t need to stress anyway—historically, markets have managed crawl back up again, after all.

There are always risks that come with any type of investing. You can gain money or lose it. Spreading your eggs across many baskets instead of relying on a few potential “winner” stocks means if one part of your investment portfolio takes a hit, others parts might not. By diversifying your portfolio to include a mix of different stocks from different sectors, bonds, and real estate, you’re spreading out your risk.