Historians call the Stock Market Crash of 1929 the greatest economic calamity in history and it is easy to see why.
What Caused the Stock Market Crash of 1929?
The cause of the 1929 Stock Market Crash was an asset and equity bubble driven by the general public’s unrestricted access to credit. Easy access to credit fueled a wave of highly speculative and risky investments in the stock market. Eventually, prices were unsustainably high and confidence in the market was shattered. When the bubble burst, millions lost their homes, jobs and over 4,000 U.S. banks went bankrupt. The impact of the collapse spread worldwide.
Specifically, the Stock Market Crash started the Great Depression which led to World War II; the most destructive conflict in human history. In addition, World War II led to the Cold War which lasted until the 1990s.
Consequently, the Great Stock Market Crash of 1929 shaped the 20th Century. For instance, World War II drove the development of disruptive technologies including electronics, computers, nuclear weapons, jets, long-range aircraft, missiles, and even frozen food.
How the 1929 Stock Market Crash Made Our World
In addition, the American welfare state was born during the New Deal of the Great Depression. Meanwhile, the British welfare state, the German economic miracle, the Japanese economic miracle, and the European Union had its origins in the aftermath of World War II.
Another consequence of World War II was the destruction of the British and other colonial empires. Thus, many countries are independent today, partially because of the Crash.
Finally, modern China began when the Japanese invasion of the 1930s fatally weakened the Nationalist regime. That provided an opening for Mao Zedong’s Communists to win the Chinese Civil War and begin building a strong Chinese state. Thus, even China’s recent economic boom owes its origins to the Stock Market Crash.
The 1929 Stock Market Crash What Happened?
Strangely, the Stock Market Crash was first regarded as a simple market correction.
To explain, the crash began with the Dow; America’s top stock index now the Dow Jones, falling by 11% on Black Thursday; October 24, 1929. However, observers noted something was wrong when trading volumes tripled.
Oddly, the market corrected slightly on Friday, October 24, 1929, because Wall Street bankers bought large amounts of stock. Subsequently, the market fell by 13% on Black Monday, October 28, 1929, and 12% on Black Tuesday, October 29, 1929.
How Did the Stock Market Crash Cause the Great Depression?
The Stock Market Crash caused the Great Depression by destroying confidence in the United States Economy which was enjoying an unprecedented boom.
In addition, the crash burst a massive asset bubble in the United States that included real estate as well as stocks. Moreover, the American economy was the engine that drove global prosperity. Consequently, the crash led to depressions in other countries like Japan, Germany, and the United Kingdom.
The Stock Market Crash began the greatest Bear Market in history. In fact, the Dow Jones index lost 90% of its value falling from 305.85 on Black Thursday, 1929, to 41.22 on July 8, 1932.
Incredibly, the Dow did not return to its September 3, 1929, high of 383, until November 23, 1954. Which means it took 25 years and two months for the American stock market to recover from the Great Crash.
What Caused the Stock Market Crash of 1929?
The cause of the Stock Market Crash was an asset and equity bubble driven by the irrational exuberance of the Roaring Twenties. An overheated American economy grew dramatically because of new technologies. For instance, electrification created massive markets for radio, appliances, refrigeration, and movies. Additionally, automobiles drove the boom by providing the middle-class with unprecedented mobility.
The new technologies led to new industries like movie production, chain grocery stores, discount stores, trucking, airlines, and broadcasting. In addition, new technologies drove the expansion of older industries; such as advertising, retail, publishing, real estate, construction, home building, mining, oil, and steel.
Moreover, there was a real estate boom in the 1920s United States as automobiles and railroads opened large amounts of new land for development. Notably, the Florida Real Estate Bubble; which burst in 1926, had similarities to the mortgage crisis of 2007-2008.
Thus, the cause of the Crash was an overheated economy which drove an asset bubble in the stock market. Interestingly, the bursting of the Florida Bubble helped trigger the Stock Market Crash by driving money from real estate to stocks.
Why Did the Stock Market Crash in 1929?
New technologies and industries led to lucrative stocks. Plus, the economic boom pushed up the price of older stocks. Consequently, interest in the stock market increased as average people bought equities.
A poorly regulated stock market magnified the effects of the bubble. For instance, many investors bought stock on “the margin.” To elaborate, an investor could buy $100 worth of stock by putting as little as 10% or $10 down.
The hope was that rising stock prices would allow the investor to sell the sock and pay the lender back at a price. However, many investors could not pay the loans off when the market crashed.
Consequently, both the brokers who were also margin lenders, and the investors lost all their money. Additionally, many of the investors were middle and working-class Americans who were investing all their savings in the margin.
Thus, many average people lost everything and their confidence in the economy and capitalism in the crash. This helped trigger the Depression because many people quit buying consumer goods and investing.
What events led to the Stock Market Crash of 1929?
Oddly, historians and economists cannot agree on when the Crash of 1929 began.
To clarify, economists think a series of events that made the Crash inevitable started long before Black Thursday. Thus, the stock was crashing for some time, but the public was unaware of it until October 24, 1929.
Events that Preceded the Crash of 1929
- 1914-1918 World War One destroys the international economic and political order. In particular, the war devastates the German economy which never truly recovers.
- 1919 – The Treaty of Versailles imposes sanctions on Germany, which the defeated nation cannot repay. This hurts the global economy by crippling the world’s second largest economy.
- 1920 United States Gross Domestic Product (GDP) is at $697.7 billion
- 1920s – US Economy grows by 42% in a decade. The economic growth inspires optimism and leads to irrational exuberance and unlimited faith in the market.
- 1922 United States Gross Domestic Product reaches $709.3 billion.
- 1923 United States GDP reaches $802.6 billion. Thus, America’s Gross Domestic Product grew by nearly $100 billion or around 12% in one year.
- 1920s – American Farm Crisis. World War I spurs agricultural overproduction and a commodities bubble. The bursting of the bubble leads to an agricultural depression in the United States that lasts until World War II. One result of the farm crisis is a massive drop in commodities prices that drives more money into stocks.
- 1920s- Income Inequality in the United States rises to new highs, by 1929 the top 1% of the US population controls 14.5% of the nation’s wealth.
- 1924 – 1929 US Stock Market value increases by 20% a year or 100% growth in five years. This inspires what British Chancellor of the Exchequer Philip Snowden describes as a “perfect orgy of speculation” driving markets to unprecedented highs.
- 1925 – British Chancellor of the ExchequerWinston S. Churchill returns the Pound Sterling to the gold standard to restore its position as the world’s reserve currency.
However, this weakens the pound and the British economy by tying the United Kingdom’s currency to a commodity. To explain, the gold standard pegs a currency’s value to the market price. Thus, the currency is at the mercy of the market.
The Overheated Roaring Twenties
- 1926 – United States GDP reaches $902.1 billion/
- 1926 – Florida Real Estate Bubble bursts shaking American confidence in property and drives investors into stocks.
- November 1928 – Herbert Hoover (R-California) wins US Presidential Election by a wide margin showing popular faith in the free market and the US economy. Hoover’s election increases optimism and faith in the market fueling more speculation.
- 1929 – United States Gross Domestic Product reaches $977 billion.
The 1929 Crash Begins
- March 1929 – US Stock Market drops by 10%. However, there is no panic and the market rebounds.
- 1929 – Joseph P. Kennedy Sr., a major American stock speculator; and father of President John F. Kennedy (D-Massachusetts), pulls all of his money out of an overheated stock market. Strangely Joe Kennedy claims he pulled his money out of stocks when a shoeshine boy gave him stock tips. This convinced Kennedy that too many people who did not know what they were doing in the market.
- August 8, 1929 – The Federal Reserve Bank of New York tries to slow the overheated economy by raising its discount rate to 6%.
- September 3, 1929 – The Dow reaches an unprecedented height of 381.77 points. Thus, the Dow grew by 27% in a year, the Dow grew by 101.0779 points in 12 months. Incredibly, the Dow will not reach this number again until November 23, 1954.
The Markets Crash
- September 20, 1929 – Famous British investor Clarence Hatry is exposed as a fraudster and arrested. Hatry overextended himself in a failed hostile takeover of British steel companies. Moreover, Hatry made the situation worse by issuing fake securities to cover his losses.
- September 1929 – Hatry’s arrest and the collapse of the companies he controlled triggers the Hatry Crisis; which destroys confidence in the British stock market. Newspaper coverage of the Hatry Crisis spreads the bear market in British stocks across the Atlantic to Wall Street.
- September 26, 1929 – Falling gold prices and the Hatry Crisis drive the Bank of England to raise its discount rate to protect the gold standard and the value of the Pound Sterling.
- October 3, 1929 – British Chancellor of the Exchequer Philip Snowden undermines public confidence by calling the US stock market a “speculative orgy.”
- October 4, 1929, – The Wall Street Journaland The New York Times further undermine confidence in the stock market by reporting Snowden’s remarks and agreeing with them.
- October 23, 1929 – The Dow has fallen by 20% from its September 3, high of 381.77 points to 305.416.
- October 24, 1929 – Black Friday the Dow falls by 11%.
- October 25, 1929 – a false correction. The Dow rises by 1%.
- October 28, 1929 – Black Monday the Dow falls by 13%.
- October 29, 1929 – Black Tuesday the Dow drops by 12%. Frightened investors sell 16.41 million shares in one day.
Effects of the 1929 Stock Market Crash
- 1929-1932 – The Dow loses 90% of its value falling to 41.22 on July 8, 1932.
- 1929-1932 – Deflation in the United States. US prices falls by 10%.
- 1929-1934 – US Economic Growth falls by 50%.
- 1929-1933 – US Consumer Price Index drops by 27%.
- 1930 – US Economy shrinks by 8.5% to $893.55 billion.
- 1929-1933 – 4,000 American banks fail.
- 1931 – US Gross Domestic Product falls by 6.5% to $835.85 billion.
- 1932 – US Gross Domestic product drops by 12.9% to $728.02 billion. Hence US GDP fell by 27.9% in three years.
- November 1932 – Angry US voters chose left-wing New York Governor Franklin D. Roosevelt (D) over Hoover.
- 1933- US Unemployment rate peaks at 24.9%.
Stagnation and Recovery
- March 1933 – Roosevelt; or FDR, becomes President and launches a program of radical left-wing economic reforms popularly called the New Deal. In particular, FDR implements Keynesian economics in the United States to spur economic growth.
- 1933-1940 – US economic growth remains stagnant and unemployment rates stay high. The only significant growth is driven by New Deal government spending.
- 1940-1945 – World War II spurs an industrial boom that launches the United States into full economic recovery.
- November 23, 1954. Dow finally returns to its September 3, 1929, record high of 381.77, 25 years later.
What We Can Learn from the Stock Market Crash of 1929?
Even though nearly 90 years separate us from the Stock Market Crash, there is a lot we can learn from that catastrophic event. The most important lessons we can learn from the crash of 1929 include:
- Overheated markets are dangerous. The American economy was headed for disaster in 1929 because it was overheated.
- Markets can stay heated for a long time. In fact, the US economy had been overheated for nearly a decade when it finally crashed.
- Crashes do not begin suddenly or come from nowhere. The Dow had been falling for over a month; and the Hatry Crisis was creating chaos in the City of London, for over a month before Black Thursday.
- Crises elsewhere will affect other markets. In fact, you can make a good case that the Crash of 1929 began in the City of London with the Hatry Crisis and spread to Wall Street.
- Panic and hysteria spread fast. Notably, the hysteria the Hatry Crisis triggered in London kept spreading.
- The media plays a role in financial panics. For example, newspaper coverage of the Hatry Crisis and Snowden’s remarks in London caused markets to fall in New York.
- Once a crash begins it is hard to stop. For instance, Wall Street bankers were unable to stem the deluge by buying stocks in 1929.
- Some people will anticipate the crash. Specifically, Joseph Kennedy Sr. foresaw the debacle of 1929 and Steve Eisman correctly anticipated the meltdown of 2007-2008.
- Once public confidence in the market is gone you cannot get it back easily. In fact, the Dow did not return until 1929 levels again until 1954.
- Bear markets and market crashes are not sudden. Instead, a crash is more like a slow-moving train wreck, a serious of jolts followed by a sudden smashup.
Finally, the Stock Market Crash of 1929 teaches us that all good markets will end. Thus, no Bull Market is forever so you should always be ready for corrections and have a process to identify a potential stock market crash.