Black Tuesday and the 1929 Stock Market Crash
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On October 28, 1929, a day known as Black Monday, the New York Stock Exchange suffered its greatest one-day loss in history. The next day, known as Black Tuesday, the market dropped even further, registering the second biggest one-day loss in history. This was the start of an extended bear market that saw the Dow Jones Industrial Average drop 89% in just under three years, and ushered in the period that we know as the Great Depression.

Learn more about the 1929 stock market crash, its causes and ramifications on this episode of Everything Everywhere Daily.

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The stock market crash of 1929 was not the first market crash in history. There had been other crashes, some of which were enormous. The Dutch tulip bubble, which I covered in a previous episode, occurred back in the 17th century. The 18th century saw speculative bubbles for particular joint stock companies, such as the French Mississippi Company, the British South Seas Company, and the British East India Company, as well as the collapses of credit markets.

In the 19th century, there were various bank panics, about once a decade in the United States and the United Kingdom, but they also occurred in France and nations such as Brazil. The Dow Jones Industrial Average was created in 1896 by taking 30 major stocks and creating an average of their prices to reflect the overall market. After the creation of the Dow Jones, there were several one-day market crashes that still rank amongst the worst in history.

On October 18, 1899, the market fell by 8.7%. On March 14, 1907, the market fell by 8.2%. And on February 1, 1917, the market fell by 7.2%. These market crashes weren't common, but they also weren't unheard of. They often led to what were called depressions, which today we would just call a recession. After the end of the First World War, the American stock market experienced a bear market.

From October 1919 to August of 1921, the market declined 43%, from a high of about 118% down to 67%. Much of this had to do with the transformation from a wartime economy to a peacetime economy. However, that low point in 1921 set the stage for a decade of some of the fastest economic growth the world had ever seen. It became known as the Roaring Twenties.

There were a host of reasons why the economy took off in the 1920s. For starters, there was pent-up demand from the war. When the economy finally transitioned back to peacetime mode, factories that had been producing military goods began producing consumer goods, and industry was able to meet the demand that hadn't been met while they were engaged in military production. The next big thing was the expansion of several major technologies throughout the economy.

Electricity became more widespread in homes and factories during the 1920s, powering a variety of new appliances like refrigerators, vacuum cleaners, and radios. This created new industries and markets, further driving economic growth. Radio began rolling out, which became the first form of electronic mass media. Motion pictures increased in popularity, and the first talking pictures were made that decade.

The 1920s were the first decade of widespread commercial aviation. Charles Lindbergh's flight across the Atlantic was one of the decade's quintessential events. Automobiles expanded in popularity, making transportation more efficient. The assembly line, which had been popularized by Henry Ford, began being used in more industrial factories, improving productivity. And on top of all of this, the war in Europe wrecked the economies of the largest European powers, which left the United States as the world's largest economy.

The gross domestic product of the United States in 1921 was approximately $670 billion. By 1929, it had reached $980 billion, just shy of $1 trillion when adjusted for inflation. All of these economic activities resulted in increased demand for all of the new electronic gadgets.

Experiencing good times and economic growth, banks began issuing easy credit. So long as the economy was growing and things were going well, loans were a pretty safe bet. Something you should be aware of is how the United States banking system is structured or at least was back in the 1920s. The United States is unique among other developed countries for having a large number of regional and local banks. Other countries have a smaller number of banks that cover the entire country.

The U.S. was traditionally fearful of large banks, so there was legislation which restricted the ability of banks to do business across state lines. The 1927 McFadden Act prohibited banks from opening branches in other states. This has somewhat been lifted since then, but in 1921, there were 30,456 banks in the United States.

The vast majority of the banks consisted of a single branch located in a single building, usually in a small town. To put this into perspective, during that same time period, Canada had just 10 banks in the entire country. All of this economic activity in the 1920s was reflected in the stock market.

From the market low in August of 1921, the stock market climbed steadily throughout the decade, with the steepest increase taking place in late 1928 and early 1929. It reached its peak on September 3, 1929, when the Dow Jones Industrial Average reached 381. That was up 5.7 times in just 8 years.

After its peak on September 3rd, the stock market began to go down, but not dramatically. It achieved a relative low on October 3rd of 325, but went back up again to 352 on October 11th. Around late September and early October, there were early signs that something might be happening. On September 8th, just days after the peak, a notable financial expert named Robert Babson said, "...a crash is coming, and it may be terrific."

The dip in September was dubbed the Babson Break. Most investors just saw this as a market correction and an opportunity to buy. Starting on October 11th, things began falling again. It fell to $3.36 on the 16th of October and $3.20 on the 21st. On Wednesday, October 23rd, the market dropped 3.6% in a single day. That drop spooked a lot of people, but there was no widespread concern that the 8-year bull run might now be over.

The day where it began to be obvious that something was seriously wrong was Thursday, October 24th, known as Black Thursday. At the opening bell, there was a major selling off of stocks and the market quickly fell by 11% in heavy trading. In fact, there was so much trading going on that the ticker tapes which provided stock data to people around the country was backlogged for hours.

The market plunge resulted in an emergency meeting of several of the largest banks on Wall Street to come up with a plan to stabilize the market. The group quickly agreed to work together, and they appointed Richard Whitney, the vice president of the New York Stock Exchange, to act on their behalf. Whitney began buying shares of top blue-chip companies at above market rates to try and halt the slide. And this wasn't a crazy idea, as this had been done several times in the past with success.

Despite the initial crash in the morning, the market only ended up down 2% on the day. However, 12.9 million shares were traded that day, over 4 million more than the previous record. On Friday, October 25th and Saturday, October 26th, the market remained jittery, but no major collapses happened over those days. Wall Street's financial leaders expressed confidence that the worst was over, encouraging investors to stay calm.

However, it was the calm before the storm. When the stock market reopened on Monday, October 28th, it was a bloodbath. Many investors were forced to sell in order to make their margin calls, more on that in a bit, and the market went into a free fall. The Dow Jones finished the day down 38.33 points or 12.82%.

It was the largest single-day drop in history at that time, and the day became known as Black Monday. The collapse of the market on Monday made investors panic. Everyone wanted out because they didn't want to be the ones left holding the bag. When the markets opened on Tuesday, October 29th, there was a selling frenzy. Thursday's record for the number of shares traded which had smashed the previous record was smashed once again with 16 million shares trading hands.

there were reports of some stocks unable to find a buyer for any price. The market was down 30.57 points or 11.73% on the day, and it was dubbed Black Tuesday. And Black Tuesday could have actually been much worse.

Just as what happened on Thursday, several industrialists, including William C. Durant, the president and founder of General Motors, and members of the Rockefeller family, put money into the market to demonstrate confidence and stop the slide. Over the course of just two days, the market had fallen 23%.

What most people don't know about that week the stock market crashed is that after Black Tuesday on Wednesday, October 30th, the market actually had its biggest one-day increase in history at that time. The market went up 12.34%, almost erasing the losses from the previous day. That was pretty much the definition of what investors call a dead cat bounce. By November 13th, the Dow Jones was down 48% from its peak on September 3rd.

There were periods of stabilization and even brief times when the market went up a little bit, but the events of late October 1929 began a massive bear market. The Dow Jones Industrial Average continued to drop until it reached its bottom in July of 1932 when it hit 41.2. Over a period of a little under three years, the stock market had lost almost 90% of its total value.

The crash of 1929 kick-started a series of events which resulted in the Great Depression, one of the greatest economic downturns in history. The big question that many economists and historians have been asking for almost 100 years is what caused the market to collapse? There are several different theories, none of which are mutually exclusive. The first is simple overconfidence. In the years leading up to the crash, the stock market experienced rapid growth fueled by speculative investments.

Many people believed stock prices would just keep rising indefinitely, which led to reckless investments, often using borrowed money. This speculative bubble inflated stock prices to unsustainable levels far beyond the actual value of the companies. Another big problem was people buying on the margin. Buying on the margin is when you take out a loan to buy stocks. If it works, you can make a fantastic amount of money buying on the margin. However, if it doesn't, it can spell disaster.

When the price starts to fall, the lender can issue a margin call where they demand repayment of their loan. In order to get the money to repay the loan, you have to sell the stock. If this happens to a large number of people all at once, you can wind up with panic selling. However, one of the biggest structural reasons for the crash may have occurred in August, just weeks before the market hit its all-time high on September 3rd.

The New York Federal Reserve Bank increased interest rates a full percentage point from 5 to 6%. As it was more expensive to take out a loan, there was less borrowing, which meant less economic activity and less stock buying on the margin. The fact that U.S. banks were generally small and regional became a problem because those banks were usually not very diversified. Before I close, there is one part of the legend of the 1929 stock market crash that I should address.

And that is the legend of stockbrokers jumping out of their window on Wall Street. This is a complete urban legend. There was not a single case of a person jumping off a building during the stock market crash. This rumor actually began almost immediately after the stock market began to fall, and it quickly became conventional wisdom all over the world.

In fact, research has shown that the number of suicides in October and November of 1929 was actually below that of other months that same year. On October 24th, Black Thursday, there was someone who died after falling from a building, but he was a German tourist and it took place before the market even opened.

The rumors became so persistent that on November 14th, New York City's chief medical examiner had to issue a press release saying that there hadn't been an uptick in suicides. In fact, they were down from the year before. That being said, there were two cases of people in financial-related jobs jumping off buildings weeks after the crash, however, this was well after the rumors started.

The crash of 1929 ended the Roaring Twenties and was the start of the Great Depression, which saw unemployment reach rates of almost 26% in 1933. As for the stock market, it wouldn't be until 1954, 25 years after the September 1929 peak, that it would ever reach those heights again.

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