The Stock Market Crash of 1929

Investors rush to withdraw their savings during a stock market crash, circa 1929.
Investors rush to withdraw their savings during a stock market crash, circa 1929. Hulton Archive / Stringer/ Hulton Archive/ Getty Images

In the 1920s,many people felt that they could make a fortune from the stock market. Forgetting that the stock market was volatile, they invested their entire life savings. Others bought stocks on credit (margin). When the stock market took a dive on Black Tuesday, October 29, 1929, the country was unprepared. The economic devastation caused by the Stock Market Crash of 1929 was a key factor in beginning the Great Depression.

Dates: October 29, 1929

Also Known As: The Great Wall Street Crash of 1929; Black Tuesday

A Time of Optimism

The end of World War I heralded a new era in the United States. It was an era of enthusiasm, confidence, and optimism. A time when inventions such as the airplane and radio made anything seem possible. A time when 19th century morals were set aside and flappers became the model of the new woman. A time when Prohibition renewed confidence in the productivity of the common man.

It is in such times of optimism that people take their savings out from under their mattresses and out of banks and invest it. In the 1920s, many invested in the stock market.

The Stock Market Boom

Although the stock market has the reputation of being a risky investment, it did not appear that way in the 1920s. With the mood of the country exuberant, the stock market seemed an infallible investment in the future.

As more people invested in the stock market, stock prices began to rise.

This was first noticeable in 1925. Stock prices then bobbed up and down throughout 1925 and 1926, followed by a strong upward trend in 1927. The strong bull market (when prices are rising in the stock market) enticed even more people to invest. By 1928, a stock market boom had begun.

The stock market boom changed the way investors viewed the stock market.

No longer was the stock market for long-term investment. Rather, in 1928, the stock market had become a place where everyday people truly believed that they could become rich.

Interest in the stock market reached a fevered pitch. Stocks had become the talk of every town. Discussions about stocks could be heard everywhere, from parties to barber shops. As newspapers reported stories of ordinary people - like chauffeurs, maids, and teachers - making millions off the stock market, the fervor to buy stocks grew exponentially.

Although an increasing number of people wanted to buy stocks, not everyone had the money to do so.

Buying on Margin

When someone did not have the money to pay the full price of stocks, they could buy stocks "on margin." Buying stocks on margin means that the buyer would put down some of his own money, but the rest he would borrow from a broker.

In the 1920s, the buyer only had to put down 10 to 20 percent of his own money and thus borrowed 80 to 90 percent of the cost of the stock.

Buying on margin could be very risky. If the price of stock fell lower than the loan amount, the broker would likely issue a "margin call," which means that the buyer must come up with the cash to pay back his loan immediately.

In the 1920s, many speculators (people who hoped to make a lot of money on the stock market) bought stocks on margin. Confident in what seemed a never-ending rise in prices, many of these speculators neglected to seriously consider the risk they were taking.

Signs of Trouble

By early 1929, people across the United States were scrambling to get into the stock market. The profits seemed so assured that even many companies placed money in the stock market. And even more problematically, some banks placed customers' money in the stock market (without their knowledge).

With the stock market prices upward bound, everything seemed wonderful. When the great crash hit in October, these people were taken by surprise. However, there had been warning signs.

On March 25, 1929, the stock market suffered a mini-crash.

It was a prelude of what was to come. As prices began to drop, panic struck across the country as margin calls were issued. When banker Charles Mitchell made an announcement that his bank would keep lending, his reassurance stopped the panic. Although Mitchell and others tried the tactic of reassurance again in October, it did not stop the big crash.

By the spring of 1929, there were additional signs that the economy might be headed for a serious setback. Steel production went down; house construction slowed, and car sales waned.

At this time, there were also a few reputable people warning of an impending, major crash; however, as month after month went by without one, those that advised caution were labeled pessimists and ignored.

Summer Boom

Both the mini-crash and the naysayers were nearly forgotten when the market surged ahead during the summer of 1929. From June through August, stock market prices reached their highest levels to date.

To many, the continual increase of stocks seemed inevitable. When economist Irving Fisher stated, "Stock prices have reached what looks like a permanently high plateau," he was stating what many speculators wanted to believe.

On September 3, 1929, the stock market reached its peak with the Dow Jones Industrial Average closing at 381.17. Two days later, the market started dropping. At first, there was no massive drop. Stock prices fluctuated throughout September and into October until the massive drop on Black Thursday.

Black Thursday - October 24, 1929

On the morning of Thursday, October 24, 1929, stock prices plummeted.

Vast numbers of people were selling their stocks. Margin calls were sent out. People across the country watched the ticker as the numbers it spit out spelled their doom.

The ticker was so overwhelmed that it quickly fell behind. A crowd gathered outside of the New York Stock Exchange on Wall Street, stunned at the downturn. Rumors circulated of people committing suicide.

To the great relief of many, the panic subsided in the afternoon. When a group of bankers pooled their money and invested a large sum back into the stock market, their willingness to invest their own money in the stock market convinced others to stop selling.

The morning had been shocking, but the recovery was amazing. By the end of the day, many people were again buying stocks at what they thought were bargain prices.

On "Black Thursday," 12.9 million shares were sold - double the previous record.

Four days later, the stock market fell again.

Black Monday - October 28, 1929

Although the market had closed on an upswing on Black Thursday, the low numbers of the ticker that day had shocked many speculators. Hoping to get out of the stock market before they lost everything (as they thought they had on Thursday morning), they decided to sell.

This time, as the stock prices plummeted, no one came in to save it.

Black Tuesday - October 29, 1929

October 29, 1929, "Black Tuesday," is known as the worst day in stock market history. There were so many orders to sell that the ticker quickly fell behind. (By the end of close, it had lagged to 2 1/2 hours behind.)

People were in a panic; they couldn't get rid of their stocks fast enough. Since everyone was selling and nearly no one was buying, stock prices collapsed.

Rather than the bankers rallying investors by buying more stocks, rumors circulated that they were selling. Panic hit the country. Over 16.4 million shares of stock were sold - a new record.

The Drop Continues

Not sure how to stem the panic, the decision was made to close the stock market on Friday, November 1 for few days. When it reopened on Monday, November 4 for limited hours, stocks dropped again.

The slump continued until November 23, 1929, when prices seemed to stabilize. However, this was not the end. Over the next two years, the stock market continued to drop. It reached its low point on July 8, 1932 when the Dow Jones Industrial Average closed at 41.22.

Aftermath

To say that the Stock Market Crash of 1929 devastated the economy is an understatement. Although reports of mass suicides in the aftermath of the crash were most likely exaggerations, many people lost their entire savings. Numerous companies were ruined. Faith in banks was destroyed.

The Stock Market Crash of 1929 occurred at the beginning of the Great Depression. Whether it was a symptom of the impending depression or a direct cause of it is still hotly debated.

Historians, economists, and others continue to study the Stock Market Crash of 1929 in the hopes of discovering the secret to what started the boom and what instigated the panic. As of yet, there has been little agreement as to the causes.

In the years after the crash, regulations covering buying stocks on margin and the roles of banks have added protections in the hopes that another severe crash could never happen again.