The Black Tuesday Stock Market Crash


A view of the Wall Street sign with the New York Stock Exchange in the background

On "Black Tuesday," October 29, 1929, the New York Stock Exchange experienced its most devastating crash in history, beginning the Great Depression.
(Image credit: Bigstock/pmitov)

Let's step back for a moment to the 1920s. Everyone thought that they could get rich quick, and investors were buying stocks in huge numbers. Credit was loose and banks were anxious to lend money for people to invest in the stock market. If you had as little as 10 to 20 percent down, bankers would line up to get you to invest on margin in the hopes of making money for both you and the bank. After all, the Roaring Twenties saw an unprecedented level of irrational exuberance and decadence.

Economic Conditions in 1929

The Dow Jones Industrial Average set a record high for that time on September 3, 1929, reaching 381.2 points. In fact, the value of common stock rose 120 percent from 1925 until September 1, 1929, with an average compound annual growth rate of 21.8 percent. Real income in the United States rose by 10.5 percent annually during the first two years of the decade and by 3.4 percent for the next six years. If you take a look at the 45 top industrial stocks, then their price/efficiency ratios rose by three points in the 21 months before the great crash. Those industries, where there seemed to be great cause for optimism, showed the greatest growth in their stocks.

The annual growth of production during each year was at 3.1 percent and had been steadily climbing throughout the entire decade. Factory payouts reached an all-time high in September 1929 and fell just slightly in October. The unadjusted measure of freight car loadings reached an all-time high in September and fell barely in October. Over 1,400 firms announced that they were paying dividends in the first nine months of 1929 while only 135 companies had announced they were playing dividends in all of 1927. Many firms produced earning statements showing that their earnings had grown year-over-year by more than 27 percent.

Federal Reserve Response

Many argue that the Federal Reserve System created or enhanced conditions causing Black Tuesday and the Great Depression that followed. In 1927 following a little recession in the stock market, the Federal Reserve System eased money rates allowing people to more easily invest in the stock market. The Fed then decided that speculation had grown too quickly, so they raised the discount rate up to 5 percent. At the same time, the United States government announced that they had sold 75 percent of all government securities. With over 36 countries on the gold system, tightening by the Fed would lead to a deficit balance of payments for those countries. Many, including the Bank of England, were left with very few alternatives but to tighten their own money system despite being in an economic slump. Following the slump, many urged the Fed to buy government securities while others argued that the system must be totally trashed in order for it to be successful again.

On October 3, Great Britain's Chancellor of the Exchequer Phillip Snowden declared the market was "a perfect orgy of speculation," and the next day the New York Times reported it along with comments from U.S. Treasury Secretary Andrew Mellon saying "(the market) acted as if the price of securities would infinitely advance" causing the stock market to drop, setting into motion the withdrawal of foreign investors from the New York Stock Exchange. Skillful short sellers and buyers purchasing stocks on margin were forced to sell on Monday, October 21, 1929.

The Crash

On Wednesday, October 23, 1929, the market only dropped 4.6 percent. Yet, The Times screamed "Prices of Stocks Crash in Heavy Liquidation" while the top headline in the Washington Post read '“Huge Selling Wave Creates Near-Panic as Stocks Collapse." The result was that many people panicked hustling to the banks to withdraw funds. The 1929 stock market crash and the Great Depression that accompanied it represents the greatest and longest economic disaster in American history. Only after World War II was the United States able to begin to recover.

The Great Depression vs. The Great Recession

While the social and political conditions were very different in 1929 than they are today, some might argue that our current economic system is in a far more precarious position than in 1929. The effects of the so-called 2007-2008 Great Recession can still be felt today. In 2008, many economists (particularly those of the Austrian school) believed that the best course of action would have been to let the entire American (and world) economy collapse, because the sonner the "reset button" was pushed and initial shockwaves wore off, the sooner we could have gotten started on formulating a better, more stable economic system.

A monument of the Great Depression-era soup lines

Some could argue that there were a lot of differences between 1929 and the world today, but there are some definite similiarites worth examining.
(Image credit: Bigstock/pmitov)

Instead, it was decided that certain corporations were "too big to fail" and austerity measures would need to be taken. In other words, the taxpayers would need to foot the bill for mistakes made by giant corporations, the rationale being it was for the good of society. The Fed also decided to keep interest rates near zero for almost a decade. This was an unprescedented move in the history of central banking, but it was reminiscent of the "easy credit" that the United States enjoyed in the years leading up to the Black Tuesday crash. Some economists have warned that the strategy of keeping interest rates near zero for over a decade was similar to patching up a giant hole in a ship with tape. The leak might be temporarily plugged, but look out when the fix breaks.

At the end of 2015, the Federal Reserve finally began a campaign of slow and steady rate hikes, which takes us to where we are today. The Fed is planning even more rate hikes throughout 2019. Since 2008, no one can deny that a low interest rate helped to pump up stock prices. The Down Jones Industrial Average is currently up nearly 30% from its 2008 lows. That's not a bad return for only ten years.

Both Presidents Obama and Trump have recently taken credit for the economic "recovery" we've been experiencing, but a closer look at the situation reveals that presidents don't have a lot of clout in economic matters, particularly the monetary policy of the Fed. Many believe the stock market is certainly showing signs of cooling off. Corrections are healthy, but we are in uncertain times. We haven't even addressed economic anomalies such as the fact that the Federal Reserve has been buying trillions of dollars of its own bonds in an attempt to stimulate the economy, and we didn't even talk about the derivatives crisis that some believe is threatening to destroy the entire global financial system. The future is uncertain, but if we can learn anything from the 1929 stock market crash, we should remember that nothing keeps going up forever.
 

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