Wall Street Crash of 1929 facts for kids
Crowd gathering on Wall Street after the 1929 crash
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| Date | September 4 – November 13, 1929 |
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| Type | Stock market crash |
| Cause | Fears of excessive speculation by the Federal Reserve |
The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange collapsed.
It was the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its aftereffects. The Great Crash is mostly associated with October 24, 1929, called Black Thursday, the day of the largest sell-off of shares in U.S. history, and October 29, 1929, called Black Tuesday, when investors traded some 16 million shares on the New York Stock Exchange in a single day. The crash, which followed the London Stock Exchange's crash of September, signaled the beginning of the Great Depression.
Contents
Background
The "Roaring Twenties", the decade following World War I that led to the crash, was a time of wealth and excess. Building on post-war optimism, rural Americans migrated to the cities in vast numbers throughout the decade with hopes of finding a more prosperous life in the ever-growing expansion of America's industrial sector.
Despite the inherent risk of speculation, it was widely believed that the stock market would continue to rise forever. On March 25, 1929, after the Federal Reserve warned of excessive speculation, a small crash occurred as investors started to sell stocks at a rapid pace, exposing the market's shaky foundation. Two days later, banker Charles E. Mitchell announced that his company, the National City Bank, would provide $25 million in credit to stop the market's slide. Mitchell's move brought a temporary halt to the financial crisis, and call money declined from 20 to 8 percent. However, the American economy showed ominous signs of trouble. Steel production declined, construction was sluggish, automobile sales went down, and consumers were building up large debts because of easy credit.
Despite all the economic warning signs and the market breaks in March and May 1929, stocks resumed their advance in June and the gains continued almost unabated until early September 1929 (the Dow Jones average gained more than 20% between June and September). The market had been on a nine-year run that saw the Dow Jones Industrial Average increase in value tenfold, peaking at 381.17 on September 3, 1929. Shortly before the crash, economist Irving Fisher famously proclaimed "Stock prices have reached what looks like a permanently high plateau." The optimism and the financial gains of the great bull market were shaken after a well-publicized September 8 prediction from financial expert Roger Babson that "a crash is coming, and it may be terrific". The initial September decline was thus called the "Babson Break" in the press. That was the start of the Great Crash, but until the severe phase of the crash in October, many investors regarded the September "Babson Break" as a "healthy correction" and buying opportunity.
On September 20, 1929, top British investor Clarence Hatry and many of his associates were jailed for fraud and forgery leading to the suspension of his companies. This may have weakened the confidence of Americans in their own companies, although it had minimal impact on the London Stock Exchange. In the days leading up to the crash, the market was severely unstable. Periods of selling and high volumes were interspersed with brief periods of rising prices and recovery.
Crash
Selling intensified in mid-October. On October 24, "Black Thursday", the market lost 11% of its value at the opening bell on very heavy trading. The huge volume meant that the report of prices on the ticker tape in brokerage offices around the nation was hours late, and so investors had no idea what most stocks were trading for. Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.
With the bankers' financial resources behind him, Whitney placed a bid to purchase 25,000 shares of U.S. Steel at $205 per share, a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907 and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing down only 6.38 points (2.09%) for the day.
On October 28, "Black Monday", more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 12.82%.
On October 29, 1929, "Black Tuesday" hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors. The panic selling reached its peak with some stocks having no buyers at any price. The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 68.90 points, or 23.05% in two days.
On October 29, William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks to demonstrate to the public their confidence in the market, but their efforts failed to stop the large decline in prices. The massive volume of stocks traded that day made the ticker continue to run until about 7:45 p.m.
| Date | Change | % Change | Close |
|---|---|---|---|
| October 28, 1929 | −38.33 | −12.82 | 260.64 |
| October 29, 1929 | −30.57 | −11.73 | 230.07 |
After a one-day recovery on October 30, when the Dow regained 28.40 points, or 12.34%, to close at 258.47, the market continued to fall, arriving at an interim bottom on November 13, 1929, with the Dow closing at 198.60. The market then recovered for several months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28, and reaching a secondary closing peak (bear market rally) of 294.07 on April 17, 1930. The Dow then embarked on another, much longer, steady slide from April 1930 to July 8, 1932, when it closed at 41.22, its lowest level of the 20th century, concluding an 89.2% loss for the index in less than three years.
Beginning on March 15, 1933, and continuing through the rest of the 1930s, the Dow began to slowly regain the ground it had lost. The largest percentage increases of the Dow Jones occurred during the early and mid-1930s. In late 1937, there was a sharp dip in the stock market, but prices held well above the 1932 lows. The Dow Jones did not return to its peak close of September 3, 1929, for 25 years, until November 23, 1954.
Aftermath
In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of the crash. The following year, the U.S. Congress passed the Glass–Steagall Act mandating a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.
After, stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. However, the one-day crash of Black Monday, October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, as well as Black Monday of March 16, 2020 (−12.9%), were worse in percentage terms than any single day of the 1929 crash (although the combined 25% decline of October 28–29, 1929 was larger than that of October 19, 1987, and remains the worst two-day decline as of 7 November 2022[update]).
World War II
The American mobilization for World War II at the end of 1941 moved approximately ten million people out of the civilian labor force and into the war. World War II had a dramatic effect on many parts of the economy and may have hastened the end of the Great Depression in the United States. Government-financed capital spending accounted for only 5% of the annual U.S. investment in industrial capital in 1940; by 1943, the government accounted for 67% of U.S. capital investment.
Effects
United States
Together, the 1929 stock market crash and the Great Depression formed the largest financial crisis of the 20th century. The panic of October 1929 has come to serve as a symbol of the economic contraction that gripped the world during the next decade. The falls in share prices on October 24 and 29, 1929 were practically instantaneous in all financial markets, except Japan.
The Wall Street Crash had a major impact on the U.S. and world economy, and it has been the source of intense academic historical, economic, and political debate from its aftermath until the present day. Some people believed that abuses by utility holding companies contributed to the Wall Street Crash of 1929 and the Great Depression that followed. Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market.
In 1930, 1,352 banks held more than $853 million in deposits; in 1931, one year later, 2,294 banks failed with nearly $1.7 billion in deposits. Many businesses failed (28,285 failures and a daily rate of 133 in 1931).
The 1929 crash brought the Roaring Twenties to a halt. As tentatively expressed by economic historian Charles P. Kindleberger, in 1929, there was no lender of last resort effectively present, which, if it had existed and been properly exercised, would have been key in shortening the business slowdown that normally follows financial crises. The crash instigated widespread and long-lasting consequences for the United States. Historians still debate whether the 1929 crash sparked the Great Depression or if it merely coincided with bursting a loose credit-inspired economic bubble. Only 16% of American households were invested in the stock market within the United States during the period leading up to this depression, suggesting that the crash carried somewhat less weight in causing it.
However, the psychological effects of the crash reverberated across the nation as businesses became aware of the difficulties in securing capital market investments for new projects and expansions. Business uncertainty naturally affects job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, naturally the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties, including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economically depressing events.
The resultant rise of mass unemployment is seen as a result of the crash, although the crash is by no means the sole event that contributed to the depression. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression. True or not, the consequences were dire for almost everybody. Most academic experts agree on one aspect of the crash: It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying.
The failure set off a worldwide run on US gold deposits (i.e. the dollar) and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 banks and other lenders ultimately failed. Also, the uptick rule, which allowed short selling only when the last tick in a stock's price was positive, was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear raid.
Europe
The stock market crash of October 1929 led directly to the Great Depression in Europe. When stocks plummeted on the New York Stock Exchange, the world noticed immediately. Although financial leaders in the United Kingdom, as in the United States, vastly underestimated the extent of the crisis that ensued, it soon became clear that the world's economies were more interconnected than ever. The effects of the disruption to the global system of financing, trade, and production and the subsequent meltdown of the American economy were soon felt throughout Europe.
In 1930 and 1931, in particular, unemployed workers went on strike, demonstrated in public, and otherwise took direct action to call public attention to their plight. Within the UK, protests often focused on the so-called means test, which the government had instituted in 1931 to limit the amount of unemployment payments made to individuals and families. For working people, the means test seemed an intrusive and insensitive way to deal with the chronic and relentless deprivation caused by the economic crisis. The strikes were met forcefully, with police breaking up protests, arresting demonstrators, and charging them with crimes related to the violation of public order.
Academic debate
There is a constant debate among economists and historians as to what role the crash played in subsequent economic, social, and political events. The Economist argued in a 1998 article that the Depression did not start with the stock market crash, nor was it clear at the time of the crash that a depression was starting. They asked, "Can a very serious Stock Exchange collapse produce a serious setback to industry when industrial production is for the most part in a healthy and balanced condition?" They argued that there must be some setback, but there was not yet sufficient evidence to prove that it would be long or would necessarily produce a general industrial depression.
However, The Economist also cautioned that some bank failures were also to be expected and some banks may not have had any reserves left for financing commercial and industrial enterprises. It concluded that the position of the banks was the key to the situation, but what was going to happen could not have been foreseen.
Milton Friedman's A Monetary History of the United States, co-written with Anna Schwartz, argues that what made the "great contraction" so severe was not the downturn in the business cycle, protectionism, or the 1929 stock market crash in themselves but the collapse of the banking system during three waves of panics from 1930 to 1933.
See also
In Spanish: Crac del 29 para niños
- Causes of the Great Depression
- Criticism of the Federal Reserve
- Great Contraction
- List of largest daily changes in the Dow Jones Industrial Average
