What Led to the Stock Market Crash of 1929?
In 1929, October witnessed the stock market crash, leading to the Great Depression and the loss of billions of dollars. This event, known as Black Thursday, followed a period of incredible growth and speculative expansion. With too much supply and decreasing demand, producers struggled to sell their products, contributing to the economic downturn.
The "Roaring Twenties," a decade of vigorous economic and social expansion in the United States, abruptly concluded in October 1929 with a stock market crash, ushering in the Great Depression of the 1930s. Subsequently, the U.S. economy contracted sharply, with GDP plummeting over 36% between 1929 and 1933. Numerous American banks collapsed, resulting in the erosion of customers' savings, and unemployment soared to a staggering 25% as jobs vanished.
"Black Thursday" Marks the Start of the Crash
On October 24, 1929, the stock market initiated the crash by opening 11% lower than the prior day's close. Institutions and financiers intervened with bids above market prices to alleviate panic, resulting in modest losses. Stocks rebounded over the next two days.
However, the respite was brief. On the subsequent Monday, termed "Black Monday," the Dow Jones Industrial Average (DJIA) recorded a 13% decline. The following day, "Black Tuesday," saw an additional 12% fall in the Dow, comprising some of America's largest companies.
Before the crash, on September 3, 1929, the Dow reached its pinnacle at 381.17. The nadir arrived on July 8, 1932, with the Dow at 41.22, reflecting an astonishing 89.2% loss.
While major blue-chip stocks dropped in value, smaller firms fared worse, leading to bankruptcies. Numerous speculative stocks were removed from stock exchanges. It wasn't until November 23, 1954, that the Dow recovered to its previous peak of 381.17.
The Pre-Crash Era: Remarkable Expansion
During the early 1920s, companies thrived by exporting to Europe, which was rebuilding post-World War I. Unemployment remained low, while the proliferation of automobiles generated employment opportunities and economic efficiencies.
Stock prices surged until their zenith in 1929. In this decade, stock market participation became a national fascination, extending to the affluent and those reliant on stockbrokers for borrowed investment funds.
The burgeoning economy cultivated a culture of stock speculation, enticing the general populace. Many individuals ventured into margin trading, acquiring assets by paying a portion of their value and borrowing the remainder from banks or brokers. Margin credit escalated from 12% of NYSE market value in 1917 to 20% in 1929.
Market Oversupply and Overproduction
Investors were driven not by fundamental analysis but by the expectation of soaring stock prices, luring more participants who perceived it as effortless gains. By mid-1929, an economic setback loomed as numerous industries grappled with excessive production, resulting in a surplus. Companies took advantage of inflated stock prices to acquire capital easily, fueling their production endeavors with unwavering optimism. Consequently, overproduction cascaded into oversupply across various sectors like agriculture, steel, and iron. Firms were compelled to offload their goods at a loss, causing a downturn in share prices. The 1930s witnessed a severe decline in agricultural commodity prices, leading to farm foreclosures and bankruptcies. In response to affordability, some families resorted to burning corn instead of coal.
Impact of Tariffs on Global Trade
Following World War I and Europe's recovery, rising production levels led to a surplus of agricultural products. This oversupply deprived American farmers of a crucial market for their goods. Consequently, the U.S. Congress implemented a series of legislative actions to raise import tariffs from Europe. These tariffs, initially targeting agricultural products, extended to a broader range of imports, prompting other nations to reciprocate with tariffs on U.S. and foreign imports. The intersection of overproduction, oversupply, and tariff-induced price hikes directly affected international trade. Between 1929 and 1934, global trade nosedived by a staggering 66%.
Debilitating Debt Burden
In bullish markets, margin trading can yield substantial profits as borrowed funds enable investors to acquire more stock than their cash would allow, thereby amplifying gains through leverage. Conversely, during market downturns, losses in stock positions are equally amplified. The rapid depreciation of a portfolio's value triggers margin calls by brokers, demanding additional deposits to cover the decline. Failure to furnish the required funds compels brokers to liquidate the portfolio.
The 1929 market crash triggered a cascade of margin calls from banks. The extensive reliance on margin buying by the general public and limited available cash led to wholesale portfolio liquidations. Consequently, the stock market tumbled, causing substantial investor losses. It's worth noting that during that era, there was no Federal Deposit Insurance Corporation (FDIC) to safeguard depositors' funds, prompting many Americans to withdraw their cash from banks. Concurrently, banks, burdened by excessive bad loans, incurred significant losses.
The Post-Crash Era
The stock market crash and the subsequent Great Depression (1929-1939) left an indelible mark on virtually every facet of society, fundamentally reshaping an entire generation's perception and interaction with financial markets. In stark contrast to the exuberance of the Roaring Twenties, characterized by robust optimism, rampant consumer spending, and economic expansion, the period following the market crash represented a complete reversal of attitude.
Market crashes, recessions, and depressions typically result from a multifaceted interplay of factors. The 1929 crash, likewise, stemmed from many causes, including the post-World War I economic boom, excessive production in pivotal sectors, heightened reliance on margin trading for stock purchases, diminished global demand due to the war, and more. Lessons from inevitable mistakes have been heeded to prevent their recurrence, while others have persisted, contributing to subsequent market downturns.