The 1929 Wall Street Crash — the boom that bought stocks with money it didn’t have

In New York in the autumn of 1929, the speculative bull market of the late 1920s broke apart over a few days in late October — Black Thursday on 24 October and Black Tuesday on 29 October — and the collapse helped tip the United States into the Great Depression. The Dow Jones Industrial Average, which had peaked at 381.17 on 3 September 1929, would fall, over the next three years, to 41.22 on 8 July 1932, a loss of about 89 percent. It is the defining financial crash of the twentieth century and the event against which every later panic is measured.

The mania that preceded it ran on borrowed money. Through the 1920s, ordinary Americans were drawn into the stock market in unprecedented numbers, and many bought “on margin” — putting down a fraction of a stock’s price and borrowing the rest from a broker, who in turn borrowed from banks. By the summer of 1929 these brokers’ loans exceeded 8.5 billion dollars, more than the entire stock of currency then circulating in the country. Margin let a small rise in a share produce a large gain on the cash invested; it also meant a small fall could wipe a buyer out entirely and force the sale of his stock to repay the loan.

That structure made the market exquisitely fragile. When prices began to slide in September and then plunged in late October, falling values triggered “margin calls” — demands that borrowers post more cash — and buyers who could not pay had their holdings dumped onto a falling market, which drove prices lower still and triggered further calls. On Black Tuesday, 29 October, some 16.4 million shares changed hands in a cascade of forced and panicked selling. A pool of leading bankers had tried to halt the slide the week before by ostentatiously buying shares, and for a day it worked; within days it failed utterly.

The crash did not single-handedly cause the Depression, but it destroyed savings, shattered confidence, and accelerated a collapse that would see thousands of banks fail and unemployment reach roughly a quarter of the workforce. Out of the wreckage came a generation of reform — the Pecora investigation, the Glass-Steagall separation of commercial and investment banking, and the creation of the Securities and Exchange Commission — built on the recognition that a market financed by debt and faith in permanent prosperity had been a disaster waiting for its trigger.