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

Summary

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.

Timeline

The decade that believed in permanent prosperity

The bull market of the 1920s grew out of a real and dazzling prosperity. The decade brought mass production, electrification, the automobile, the radio, and a surge in corporate earnings, and it was easy to believe that a new industrial age had repealed the old business cycle. Respected figures said as much; the economist Irving Fisher famously declared that stocks had reached "a permanently high plateau." This "new era" conviction did the essential work of a bubble: it supplied a reason why prices that looked extravagant were actually justified by a transformed future.

Crucially, the market opened to people who had never owned stock before. Through the 1920s, equity ownership spread well beyond the wealthy into the middle class, fed by a booming brokerage industry, investment trusts that packaged shares for small buyers, and a financial press that turned rising tickers into national entertainment. The Dow's roughly sixfold climb from 1921 to 1929 was not a quiet professional affair; it was a popular enthusiasm, with shoeshine boys and clerks trading tips and the act of buying stock recoded from gambling into prudent participation in the country's destiny.

That broad participation made the market both larger and more credulous. New entrants had no memory of a serious bust and read each year's gains as proof that gains would continue. Social proof compounded as neighbors and colleagues visibly grew richer on paper, so that staying out came to feel like the foolish choice. The belief was not merely that particular companies were valuable; it was that the market as a whole could not durably fall — a conviction that, by drawing in ever more buyers at ever higher prices, briefly made itself true.

The market built on borrowed money

What turned a high market into a fragile one was leverage, and in 1929 leverage meant buying on margin. A buyer could purchase shares by putting down only a portion of the price — sometimes as little as ten or twenty percent — and borrowing the rest from his broker, who pledged the shares as collateral and funded the loan by borrowing from banks. The appeal was arithmetic: if a stock bought with ten percent down rose ten percent, the buyer doubled his money. Margin let modest savings command large positions, and in a rising market it made speculation look like genius.

The scale of this borrowing was extraordinary. By the summer of 1929 brokers were routinely lending small investors more than two-thirds of the face value of the stock they bought, and total brokers' loans had climbed past 8.5 billion dollars — a sum larger than all the currency then circulating in the United States. An immense edifice of stock prices was thus resting on debt, and the debt was resting on the assumption that the prices underneath it would hold.

That same arithmetic ran in reverse on the way down, and far more violently. Because the loan was secured by the shares, a falling price could erase the buyer's thin margin and prompt the broker to issue a "margin call" demanding more cash. A borrower who could not pay had his stock sold immediately to repay the loan — and those forced sales pushed prices down further, triggering still more margin calls on still more accounts. Leverage had concentrated the gains during the climb; now it concentrated and multiplied the losses, converting an ordinary decline into a self-feeding collapse. The market did not merely fall in October 1929; the way it had been financed made it fall faster the more it fell.

The Five Factors

Aftermath

The crash and the Depression that followed it inflicted hardship on a scale that the market figures only begin to convey: ruined savings, lost homes and farms, thousands of failed banks, and unemployment that reached roughly a quarter of American workers at the trough. Fortunes built on margin vanished, and so did the modest savings of ordinary people who had been told that owning stock was a patriotic form of thrift. The human meaning of the numbers was a decade of want.

The wreckage produced the modern architecture of financial regulation. The Senate's Pecora investigation of 1932–34 exposed the manipulations and conflicts of the boom; the Glass-Steagall Act separated commercial banking from the securities business; and the Securities Act of 1933 and Securities Exchange Act of 1934 created the Securities and Exchange Commission, imposing disclosure rules and limits on margin lending. The crash thus became the founding trauma of twentieth-century market governance, the event that justified federal oversight of Wall Street.

It also became the permanent reference point for financial folly. "1929" is the shorthand the world reaches for at the top of every boom and the bottom of every panic, and the lessons drawn from it — about leverage, about the danger of believing prosperity is permanent, about the speed with which forced selling can feed on itself — are taught to every new generation of investors, who tend to learn them again only by living through a version of their own.

Lessons

References

• Wall Street Crash of 1929 WIKIPEDIA
• Stock Market Crash of 1929 ENCYCLOPAEDIA BRITANNICA
• Stock Market Crash of 1929 HISTORY.COM