Learn the history of the Great Crash, which saw stock prices decline almost 90% between 1929 and 1932.

When people talk about the 1929 Crash, Great Crash, or Great Depression they’re talking about the events leading up to the 1929 stock market crash and the economic depression that followed.

The 1929 stock market crash is also known for some specific dates: Black Thursday (October 24, 1929) when the Dow Jones Industrial Average (DJIA) lost 11%, Black Monday (October 28, 1929) when the DJIA lost 13%, and Black Tuesday (October 29, 1929) when the DJIA lost 12%.

Stock market crashes follow price increases. Between 1919 and 1929 the DJIA rallied from 80 to a 1929 (Sept. 3) peak of 381.17. A 476% gain.

Source: macrotrends.net

Selling continued after Black Tuesday into November 13, 1929, were the market formed a temporary bottom at 198.6, a drop of 48%. The market recovered somewhat over the next year, reaching a high of 294.07 on April 17, 1930. This was not the end of the selling though. Prices continued lower into 1932 where they bottomed at 41.22 on July 8, 1932, a level never seen again. That concluded an 89% drop from the 1929 high. It took until 1954 for the price to reach the 1929 high again. Even though the stock market has risen consistently over time, it often takes many years for most investors to recoup their capital after a crash.

October 1929 crowds gather on Wall Street

The economic depression lasted from 1929 to 1939, where unemployment was over 15% much of the time and tax revenue, corporate profits, and personal income were cut in half.

While there are multiple variables at play in any crash and depression, there are three main elements which drive stock prices rapidly higher and then hammer them lower.

• Euphoria: There is a widespread sense that prices will go higher, and that if they do decline it won’t occur for a long time. This belief leads people to take risks they wouldn’t take under normal circumstances. Euphoria requires a catalyst though (people aren’t euphoric for no reason). In late 1918 the World War ended, a positive thing and joyous event. Over the next 10 years, as the market rose, electricity was being introduced into homes across America. As were household appliances and radios. Access to information was now instant; waiting for the morning paper was no longer required. It was a “new era.” That’s a phrase often heard during a euphoria driven market. Cars were also within the grasp of most Americans and passenger air flights were becoming more common. It seemed like a magical time, with unlimited potential…and therefore unlimited stock prices. Eventually, the veil is lifted, and the reality is that prices are unsustainable to euphoric levels.
• Rampant speculation, fueled by euphoria, is when people are willing to “gamble” that prices will continue to rise, and do it with borrowed money. Leading up to 1929 the market was pushed higher by borrowed money, $8.5 billion worth of it. That is more money than was in circulation at the time. That means there was no way to pay off all those loans. Borrowing money to make an investment is fine as long as the investment keeps going up. Once the stock market started to drop though, the people who couldn’t afford the investment in the first place were forced to sell. This creates a domino effect, and the more borrowed money and more people involved the bigger the fall.

There were additional complications, including runs on banks–which is when everyone goes to pull their money out of the bank at one time creating great strain on financial institutions. For more see the quick video on the crash courtesy of the History Channel, which also looks at some of the economic factors at play.

• Another element that led to the crash (and others) is a lack of regulation or regulatory oversight. Regulators and politicians sat on the sidelines while stock prices rose, unwilling to stop the speculative frenzy or constrain borrowing to buy stock. Had stiffer borrowing restrictions been implemented earlier, many people would’ve been unable to borrow, which means they would’ve been unable to buy stock, which means prices wouldn’t have risen so high or fallen so far. Also, many people would’ve had money left in their pocket (those who didn’t invest, and thus wouldn’t have lost) which would’ve help lessen the economic blow that followed the crash. That said, no matter what regulations are implemented following a stock crash, crashes continue to occur over and over again.

These three causes play a role in all stock market collapses, including the more recent crashes of 2000 and 2008.

Further Reading on the 1929 Crash

2009 BBC documentary on the 1929 Crash, called The Wall Street Crash