History Online: 1929 Stock Market Crash –

The 1920s were a decade of great prosperity and optimism in the United States. Unemployment and inflation were low and industrial production and per capita income were increasing. To understand how a decade of tremendous economic growth could end with the catastrophic stock market crash of 1929 and lead to a decade of economic depression, one must understand the economic weaknesses present in the 1920s and how the events immediately following the stock market crash compounded and magnified each other. The stock market crash and the resulting Great Depression in the United States affected both the domestic and international economies, leading to widespread unemployment and poverty at home and abroad. The New Deal and other government initiatives helped to get people back to work and gave wage earners a way to feed their families with dignity. Explore these elements of the stock market crash of 1929 and the Great Depression below.

The “Roaring Twenties” are known for jazz music, economic prosperity, and national optimism. The economic growth of the 1920s did not reach all Americans: 60 percent of American families earned less than the amount necessary to support their basic needs ($2,500 was considered enough to support a family’s basic needs). Wages in some industries, such as mining and manufacturing, either fell or remained stagnant, despite higher productivity. The agricultural sector was similarly stagnant: farm prices dropped after World War I when Europe again began to feed itself and new grain exports from South American further depressed prices. The lack of purchasing power of rural people and farmers resulted in declines in consumer purchasing in those areas, as well as increased defaults on debt. Rural, urban, and suburban consumers began to increase their personal debts through mortgages, car loans, and installment plans to buy consumer goods, such as radios. Over 15 percent of U.S. banks failed between 1920 and the stock market crash of 1929. The crisis in banking became a crisis for small business owners, who could not secure loans or who lost their capital in the stock market. To service their growing debt, consumers decreased their discretionary consumer spending, which led to decreased industrial production, layoffs, and higher unemployment. Increases in international trade tariffs in the 1920s further depressed U.S. manufacturing and industry.

The stock market of the 1920s was booming, with prices soaring out of control and not supported by corporate earnings. Between 1928 and 1929, stock prices increased by 40 percent. Businesses and rich individuals believed that the stocks would continue to go up and that technology would increase production and stock value. Many people borrowed money to speculate in the market, purchasing stock for ten percent of its value and borrowing the rest. The newly created Federal Reserve attempted to curb stock market speculation by increasing interest rates, making borrowing money in order to purchase stock more difficult, and decreasing the supply of money, which by August of 1929 resulted a recession. The stock market bubble was about to burst.

The stock market reached its pre-crash height on September 3, 1929. The crash began on Black Thursday, October 24. Worried that the bull market would end, some investors began selling stock in 1929, which led to brokers calling in the debts of many who purchased their stock on margin. These investors sold their stock to pay their debts, which caused prices to fall further. Five banks invest $20 million dollars each in the market to buy up shares and prop up the faltering market. The rally continues through October 25, but ends on Black Monday, October 28, when panicked sellers send the market into a 13 percent decline. The stock market bubble officially burst on Black Tuesday, October 29: the stock market lost another 12 percent, with the Dow Jones Industrial Average closing at 230.7, down from 381.17 on September 3 and 299.47 on October 24. Panicked investors continued to sell their stocks, which lost one half of their value by the middle of November. The investors who had borrowed money to speculate in the market, buying stocks “on margin”, saw their debts called in and their potential profits wiped out. By the middle of 1932, stocks were worth one-tenth of their original value. Banks had also speculated in the stock market and lost immense amounts of money. Depositors worried that the banks could not guarantee their savings, rushed to withdraw their deposits. In late 1929 and 1930, bank runs left many banks without any liquidity, and led to the failure of 40 percent of U.S. banks.

The stock market crash affected the domestic and international economies. U.S. businesses that lost money in the market crash decreased their production and fired many workers. Over 100,000 businesses failed between 1929 and 1932 because they lacked the capital to weather the decrease in consumer spending and weakened market. Unemployment rose steadily from 3.2 percent in late 1929 to 25 percent in 1932 and underemployment skyrocketed. Over one in four American families had no income and many more had drastically reduced incomes. Millions of men moved from town to town in search of jobs and many families lost their homes. The mid-1930s saw a tremendous drought in the Midwest and Southwest, earning the southern plains states the name “The Dust Bowl”. Millions of acres of farmland lost their topsoil to dust storms and farmers lost their crops, which further depressed the economy of agricultural regions and led to an exodus of many farming families to other states, looking for work.

The U.S. federal government began to take more aggressive action under Franklin D. Roosevelt in 1933. Roosevelt declared a Bank Holiday in March of 1933 and Congress passed the Emergency Banking Act to stabilize the banking sector and later the 1933 Banking Act to form the Federal Deposit Insurance Corporation to guarantee personal savings. From March to June of 1933, Congress passed numerous bills presented by Roosevelt that formed “the New Deal”: public works projects aimed at the “three Rs”—relief, recovery, and reform. The most famous of these were the Works Projects Administration, the Civilian Conservation Corps, the Public Works Administration, and the Farm Security Administration. Others, such as the Federal Emergency Relief Administration, sought to alleviate the suffering of the unemployed by providing basic necessities. The Social Security Act, passed in 1935, provided pensions for older Americans and relief for the unemployed.

The Smoot-Hawley Tariff, passed on June 17, 1930, raises tariffs on imports by 40 percent. This exacerbated the international economic weakness and depression, as exports to the U.S. fell and U.S. investors decreased their foreign investing. The post-World War I German economy depended heavily on U.S. investment and nearly collapsed after the stock market crash wiped out U.S. investors. France, and to some extent Great Britain, depended on German reparations to subsidize their own economies and service their national debts to the United States. As the German economy faltered, so did those of other western European countries. Agricultural over-production, the stagnation of the consumer goods industry after the crash, and the decrease in fuel prices exacerbated the European depression. Britain and France weathered the depression with their democratic governments intact, although citizen confidence was shaken in France. In Germany, the Depression and resulting societal instability allowed the Nazi party to seize power in the 1930s, which led to the appointment of Adolf Hitler as chancellor in 1933. In Italy, Mussolini and the fascists attempted to stimulate the economy with public works projects and sought to rework the economy in a corporatist way. The differing responses to the Great Depression in Europe paved the way for World War II.