Stock Market Crash of 1929

STOCK MARKET CRASH OF 1929

During the 1920s increasing numbers of Americans became interested in Wall Street and in buying stocks. A prospective buyer did not have to pay the full price of a stock in order to buy. Instead the practice of "buying on margin" allowed a person to acquire stock by expending in cash as little as ten percent of the price of a stock. The balance was covered by a loan from a broker, who was advanced the money by his bank, which, in turn, accepted the stock as collateral for the loan. Credit was easy, and the Federal Reserve System did little to restrict the availability of money for stock investment.

But mindful of the run of the bull market and the practice of buying on margin, pessimists kept insisting that all was not right with the speculative boom. Many newcomers to the market failed to realize that a stock certificate was only a piece of paper, and that its primary worth was essentially connected with the prosperity of the company that issued it. A strange and frightening fact was becoming apparent to some observers—the increase in the market value of most stocks often had little relationship to the profits or prospects of the issuing companies. The stock itself had taken on a life of its own, based on the circumstance that people were bidding for these equities (stocks) at ever-rising prices. Stock prices represented not corporate profit, but speculative buying of stock certificates.

In September 1929 confidence in the market's ability to continue its upward spiral began to weaken. Stock prices turned lower. Apparently investors were turning from "bulls" to "bears" in increasing numbers and were selling short. As the market was crowded with inexperienced but feverishly eager investors who lacked capital reserves, the falling prices produced a shock effect. For the small investor who had all of his/her money tied up in stocks, it became imperative to sell fast before the prices dropped lower. Since many people were in this situation, orders to sell flooded the market until the ticker tape could not keep pace with Exchange transactions. Chaos reigned as the figures listed on the "big board" became increasingly out of line with actual selling prices. Ignorance was an additional element in the panic.

To stem the crisis, a group of leading New York bankers decided to act. Meeting in the office of Thomas W. Lamont, a partner in J.P. Morgan and Company, the bankers pooled their resources and bought stock above the current market levels. Their purchases might be insignificant, but they reasoned that the well-known personalities involved might serve to restore the confidence of the small investor. Accordingly, on Thursday, October 24, 1929, Richard Whitney, vice-president of the New York Stock Exchange and broker for the House of Morgan, entered the market and attempted to stem the tide. Amazingly the tactic worked, but only temporarily—on the following Tuesday, October 29, 1929, the bottom fell out of the market. Within two weeks the value of stocks on the exchange had declined some 37.50 percent, and by early 1932, stocks were worth only 20 percent of their value at the 1929 peak.

As the debacle on Wall Street continued, the average New Yorker could still speak with scorn of the "numbers game." After all, the economy of the United States was apparently still in good shape. The railroads, the steel mills, communications facilities, and large segments of the citizenry stood untouched by the panic. Professor Irving Fisher of Yale University reassured the nation about the general state of the economy. The average citizen had little awareness that the figures on the "big board" at the New York Stock Exchange were indicative of forces which would have an impact upon how the majority of Americans lived or acted. They were soon made painfully aware of the situation. The Stock Market Crash of 1929 developed into the long-lasting Great Depression (1929–1939) and affected every aspect of American life.

See also: Bear and Bull Markets, Great Depression, Great Depression (Causes of), Investment, New York Stock Exchange, Stock, Stock Market, Wall Street

FURTHER READING

Galbraith, John Kenneth. The Great Crash, 1929. Boston, MA: Houghton Mifflin Co., 1954.

Hicks, John D. Republican Ascendancy, 1921–1933. New York: Harper and Row Publishers, 1960.

Leuchtenburg, William E. The Perils of Prosperity, 1914–1932. Chicago: University of Chicago Press, 1958.

Mitchell, Broadus. Depression Decade, 1929–1941. New York: Holt, Rinehart and Winston, Inc., 1947.

Robbins, Lionel. The Great Depression. New York: The Macmillan Company, 1934.