Stock Market Crash of 1929

Stock Market Crash of 1929. On 24 October and again on 29 October 1929, panic selling swept the New York Stock Exchange. The index of common stocks had peaked in early September; within two months, however, it fell 39 percent, reducing the value of stocks traded on the exchange by $26 billion.

The 1920s brought the great bull market in which the value and quantity of stocks traded soared. Most experts agree that until early 1928, the rise in stock prices was justified. The U.S. economy grew rapidly, productivity soared, and corporate earnings multiplied. Firms sought funds for mergers or for new plants and equipment through the sale of stocks and bonds. More importantly, anticipating large gains, thousands of investors snapped up the new issues and bid up the prices of old issues.

But by 1928 the market had become a bubble—that is, the prices paid by investors exceeded any reasonable expectation of future earnings. Speculation was particularly rampant in high technology and utilities stocks such as the Radio Corporation of America, RKO (Radio‐Keith‐Orpheum), Westinghouse, United Aircraft, and Commonwealth and Southern. Securities affiliates of banks and brokers encouraged speculation by letting investors buy stocks on credit, known as margin accounts. Investors put up as little as 25 percent of the stock's purchase price and borrowed the remainder from their brokers or banks, using the stock purchased as collateral.

By September 1929, the economy was contracting. With corporate earnings down, stock prices began to slip. The crashes of late October reflected panic selling. With millions of shares of stock traded, quotations of stock values fell hours behind. Unable to keep track of their stocks' values, investors dumped them. Those who had bought stocks on margin faced calls from their brokers for more collateral to cover their loans, forcing many of them to liquidate their stock holdings to satisfy their debts. The result was the great stock market crash.

The crash did not cause the Depression of the 1930s. To be sure, the losses sustained by investors and the greater difficulty firms had in floating new issues depressed the economy. But the Federal Reserve stepped in quickly, lending freely to member banks and thereby confining the crash to the financial system. During the 1930s, congressional investigations uncovered a number of unsavory practices by the essentially private, unregulated stock exchanges. In response, Congress passed the Securities Act of 1933 and the Securities and Exchange Act of 1934, inaugurating active federal regulation of the securities markets.
See also Banking and Finance; Business Cycle; Depressions, Economic; Federal Reserve System; Hoover, Herbert; Securities and Exchange Commission; Stock Market; Twenties, The.

Bibliography

John Kenneth Galbraith , The Great Crash, 1954.
Eugene N. White , The Stock Market Boom and Crash Revisited, Journal of Economic Perspectives 4 (Spring 1990): 67–83.

Diane Lindstrom