Tuesday, October 29, 1929, is remembered as Black Tuesday in the United States. That day, the value of stocks on the New York Stock Exchange (NYSE) plummeted, and many Americans lost their savings. Black Tuesday is commonly regarded as the beginning of the Great Depression , an economic recession in which much of the country struggled to keep food on the table and a roof overhead.
The United States had a great sense of prosperity during the 1920s. A strong economy and technological advancement brought luxury items like radios, vacuum cleaners, and automobiles into the lives of average Americans. Many such items could be bought on credit by paying in monthly installments. The growing sense of optimism and prosperity in the country led many people to acquire heavy loads of debt, or borrowed money that they had to repay.
The dream of making a fast fortune and the ability to buy stocks on credit prompted ordinary Americans to invest their small savings in the stock market. Stocks, or shares, represent part ownership in a company. An investor chooses to buy stocks in hopes that the value of the stock will go up, so they can sell the stocks for more than they paid. Stock prices can rise as more people become interested in the stock or if the company performs well. Likewise, the value will fall if few people buy the stock or if the company is not successful. When that happens, investors lose money. Stocks are bought and sold at stock exchanges, and in 1929 the NYSE was the primary exchange in the country.
Buying on credit
Buying stocks in the 1920s was made easy by brokerage firms. Investors were encouraged to buy stocks “on margin.” This meant the investor paid a small percentage of the total cost of the stocks and borrowed the rest from the broker. If the value of the stock rose, then the investor still made money. If the value of the stock dropped, however, then the broker could demand more money to cover some of the loss, an act known as a “margin call.” If the money was not paid, the broker could choose to sell the stock at current market prices. This meant that the investor would not only lose the investment but also often end up owing more money to the broker. As stock prices were rising steadily through the 1920s, many investors thought buying on margin was safe.
During the 1920s, there was little regulation of the stock market. Certain unregulated practices inflated the value of stocks. Often the value of stocks reflected investor interest in a company rather than the performance of the company. Some powerful investors took advantage of inside information to manipulate stock prices and make immense profits. With stocks performing so well, few people recognized the subtle signs that companies were actually struggling.
Stock prices reached a record high on September 3, 1929, then began a slow but steady decline. Although there were small rallies of increased value, the decline continued through September and October. By the end of October, fear and apprehension began to mount among all investors. As more and more brokers demanded their money with margin calls, values continued to drop.
Stock prices began to plummet on Thursday, October 24, when thousands of brokers placed margin calls to their investors. Bankers prevented a complete collapse of the market on that day, but only temporarily. By Tuesday, October 29, the continued loss of stock values created panic among investors. Selling occurred at such a rate that the market crashed. Many investors, large and small, not only lost their savings but also found themselves in great debt.
Stock market prices continued to decline for the next two and a half years. The stock market crash of Black Tuesday developed into a long-lasting depression that affected every aspect of American life for a decade.