The Crash of 1929: The Day the Roaring Twenties Died

The morning of October 29, 1929 began with dread.

The week before had already been brutal. On Thursday October 24 — Black Thursday — the market had fallen sharply at the open before a consortium of bankers intervened to stabilize prices. On Monday October 28 — Black Monday — it fell again, harder, with no intervention. The Dow Jones Industrial Average dropped nearly 13 percent in a single day.

On Tuesday morning, investors across America placed sell orders before the market opened. The orders kept coming. By the time the closing bell rang on what would be called Black Tuesday, 16.4 million shares had traded — a record that would stand for nearly four decades — and the Dow had fallen another 12 percent.

In two days, the American stock market had lost roughly a quarter of its value.

It would lose more than 80 percent before it was finished.

The Roaring Twenties

To understand the crash, you have to understand what preceded it.

The 1920s were the first decade of mass consumer culture in America. The assembly line — Henry Ford's great innovation, refined through the decade — made consumer goods affordable for the middle class. Automobiles. Refrigerators. Radios. For the first time in history, ordinary Americans could buy things on credit.

They also bought stocks on credit. Margin trading — borrowing money to buy stock — became widespread during the twenties. Brokerage firms allowed customers to put down as little as 10 percent of a stock's price and borrow the rest. As long as prices rose, this was extraordinarily profitable. When prices fell, the margin calls came — demands to put up more collateral immediately — and forced selling cascaded through the market.

Stock prices had been rising throughout the decade. The Dow Jones Industrial Average rose 500 percent between 1920 and 1929. Everyone, it seemed, was getting rich. In his 1928 campaign, Herbert Hoover spoke of "a chicken in every pot and a car in every garage." The prosperity felt permanent.

John Kenneth Galbraith's The Great Crash 1929, still the most readable account of what happened, describes the speculative mania of the late 1920s with a kind of dark comedy: the investment trusts created to invest in other investment trusts, the leveraged pyramids of borrowed money, the chorus of expert voices insisting that a "new era" of permanent prosperity had arrived.

The new era arrived. It lasted about 18 months.

The Crash

The first signs of trouble came in September 1929, when the market peaked and began a slow decline. Then came the October acceleration.

The mechanics were simple and devastating. Margin calls forced investors to sell stocks to raise cash. Selling drove prices lower. Lower prices triggered more margin calls. More margin calls forced more selling. The spiral was self-reinforcing and unstoppable once it began at scale.

The bankers who had organized the 1907 panic rescue attempt again — led by the House of Morgan — tried to stabilize prices on Black Thursday by buying large blocks of stock publicly to signal confidence. It worked for two days. Then the selling resumed and overwhelmed them.

By mid-November, the Dow had fallen 48 percent from its September peak. Most observers thought the worst was over. They were wrong. The Dow continued falling, in waves, for the next three years.

The bottom came in July 1932. The Dow closed at 41.22 — down 89 percent from its 1929 peak. It would not recover to its 1929 levels until 1954. Twenty-five years to recover from a single speculative bubble.

The Depression

The crash alone did not cause the Great Depression. Economists have argued for nearly a century about what transformed a stock market collapse into a decade-long economic catastrophe. The most widely accepted explanations include:

Bank failures. Without federal deposit insurance (which did not exist until 1933), bank runs were self-fulfilling. When depositors feared a bank might fail, they withdrew their money. Enough withdrawals caused the failure they feared. Roughly 9,000 American banks failed between 1930 and 1933. Businesses and individuals lost savings with no recourse.

The Smoot-Hawley Tariff. Signed into law in 1930 despite the protests of more than 1,000 economists, the tariff raised import duties to historic highs. Other nations retaliated. International trade collapsed. An already-shrinking economy contracted further.

The Federal Reserve's catastrophic response. Rather than expanding the money supply to counteract deflation, the Fed contracted it — raising interest rates in 1931 in an attempt to defend the gold standard. Milton Friedman and Anna Schwartz's A Monetary History of the United States makes the case that the Fed's actions transformed a recession into a depression.

By 1933, unemployment reached 25 percent. Industrial production had fallen by half. Thousands of banks were closed. Franklin Roosevelt's inauguration came on the day when most American banks had suspended operations.

The New Deal and the Regulatory Response

The crash and Depression permanently changed the relationship between the federal government and financial markets.

The Securities Act of 1933 required companies selling securities to the public to disclose material financial information. The Securities Exchange Act of 1934 created the Securities and Exchange Commission. The Glass-Steagall Act of 1933 separated commercial banking from investment banking — preventing banks from gambling with depositors' money — and remained law until its repeal in 1999.

The Federal Deposit Insurance Corporation, also created in 1933, guaranteed bank deposits and ended the era of bank runs. Social Security, enacted in 1935, created a safety net that would prevent the worst outcomes for the unemployed and elderly.

These reforms fundamentally reshaped American capitalism. The market that emerged from the Depression was more regulated, more transparent, and — most would argue — more durable than what had preceded it.

The Lesson That Keeps Getting Forgotten

Galbraith ends The Great Crash 1929 with an observation that has been cited in the aftermath of every subsequent bubble: that the conditions that produced the 1929 crash — easy credit, widespread speculation, the sense that prices can only go up, the dismissal of skeptics as people who "don't understand the new era" — are not unique to 1929.

He was right. They have recurred in 1987, in 2000, and in 2008. Each time, the bubble feels different. Each time, someone explains why this time is not a bubble. Each time, the gravity reasserts itself.

The tree under which the Buttonwood brokers signed their agreement in 1792 is gone. The market they created is the most powerful engine of capital allocation in human history. It has also crashed, spectacularly, more than once.

Both of these things are true simultaneously. That has always been the honest description of Wall Street.