Wall Street Crash of 1929: Black Tuesday and the Global Slump

The Wall Street Crash of 1929 was the collapse of share prices on the New York Stock Exchange in late October 1929 that ended the speculative boom of the “Roaring Twenties”. Over a few days, from Black Thursday on 24 October to Black Tuesday on 29 October, panic selling wiped out billions of dollars in paper wealth. The crash became the symbolic beginning of the Great Depression, a worldwide economic slump that transformed politics on both sides of the Atlantic.

Background: the boom of the 1920s

The United States emerged from the First World War as the world’s leading creditor and its largest industrial economy. Through the 1920s mass production of cars, radios and electrical appliances, the spread of consumer credit and rising productivity fed a sense that a “new era” of permanent prosperity had arrived. Corporate profits grew strongly, and so did share prices.

From about 1927 the rise in the stock market turned into a speculative mania. The Dow Jones Industrial Average, an index of leading industrial shares, climbed from around 63 in August 1921 to a peak of 381.17 on 3 September 1929, a roughly sixfold increase. Shares such as Radio Corporation of America became the talk of the nation, and newspapers carried stories of ordinary people making fortunes.

Much of the buying was done on margin: investors put down only part of the price, often 10 to 20 per cent, and borrowed the rest from their brokers, using the shares as security. Loans to brokers rose to more than 8 billion dollars by October 1929. Investment trusts, companies that existed to buy shares in other companies, often with borrowed money, multiplied, adding further layers of debt. Although only a minority of Americans owned shares, the market’s fortunes had become a national obsession.

Warning signs

By the summer of 1929 the real economy was already slowing. Industrial production, construction and car sales had begun to fall. The Federal Reserve, worried about speculation, had raised its discount rate to 6 per cent in August, making borrowing dearer.

Some voices warned of trouble. On 5 September the economist Roger Babson predicted a crash, causing a brief fall known as the “Babson Break”. On 20 September the London financial empire of Clarence Hatry collapsed amid fraud, shaking British investors. Yet many experts remained confident. In mid-October the Yale economist Irving Fisher declared that stock prices had reached what looked like “a permanently high plateau”.

The crash

Prices fell unevenly through September and early October. On Thursday 24 October 1929, “Black Thursday”, the decline turned into panic. A then record of almost 13 million shares changed hands, and the ticker machines that reported prices fell hours behind, so investors did not know what their shares were worth. Crowds gathered on Wall Street outside the exchange.

At midday leading bankers, including Thomas W. Lamont of J. P. Morgan and Charles E. Mitchell of National City Bank, met and formed a buying pool. Richard Whitney, vice-president of the exchange, walked onto the trading floor and placed a large bid for shares of US Steel well above the market price. The gesture calmed the market, and prices recovered much of the day’s losses. The next day President Herbert Hoover assured the public that the fundamental business of the country was sound.

The respite did not last. On Monday 28 October the Dow fell by about 13 per cent, and the bankers did not step in again. On Tuesday 29 October, “Black Tuesday”, around 16 million shares were traded and the index fell by a further 12 per cent, closing at 230.07. Margin calls forced investors who could not provide extra cash to sell, pushing prices down further. By 13 November the Dow had fallen to 198.69, almost half its September peak.

Key people

• Herbert Hoover (1874-1964): President of the United States from March 1929, who tried to maintain confidence and persuaded business leaders to keep up wages and investment, but whose policies are often judged inadequate to the crisis.
• Richard Whitney (1888-1974): acting president of the New York Stock Exchange on Black Thursday; he later became its president and was imprisoned for embezzlement in 1938.
• Thomas W. Lamont (1870-1948): senior partner at J. P. Morgan who organised the bankers’ support pool.
• Charles E. Mitchell (1877-1955): head of National City Bank, a prominent promoter of share buying, later tried and acquitted on tax evasion charges.
• Irving Fisher (1867-1947): leading American economist, whose optimism shortly before the crash became notorious.

From crash to depression

The market recovered partially in early 1930, and many people believed the worst was over. Instead the economy slid into the Great Depression. Between 1930 and 1933 thousands of American banks failed, wiping out deposits, and the money supply contracted by about a third. Industrial production fell by nearly half, and by 1933 roughly a quarter of the American workforce was unemployed. The Dow reached its lowest point of 41.22 on 8 July 1932, about 89 per cent below its 1929 peak.

The crisis spread around the world. American banks and investors, who had lent heavily to Germany and other countries during the 1920s, stopped lending and called in loans. The Smoot-Hawley Tariff of June 1930 raised American import duties and provoked retaliation, while countries tied to the gold standard cut spending and raised interest rates to defend their currencies. In May 1931 the collapse of Austria’s largest bank, the Creditanstalt, set off a banking crisis in central Europe, and in September 1931 Britain left the gold standard. The value of world trade fell by around two-thirds between 1929 and 1933.

Hoover’s response was more active than his later reputation suggests, but it was limited by the economic thinking of the time. He urged business leaders to maintain wages, supported public works, and in 1932 created the Reconstruction Finance Corporation to lend to banks and railways. At the same time he believed in balanced budgets, signed a large tax increase in 1932 and resisted direct federal relief for the unemployed. The Federal Reserve, for its part, did little to stop the wave of bank failures, a failure that later economists, notably Milton Friedman and Anna Schwartz, saw as central to the depth of the slump.

The social and political consequences were profound. In Germany unemployment rose to about 6 million by early 1932, helping the Nazi Party grow from a fringe movement into the largest party in parliament and contributing to the circumstances in which Hitler became chancellor in 1933. In the United States voters turned to Franklin D. Roosevelt, elected in November 1932.

Myths and facts

Myth: ruined speculators jumped from windows en masse. The image became part of popular memory, but only a few such cases are documented, and suicide statistics show no surge in late 1929. Galbraith and later historians have traced how the legend grew.

Myth: the crash alone caused the Great Depression. Most economists see the crash as one trigger among several. Bank failures, monetary contraction, the rigidities of the gold standard and protectionism did more to turn a recession into a decade-long slump.

Fact: most Americans did not own shares. Estimates suggest only a few million Americans held stocks in 1929, far fewer than the popular image of a nation of speculators. The crash hurt the wider public mainly through its effects on confidence, credit and banks.

By the numbers

Reform and legacy

Senate hearings held in 1932-1934, led from 1933 by the lawyer Ferdinand Pecora, exposed insider dealing, market manipulation and conflicts of interest at major banks. Under Roosevelt’s New Deal, Congress passed the Securities Act of 1933, requiring companies to disclose information to investors, and the Glass-Steagall Act of 1933, which separated commercial from investment banking and created federal deposit insurance. The Securities Exchange Act of 1934 established the Securities and Exchange Commission to regulate the markets.

The crash also became the classic example of a speculative bubble, alongside earlier episodes such as the South Sea Bubble of 1720. Comparisons with 1929 were made after the stock market fall of October 1987 and during the global financial crisis of 2008, when policymakers drew on the lessons of the Depression by supporting banks and expanding the money supply.

Timeline

• 1929, 3 September: The Dow Jones Industrial Average peaks at 381.17.
• 1929, 20 September: The Hatry group collapses in London.
• 1929, 24 October: Black Thursday; bankers organise a support pool.
• 1929, 28 October: Black Monday; the Dow falls about 13 per cent.
• 1929, 29 October: Black Tuesday; about 16 million shares are traded and the Dow falls about 12 per cent.
• 1929, 13 November: The Dow reaches its low for the year at 198.69.
• 1930, 17 June: The Smoot-Hawley Tariff becomes law.
• 1932, 8 July: The Dow hits its Depression low of 41.22.
• 1934, 6 June: The Securities and Exchange Commission is created.
• 1954, 23 November: The Dow finally closes above its 1929 peak.

Why it matters

The Wall Street Crash ended the optimism of the 1920s and opened the way to the Great Depression, whose hardships helped bring about the New Deal in the United States and the rise of dictatorships in Europe. It remains the defining warning of how speculation, debt and fragile banks can turn a market collapse into a global crisis.